Don't get burned chasing hot numbers

[FunGoals]

Here is a story on CBS MarketWatch concerning the bankruptcy filing of American Business Financial Services Inc.

http://www.marketwatch.com/news/yho...o&guid={4E2ADF71-1F4F-46C8-99D6-FC387A8147D5}

Here is the ticker

http://finance.yahoo.com/q?s=ABFIQ

 

[Cut-Throat]

This was basically a junk bond paying 8%. These are much more risky than stocks IMHO.

"Not only will these people not get the attractive return they were expecting, but their principal most likely is gone too," says Greg McBride, senior editor for Bankrate.com, "The damaging thing for an income-oriented investor is that they now have less money on which to generate any kind of return."

 

[JOhn Galt]

I have some "junk" and "near junk" in my portfolio. I know it is risky, but I also have some super-safe bonds in the basket. Anyway, I thought about it a
long time (before taking the plunge). I just prefer
bonds (even junk) to stocks. So far, so good.

JG

 

[FunGoals]

Management disclosed the risks. Heck, the prospectus even included this outrageous line: "Since our management has broad discretion over how to use the proceeds from the offering, they could use the proceeds in a manner contrary to the best interest of investors.

 

[JOhn Galt]

Even without this surprising disclosure, whenever you
hand over your money to someone, you should assume
they may do things "not in your best interest". I always do. Anyway, in a perverse way, you have to admire
their chutzpah for putting that disclaimer in the prospectus.

JG

 

[ESRBob]

I have some "junk" and "near junk" in my portfolio.
JG

John,
Don't you have some GMAC bonds bought recently? I've been seeing them in the news with a downgrade or imminent downgrade etc. How are you feeling -- same or worried? This was always my problem with buying individual junk bonds -- the credit risk, no matter how far-fetched it may seem, outweighs the slight yield premium in my book; I can get a junk bond fund to do almost the same thing, pay their annual mgmt fee, live through the mark-to-market while rates rise, but have a nicely diversified basket of bonds to spread credit risk of any single bum issue.

Not trying to win any converts but just curious how you assess the risk/reward tradeoffs.