Should I look at rating companies to decide whether to buy bonds?

Good question.

You want to look at everything. But the mistake that investors make is they place too much weight on ratings and forget that bonds should be backed by hard assets like mortgage notes or real estate.

The safest bonds are backed by hard assets such as real estate or packages of mortgage notes. The fact that a company has a good bond rating does not always give good protection. Some investors just look at the rating and think that will keep them safe.

For example, the American energy company, Enron, had a credit rating from Baa1 to Baa2, two levels above junk status. Standard & Poor's affirmed Enron's rating of BBB+, the equivalent of Moody's Baa1.

Don’t be that investor that just leaves everything to a rating agency. Those agencies are fine but you need to not pay that much attention to their ratings.

Far better is if the bonds are backed by hard assets. Too many investors are in love with public company debt and simply don’t take the time to explore private company debt that can often pay hundreds of basis points more.

Bond purchasers should not miss out on corporate bonds that are privately held and might pay hundreds of basis points higher rates. Alamo Mortgage Holdings, Ltd. corporate income bond pays hundreds of basis points higher rates than standard UK government bonds.

I hope that helps and good luck with your investing!

Benjamin Z Miller
www.benjaminzmiller.com