Editor's note: Our colleague Mike DiBiase says that right now, it's finally time to act on a setup he has been watching for years. A wave of corporate defaults has just started. Even the bonds of healthy companies will likely get dirt-cheap in the coming months... And if you know where to put money to work, he believes you could see some of the best opportunities of your lifetime... without taking on stock-like risks.
So today, we've updated one of Mike's pieces, which we last published in DailyWealth on April 22, 2020. As he explains, to make big profits with corporate bonds, you need to know which ones to avoid...
On a quiet Tuesday night in Germany, a 1,100-pound bomb exploded... killing three men.
This wasn't a terrorist attack. The active bomb had been buried for nearly seven decades.
You see, the three victims were experts on disposing of World War II-era bombs. Reports said they had defused more than 600 bombs in their careers. But as the head of the Hamburg Ordnance Disposal Unit told German public television at the time... accidents happen.
Old, unexploded bombs remain a major problem throughout Europe. Working near such danger is a risky proposition, even for the best-trained experts. They know most of the bombs will eventually explode... They just don't know exactly when.
For years, I've been observing a similar dynamic in the corporate-bond market...
Fueled by a decade of record-low interest rates, U.S. companies amassed trillions in corporate debt. But with today's higher interest rates, much of this debt will blow up... meaning it will never be repaid. Unsuspecting investors will be wiped out.
After more than a decade, the next credit crisis has finally arrived... And I don't want you to be a victim.
What most folks don't realize is, you can do much better than avoiding the damage.
In fact, savvy investors will be able to make hefty profits with investments that are much safer than stocks.
I'm talking about buying corporate bonds for $700, $600, or even $500 or less that come with the legally protected promise to pay you $1,000 at maturity... on top of fat interest payments along the way.
It's the heart of the distressed-debt strategy my colleague Bill McGilton and I use in our Stansberry's Credit Opportunities newsletter.
But to succeed, you need to know a few more details. So today, let's discuss what you should do to build your ideal bond portfolio...
1. Only put your money to work in safe distressed bonds with attractive returns given the level of risk.
Some distressed bonds aren't safe. Others are. That's where we come in... We do all the work for you in Stansberry's Credit Opportunities.
We look for businesses that produce solid cash flows... and have balance sheets built to survive a credit crisis. We don't have to even love the business. We only care about one question: Can it pay us?
To answer this, we look at two things: Whether the company can afford the annual interest costs on all of its debt... and whether it will have enough cash on hand to pay off our bond at maturity. (You can learn more about these two ideas right here.)
2. Stay away from corporate-bond mutual funds and corporate-bond exchange-traded funds ("ETFs").
Investing in these funds is not like investing in individual bonds. These ETFs can't choose to hold all of their bonds until maturity – which is the date that bondholders are scheduled to receive their principal payments.
When defaults rise, investors in these bond ETFs will want to get their money out in large numbers... And the ETFs will be forced to sell their bonds to meet customers' redemptions. They have no choice.
Worse, the fund managers will likely sell their best bonds first... the ones with the most liquidity that have sold off the least and can raise the most cash in a short period. Then, the ETFs will be left with a portfolio of ever-riskier bonds whose prices have collapsed. There won't be nearly enough liquidity to handle all the sales.
Investors in these high-yield ETFs will be wiped out quickly. Don't make this mistake.
3. Build your cash stockpile. It's OK to sit on the sidelines and wait for the best opportunities to emerge.
We've seen some good deals out there. But right now, we're still in the early stages of this credit crisis... Soon, there will be much better – and many more – opportunities.
As the credit crisis unfolds, you'll be able to pick up bonds for pennies on the dollar. But you don't want to act until you know a distressed bond is safe – unfairly punished by the market.
4. Diversify your bond portfolio across at least 10 positions.
Understand that investing in distressed debt still involves risk. Despite all the homework we do, in the end, these companies and banks are run by people operating in a competitive, fluctuating economy.
Just like in the stock market, we can't avoid the human element. Management teams can act in their own best interests in ways we may not anticipate. We can't predict the future or control every variable.
In the long run, some of your bonds may default. But if you're well diversified, the large gains in your other positions will more than offset the few losses you endure.
And in the end, you can still vastly outperform the market...
Since launching our newsletter in November 2015, for example, we've closed 62 recommendations. Only three have defaulted. We've booked 50 winners for an 81% win rate. And our average annualized return across all closed positions – including the defaulted ones − is 10.2%. That's nearly double the return of our benchmark – the iShares iBoxx High Yield Corporate Bond Fund (HYG) – in the same holding period.
This includes individual bond annualized gains of 335%... 140%... 86%... 79%... and 68%.
And since the pandemic, we've done even better. We've closed 24 recommendations with a 92% win rate. Our average annualized gain on those 24 recommendations is 37%... nearly three times higher than the 13% return of our benchmark.
That even beats the stock market. You would have earned an annualized return of only 35% if you had invested in stocks instead, as measured by the SPDR S&P 500 Fund (SPY).
5. Try not to be too exposed to any single market sector.
In our Credit Opportunities portfolio, we've focused on attractive opportunities in many sectors, including energy, commodities, retail, technology, real estate, and finance.
The credit crisis is starting now... But you don't have to be a victim. This is the moment we've been waiting for since we launched our newsletter.
Following this advice, you can build your ideal bond portfolio of good-quality bonds at incredible discounts... And you'll be far ahead of most investors when disaster strikes.
Editor's note: Billionaires love this kind of crisis... when world-class investments go "on sale" for pennies on the dollar. But anyone can use this distressed-bond strategy. One of our subscribers recently went public to share how it has helped him make hundreds-of-percent gains... including a 321% gain on his first try. And that's despite the chaos of the past few years. To learn how it works – and how it helped him retire at age 52 – check out his video here.