

Ask HN: Do you hold corporate bonds in your private portfolio? - sushirain

Edit: I am also asking about corporate bond ETFs.<p>I found many sources that go against buying corporate bonds, because it&#x27;s too risky&#x2F;expensive. They prefer government bonds and shares. But investment advisers keep using them.
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akg_67
Yes, I hold variety of Bond ETFs in my portfolio including High Yield
Corporate and Government Bond ETF (HYG), Emerging Market Bond ETF (EMB),
Investment Grade US Bond (AGG), Inflation adjusted US Treasury I-series Bond.
I believe in keeping a diversified portfolio of different asset classes. All
asset classes have different risk and return profile and have different
correlations with each other.

As for corporate bond being more risky/expensive than government bond, ask
investors who invested in Greece Debt vs those who invested in Apple debt.

You may want to consider reading up a few books in investing and finance.
/r/personalfinance, /r/investing, /r/financialindependence, and /r/finance are
a few good subreddits with some smart regulars. Also these subreddits have
good list of recommended books.

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harperlee
You can invest in them, of course. I think the confusion is that fixed income
may serve two different purposes.

According to Markowitz, you buy fixed income as "risk free" asset, to offset
an optimal portfolio of risky assets. That way, once you have a target
combination of risky assets, you just need to decide that % to put on that,
and you put the rest to the risk-free asset.

Government bonds are usually very low risk. Of course, they are never risk
free, plus you hold inflation risk. But Germany, US, etc. have negligible risk
compared to corporate bonds or emerging / distressed government bonds. So they
are good to plug into the "risk free" basket of that methodology.

Corporate bonds (as well as some government bonds) are much more risky, so you
cannot use them like that. But they can be part of the risky portfolio, as
they give much more interest and volatility, with which you can earn more (or
lose it!).

So it's a matter of treating them as a different thing as government bonds,
and understanding that when people talk about fixed income, they refer to the
low risk government one, unless it is obviously otherwise.

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akg_67
> when people talk about fixed income, they refer to the low risk government
> one

I am sorry to say this is incorrect. No knowledgeable person will refer fixed
income as "low risk government one". Fixed Income covers a broad range of
assets that are typically debt-based, non-equity based that generate periodic
payments/interest. This includes Government Bonds, Corporate Bonds, and other
debt securities (Real Estate, Consumer Loans, Invoice Financing, come to my
mind). Fixed income is a very large and complex (much more than equities)
field and calling it as just "low risk government one" is a disservice to the
field.

> According to Markowitz, you buy fixed income as "risk free" asset, to offset
> an optimal portfolio of risky assets.

I would like to see reference that attributes this to Markowitz. Markowitz's
Capital Asset Pricing Model (CAPM) refers to "risk-free" rate but never
specifies if fixed income equates to risk free. There is no risk-free assets.
Anything close to being considered "risk free" is very short-term (not long
term) government paper issued by US, UK, Germany, Switzerland and Japan.

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harperlee
Yes, sure, it was a simplification. And probably not Markowitz paper will
display verbatim "you buy fixed income as "risk free" asset". But I think
you're nitpicking. Markowitz defined the Modern Portfolio Theory as working
with risk-free assets. Sure, that does not exist. But there are
approximations. FI is normally used as such.

Also:

> No knowledgeable person will refer fixed income as "low risk government
> one".

Being knowledgeable is not something binary, and you have lots of people in
the internet talking about holding stocks and bonds. Whenever you see
investment advice stating "hold your age as percentage of FI", they are not
referring to junk bonds, nor securitizations or whatnot. They are talking
about low risk, low yield, typically government bonds.

EDIT: Context is also to consider. In some contexts, people equate both
things.

In any case, rereading my post, it now sounds a little bit defensive, so sorry
for that.

~~~
akg_67
No problem. Thanks for the clarification. I just didn't want readers to assume
that Fixed Income always equates to low risk.

~~~
harperlee
No, that was precisely my point :) sometimes it is, sometimes it's not. And
you need to know what are you buying.

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andrew-lucker
I don't hold corporate bonds. That seems really easy to screw up if you don't
know what you are doing. I think it is a reasonable option for financial
professionals to choose if they are looking for slightly higher returns and
are willing to invest the time to do due diligence, but for everyday investors
I agree definitely stay away before you lose your whole investment.

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ksherlock
I have a handful of high-yield corporate closed end funds. The biggest
downside is that some of the payments are non-dividend distribution (such as
return of capital) which are tax-free but lowers the cost basis when you sell.

