Don’t invest in junk bonds unless you are an expert

In the world of investing, it is easy to fall prey to dangerous investments. If you have a good broker, they will steer you out of harm’s way. If you want to invest in bonds or stocks, the first thing you should do is to check their credit rating. S&P does credit ratings and so does Moody’s. The ratings systems are similar, but start diverging when you get into the BBB or baa range. The two do not translate directly into each other. So, it’s complicated.

AAA investments are by far the safest. They are almost guaranteed to pay you back, but the return on investment might be a lot lower as a price you pay for safety. AA is the next best bet on the S&P scale with roughtly a (.2)% chance of default in any given year. Those are odds I can handle if I am diversitifed. A+, A, and A- are around a (.3) to (.7)% chance of default in any given year. Once you get into BBB territory, then you are in a lot of risk. If you invest in a 45 year old bond that is BBB, there might be a 1.5 chance per year that they default, but after 45 years that turns into more of a 65% chance of default. Do you really want to take that risk unless the monthly payments are high?

Then, there are Illinois and their partner in crime Puerto Rico. These two territories have bonds up the yin-yang who are not looking like they will get paid off. Investors are picking them up at half price hoping for the best.

In my opinion, the biggest issue with this whole investing fiasco is that most financial entities put themselves into too much debt. First they borrow a little, and then a little becomes a lot. It’s easy to get into debt, but not so easy to get out. Once your debt is beyond a particular point — depending on how old your establishment is and what industry you’re in — then, your credit rating goes down and your interest rate goes up putting you in an even worse situation.

When I invest in stocks or bonds, before I even look at the credit rating, I look at how in debt you are, and how much your debt fluctuates from year to year as well as how stable your income is in a recession such as 2009.

In any case, my broker emailed me with rates for utility and trash bonds. I replied:

“I said I wanted junk bonds, not trash bonds!”

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