When most people think about the riskiness of an investment, they think about the bonds' credit rating

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Question:

When most people think about the riskiness of an investment, they think about the bonds' credit rating (such as that provided by Fitch) as this has been a standard way to test a company's risk of default. While this rating scale is very consistent across companies, the rating does not guarantee a AA rated company will not default, nor a BB company will as there are a multitude of factors that lead to such issues.

However, credit default swaps are a pretty easy way to see an investment vehicle is unstable. If investors are able to swap and/or offset their credit risk with that of another investor, this clouds the true reliability of the investment. I think allowing credit default swaps is a great solution if the investor has a bad credit history or needs quick cash, but there's a reason an investment vehicle would allow this type of lending- there is always a downside when things seem too easy. Just like some of the "payday loans" places where you can get money quick and pay back later, there is always a downside (typically those lenders have extremely high interest rates) and in the case of credit default swaps, they can hide the inherent default risk.

Rather than relying on one source for investment worthiness, I think investors should know the economic indicators that better tell a story about the investment. Market inflation is a key area to watch across all investment areas. If you have a loan or bond, but inflation rises higher than your interest rate you end up losing money. The same logic is applied to a stock- inflation will devalue the currency and if the stock is underperforming, it will not grow at the rate of inflation. So while inflation is a key care about in today's economy, keeping your money in a high yield savings account is one of the best routes.

Overall, I think the Fitch ratings are a great start to determine the worthiness of an investment, but there are a few other indicators to research prior to jumping into a new investment stream.

Question: After reading the opinion above, what is your response? What may be some risks or drawbacks? Please be detailed in your opinion.