This is a subscriber-only article. Join Entrepreneur+ today for access

Learn More

Already have an account?

Sign in
Entrepreneur Plus - Short White
For Subscribers

Garbage Collectors Junk bonds shed their dirty reputation.

By Lorayne C. Fiorillo

Opinions expressed by Entrepreneur contributors are their own.

So far, 1997 has been anything but a picnic for investors,unless you're rooting for the ants. Volatility in the stock andbond markets and unpredictable interest rate moves have madeinvesting a party you might not want to be invited to. But if everycloud has a silver lining, every investment strategy has a secretweapon, and this one can be found at the bottom of the barrel--junkbonds.

Don't flip that page: Junk bonds have come a long way, baby.The last many investors heard about junk bonds or, as they'recalled in polite society, high-yield corporate bonds, might havebeen in connection with leveraged buyouts, corporate raiders,Drexel Burnham Lambert, the predator's ball and the infamousMichael Milken. The late 1980s and early 1990s saw the unravelingof the high-yield corporate bond market due to aggressive issuingof debt from the lowest ranks of corporate society. While millionsof dollars were lost on those highly speculative issues, thesebonds look as different now as Milken does without his toupee.

High-yield bonds are still subject to greater risk of loss ofprincipal and interest than higher quality bonds; many investorsavoid these securities, fearing default and spurred on by advice toput all their money in stocks. However, recent stock market ups anddowns may warrant another look into the idea of diversification asthe best investment policy. Diversification isn't just a mix ofdifferent investments but a combination of instruments thatdon't all move the same way when the market winds blow. Historyshows that junk bonds offer high returns relative to both stocksand bonds and, in a stock market correction, often perform betterthan equities. Investors in search of instruments ofdiversification would be well-advised to look into possibilitiesoffered by high-yield securities.