Successful investingrequires a balancing act between two important things: the desire to make as much money as you canfrom your investment versus the wish to preserve your capitalin case things go wrong. With one increasingly popular investment, however, the limited reward that's available to investors today doesn't justify the potentially huge risks if the economy fails to maintain its upward track.

Reaping riches from junk
Late last year, the financial crisis sliced the bond market in two more sharply than a Ginsu can slice a tomato. On the one hand, Treasury bondssoared as panicky investors fled to the assets they considered the safest. On the other hand, with many companies completely unable to tap the credit markets at all, demand for some types of corporate bondsall but evaporated, and investors who owned them lost huge amounts of money.

But now, the tables have turned, and everyone is piling into all sorts of bonds, including junk. Treasury bonds have actually lostvalue this year, even including interest payments. Their rates are still so low that yield-starved investorsare flocking to any alternative that offers higher income, regardless of the risk involved. The demand has helped corporate bonds produce huge results so far this year.

Understanding risk
And unfortunately, the market for corporate bonds does involve more risk than investors are giving credit for right now. For instance, high-yield "junk" bonds usually trade at a substantially higher interest rate than Treasury bonds with the same maturity date. The additional interest serves to compensate investors for the additional risk of default.

According to the Wall Street Journal, the spread on junk bonds has narrowed from almost 20 percentage points last fall to just 7.6 percentage points today. Although that's still a significant spread by historical standards -- the average figure is just 5.6 percentage points -- it shows just how much investors have bid up the prices of these bonds lately.

Big gains are done
The problem, though, is that bonds can only rise so much. Back in October, the WSJreported that bonds on Ford Motor (NYSE: F) had jumped from $0.125 on the dollar at their February/March lows to $0.72, and that MGM Mirage (NYSE: MGM) bonds had tripled in value since the rally began. Those returns compare pretty favorably with how the stocks of those companies have fared this year.

But although shares can keep rising indefinitely, there's an upper limit on how much a bond can appreciate. Take a look, for instance, at these recent prices on high-yield corporates:

Issuer

Bond Coupon and Maturity Date

Current Price

MGM Mirage

6.75% of Sept. 2012

85.25

Freeport-McMoRan Copper & Gold (NYSE: FCX)

8.25% of April 2015

107.03

Community Health Systems (NYSE: CYH)

8.875% of July 2015

102.00

Sprint (NYSE: S) Capital

7.625% of Jan. 2011 Continued...