The Role of High Yield Bonds in Your Income Portfolio



It's a percentage game...
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The DIY Income Investor portfolio is based on an asset allocation split between high-yield dividend shares and high-yield fixed-income securities. As far as I am aware no-one has previously advocated or publicised such an asset allocation mix. Yes, the 50/50 equity/bond split recommendation is fairly commonplace - but not with the emphasis on high-yield.

While there is a lot of evidence supporting dividend investing and, perhaps more speculatively, high-yield dividend investing, there seems to be less evidence for the success of high-yield fixed-income investment. But there is some...

Mean Reversion - What Goes Up Comes Down?

Mean reversion - the phenomenon of security prices (and therefore yields, for income-producing securities) returning to a 'normal' level - may exist for both equities (shares) and fixed-income investments.

In fact, this does seem to be what I rely on to make money with my high-yield DIY Income Investor portfolio! As well as hopefully pocketing the high yield for the foreseeable future, I am also betting on a price rise, so that I can sell in the short to medium term at a profit.

A Preference for Diversification (Portfolio Buy)

Warren Buffett famously said (on the subject of portfolio diversification) that - and I paraphrase the words of the master - you should be very discriminating about which companies you buy shares in and consequently (because you don't buy much) you should: 'put your all your eggs in one basket but watch that basket carefully'. (Andrew Carnegie said something similar a generation before.)

Passive Aggressive - It All Depends on Which Index You Choose

Much as I enjoy the active investment process, I do have a lot of sympathy for the passive index investors out there.

Although they do seem a bit too smug sometimes, I admit that they have some excellent advocates - including Warren Buffett, William (Four Pillars of Investing) Bernstein and of course the Grand-daddy of low-cost index investing, John Bogle.

But it seems to me that the results obtained depend crucially on which index you choose, and how you structure your portfolio. So I was intrigued when I came across a useful summary of performance of the key worldwide indices...

SEMLing of Roses? (Portfolio Buy)

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Judging from my DIY Income Investor portfolio, the world stock markets are going through a period of risk reappraisal - and the next direction could be up or down. The value of the portfolio has been steaming upwards until November, when it paused and then started dropping alarmingly.

I have noticed this hiatus and reversal pattern in the markets before. Uncertainty in the financial markets can be an opportunity or a trap - all we can do, as individual DIY investors, is to have a long-term strategy (hopefully based on some academic evidence) and try to stick to it, no matter if the markets are crashing around our ears.

My latest portfolio buy is just that - a continuation of the long-term strategy.

All That Glisters... (Portfolio Sale)

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...Is Not Gold.

Gold mines in Tanzania - what was I thinking?

Not exactly Fool's Gold - more like a distant African mirage of untold wealth. Like Stewart Granger (as Allan Quartermain) searching for the lost diamond mines of King Solomon, I ventured into the steamy forests of the 'Dark Continent', looking to make my fortune.