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Our New Low(er) Interest Rate Environment

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With the talk of interest rates and recession in the headlines, I figured it was a good time to check-in, and give a little update on interest rates and how lowering them can impact the economy, issuers, and investors.

Why is the FED cutting?

Basically, the FED is cutting to extend the current economic expansion we are in.

The fundamental reason behind that is lower interest rates encourage corporations and consumers to spend more.

For two reasons.

One, they get paid very little, in interest, to put their money in the bank. And two, they are able to borrow money at lower rates.

Current income needs

People who need income, retirees, for example, invest their money in income-producing securities. Often times, those securities are fixed income instruments, like bonds.

Bonds pay interest on a semi-annual basis. The higher the credit quality of the issuer (company or government entity) the lower the payout. The inverse is true for a low credit quality issuer.

It’s the ever-present adage in investing, more risk equals more potential for reward.

When interest rates continue to creep lower, then those people start to make different choices.

What people are doing now

People are getting paid less, in interest, to invest in high-quality debt issuers, so they’re getting riskier. Meaning, they are investing that money with low credit quality companies and/or government entities.

Their risk of not receiving interest payments and getting their principal (the initial investment) back goes up.

The FEDs tool kit

I’ve touched on this point a few times in the past, but I’m going to hammer it home.

The Federal Reserve, essentially, has two tools. Lowering interest rates and buying Treasuries. Lowering interest rates promotes spending and buying Treasuries provides liquidity.

Because they are lowering interest rates during an expansion (whether we are still in one or not is debatable, but let’s say we are for the sake of argument), they are, effectively, removing the number of tools they have available.

When the next recession comes, my fear is they won’t be able to do enough to help us out of it.

Corporate debt

Currently, the amount of corporate debt in the market is the largest in history. Additionally, the amount of debt that’s rated BBB is also the highest in history.

BBB is the last rung on the investment-grade scale. Investment grade is anything BBB and above.

That’s a problem for basically one reason. When a BBB rated issuer gets downgraded (to BB) they are classified as junk (high-yield). When that happens, they need to tighten up their debt and improve their balance sheet. This means less borrowing and less spending.

It’s a dynamic that feeds itself. The issuer is downgraded, they spend less, GDP gets weaker, more corporations follow suit, and here comes the recession.

Investors

Once the corporate (high-yield) debt pops, issuers of debt will have trouble meeting their obligations. They’ll start to default, and their investors will be left high and dry.

Conclusion

This post is not intended to scare people, it’s to inform.

One last point. Because interest rates have been so low for so long, there are economists/academics that think the lowering of interest rates won’t actually help.

Related Reading:

Interest Rates And Trade

What Is A Bond?

Why Do Interest Rates Matter?

 

 

*The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

What It Take To Be A Successful Investor

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What makes a successful investor? Is it your ability to beat the market or to beat your competition?

In my opinion, being a successful investor doesn’t have to do with out-earning your peers or leaving the S&P in the dust. No, my definition is very simple.

Develop an investment plan using a variety of factors, and be able to execute and follow that plan indefinitely.

Suitability

This is step 1. You need to figure out what your “suitability” is. Your suitability will lay a very good foundation upon which you build your investment plan. Suitability involves three things:

  • Risk tolerance – This is your ability to handle drawdowns in your portfolio. If you crumble with fear every time you lose 5 percent, then you’ll probably want a fairly conservative portfolio*. On the other hand, if you have no problem seeing your portfolio drop 50 percent, then you’re ready for a more aggressive allocation.
  • Time horizon – Probably the most important factor of the three. Your time horizon is basically when you’ll need the money. A long time horizon allows an investor to take on more risk because there’s more time for them to recover from drawdowns. The inverse is true for short time horizons. You’ll want to be conservative because you have little time to earn back what’d you lost.
    • Long time horizon – 10+ years
    • Medium time horizon – 2-5 years
    • Short time horizon – Less than 2 years
  • Goals – What’s your plan? Is this savings going to be used as a down payment for a house? If so, there’s probably a minimum dollar amount you have in mind and you’ll want to tip the odds in your favor that you don’t go below that. Similarly, if this is for retirement and you have 30 years to invest, you have the green light for risk assets.

Keep in mind that all three of these things, plus one other, need to be used together when determining your asset allocation. If you are tolerant of risk, but need the money in 5 years, somewhere in the middle between aggressive and conservative is probably better. That one other thing is your behavior as an investor.

Investor behavior

The finance/investment world is coming around to this, but your psychology is a HUGE factor as an investor.

Obtaining a high return on assets is one of your goals, but it should not be the primary goal. When you create an investment plan you have to make sure it’s something you can actually stick with.

I wrote about it previously, here.

You could be tolerant to risk and you could have a long time horizon, but if you lay awake at night every time the market drops, then you need to rethink your approach.

That kind of fear and anxiety hinders your ability to follow your plan. What normally happens, is someone sets an unrealistic investment plan, one where they take on too much risk.

Thereafter, volatility picks up. They check their portfolio and it’s declined 15 percent. They wait a day and check the next.

Another 2 percent drop. Then the thought of 2008 creeps into their heads and the panic sell.

You can set up a great investment plan, but your behavior will ultimately make the decisions. Keep that in mind.

Asset allocation

Using your suitability and behavior, you can then determine your asset allocation. The types of assets you use in your allocation can vary. If you wanted to invest a small percentage of your portfolio in gold, for instance.

The three most common assets are stocks, bonds, and cash. With risks ranging from high risk to virtually (there’s always some risk) no risk.

Speaking very generally, people with long time horizons and are more tolerant of risk, have a more aggressive portfolio. The inverse is true for people with short time horizons and a low-risk tolerance.

That said, the ultimate goal is to develop a plan that meets your goals in the smoothest fashion possible.

Ignore the noise

Throughout your investment “career” you’ll run into people, friends, family, or even random people on the street that will tell you the sky is falling or that the newest IPO will go gang-busters and you need to get in now!

Put your blinders on. There are two things that hurt investors. Their own behavior and their ability, or lack thereof, to tune out what’s happening around them.

This is extremely difficult because we, as humans, have evolved to use our peers to compare or judge, our standing in society.

Stay in your lane and focus on your goals.

Never stop learning

Every single experience in your life is a learning opportunity, especially the bad one. I recommend journaling daily, recount your day, and dig little nuggets of knowledge from your experiences.

Additionally, take in some form of content every day that improves your understanding in your line of work, or in an industry that you’re interested in.

With regard to your finances, give our Toolkit page a look. There you’ll find a number of books and resources to enhance your financial know-how.

Please be advised: Everything written in this article is for informational purposes only and should not be taken as investment advice. Opinions are my own and do not reflect the opinions of this publisher or my employer.

Further reading:

The Psychology Of Money

 

What is the Coverdell ESA?

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Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

  • Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
  • When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
  • Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
  • These accounts are self-directed, so your investment options are plentiful. They include…
    • Age-based funds
    • Static mutual funds
    • ETFs
    • Stocks
    • Bonds
    • Real estate

Disadvantages

  • Contribution limit of $2,000 per child per year.
  • The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
  • If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
    • After 30, the funds inside the account become fully taxable and you’re penalized 10%.
  • Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

  • Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
  • The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
  • Qualified expenses include…
    • Tuition
    • Books
    • Supplies
    • Equipment
    • Tutoring
    • Special needs services
  • And can also include…
    • Room and board
    • Uniforms
    • Supplementary and transportation services
  • With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

5 Benefits of Investing in Real Estate Through Private Lending

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Real estate investing is a key ingredient for creating a long-term investment plan that will maximize your wealth and can even lessen your risk. But it seems like there are limited options available to you, considering most investors don’t have the necessary time or experience to do it successfully. You can:

Purchase your home. Although this is considered more consumption than investment, this is still an investment in real estate with potential appreciation.

Purchase rental property. Most people have heard about the ups and downs of owning rental properties, but collecting monthly rent from tenants is great way to generate income. The downside is the need to manage the property yourself or hire a property manager to directly handle tenant and property issues.

Purchase REITs. Similar to purchasing stocks, a real estate investment trust is a corporation that raises money by trading on major exchanges, and it pays investors 90 percent of its taxable profits via dividends.

Buying real estate doesn't necessarily mean dropping a ton of cash into the ground.

Buying real estate doesn’t necessarily mean dropping a ton of cash into the ground.

Besides these options, there’s another that the majority of real estate investors are unaware of: investing in real estate through private lending. As a private lender, you essentially become the bank. You lend your money to other investors (borrowers) and charge an appropriate interest rate for the use of your money. Here are some of the benefits of real estate private lending:

1) Monthly cash flow: The borrower pays you interest every month, which is typically between 8 and 15 percent.

2) Security: Your investment is secured by a lien on a tangible piece of real estate. That gives you collateral when lending your money, aside from just the soundness of the borrower. Typically, you shouldn’t loan more than 75 percent of the property’s current market value, giving you some cushion in the event that the property’s value decreases.

3) Diversification: Real estate private lending gives you the ability to diversify your portfolio — and not only from a real estate perspective. If you want to create current income, it’s another fixed-income option.

4) Lower volatility: You can better manage the market risk if you keep your real estate loans short term.

5) Passive investment: Instead of learning the nuances of real estate development, construction, management, etc., you can lend to other experienced real estate investors who do all the work. You just act as the bank and receive interest payments, and your money is returned at the end of the investment.

Being a real estate private lender is a great way to get exposure to real estate without doing all the work. But you still have to understand some of the risks involved. The market value can cause properties to quickly increase or decrease in value due to local and national factors.

Borrower credit can also be volatile; you need to make sure the borrower is in stable financial condition and can pay back the loan. Also, verify that the borrower’s investment strategy is solid.

Finally, make sure you have good legal representation to draft loan documents, coordinate the transaction, ensure your loan is properly recorded, and see that agreements are in place to protect you as the lender.

Real estate private lending is a great way to get exposure to real estate and generate passive income for your investment portfolio. As with any investment, you need to understand the risks involved and do your homework before jumping in headfirst. But if done right, real estate private lending can generate some of the best risk-adjusted returns in the marketplace.

Jeff Carter is the managing director and founder of Grand Coast Capital Group, where he oversees all aspects of the business. Grand Coast Capital Group is a national private lending firm based in Boston that provides creative short-term financing to real estate investors, builders, and developers across the country.

How To Increase Your Yield Through Microloans

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Sometimes it takes a little creativity to reach your destination.

The world economy continues to slowly gain traction but many cash investors aren’t seeing that translate to increased yield in their short and mid-term cash investments.  According to Bankrate.com, the average yield for a $10,000 money market investment was a paltry 0.52%.  That’s a whopping $52 per year, excluding any fees or costs, and definitely excluding inflation.  Last year, the Social Security Administration increased retiree benefits by 1.7% to offset increasing costs.  Based on that inflation adjustment, investors are losing purchasing power each and every year by doing what at first glance appears to be the right thing: investing in a reliable money market account.

Imagine an investment that guarantees you’re going to lose money – that’s what a traditional cash reserve is doing today. That’s why so many bloggers lately question the need for an emergency fund at all. Don’t fall into that trap.

Microloans: A Primer

Microloans are very small loans made to borrowers who typically lack collateral to support the loan.  Sometimes, microloans are also made to those who don’t have steady employment or even verifiable credit.   There are two well-known microloan organizations – serving a completely different market. The most well known peer-to-peer lender is Prosper.com.  They have over 1.6 million customers and have funded over $400 million in loans to their members.  Prosper.com helps connect borrowers who have reasonable credit with lenders who are trying to earn a higher return on their money.  The other micro-lending site is Kiva.  They primarily help people and families across the world to “create opportunity and alleviate poverty.”  Between the two, Kiva seems altruistic, whereas Prosper seems more capitalistic.

How To Earn Money

While both Kiva and Prosper offer the opportunity to lend money to whomever you wish (and for whatever purpose you wish), Prosper created a system to help those who want to use Prosper as an investing tool.  On their website, they breakdown all the financial metrics for the different types of loan ratings.  Prosper also provides advice on how to create a “diversified” portfolio of microloans.  (Diversification is important when investing in loans – some are going to default!)

Returns on these investments are beyond enticing – Prosper’s best members, those they rate AA – have an average credit score of 808 (well above the national average).  Those AA loans have a historical loss rate of 1.70% – but have an average return of 5.50%!  That’s leaps and bounds above our Money Market rate listed above.  The lowest rated Prosper members (credit score 683) have a 14% loss rate and a 13.29% average return.  A well-diversified portfolio of Prosper loans could make an attractive portfolio.

It’s Not All Roses

This may seem like a great “fire-and-forget mission” and in some ways it is, but there are some things you’ll need to recognize before you invest in microloans at a place like Prosper.  First, the loans are three years long, and there’s no way to get your money back early if you truly need it.  Secondly, you will experience some defaults.  As I mentioned above, even the highest rated consumers still default.  You need to realize you’re becoming the bank!  Prosper recognizes that their traditional model doesn’t suit everyone, so they have created their Prosper Trade Notes program, but even that comes with it’s own long list of pros and cons.

Sum It Up

If you have some extra cash reserves – money that you know you aren’t going to use for at least three years – Prosper.com could be a viable solution to increase your yield.  If you want to loan money for a more altruistic purpose, consider Kiva.  Both of them serve a specific purpose, but Prosper has a greater chance to provide a consistent income stream for the investor.

Photo: Philip Taylor PT

Investing Myths: Four Traps That Catch Amateurs

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Why do so many do-it-yourself investors perform far worse than they should? How do you make sure and avoid some of the potholes that most amateurs seem to step in?

In theory, people managing their own funds should do well. Today’s investor has access to more tools, more research, and more information than ever before.  You can easily view data in near-real time, putting the average person on par with professional brokers and large brokerage businesses on Wall Street.  It’s easy to track company performance, get up-to-date and late breaking information just by opening an app on your phone.  What a world!

But, with all this information available, you’ll need to filter out truisms, half-truths and outdated ideas. Managing your own money isn’t tough, but it’s easy to fall into traps.

Let’ s walk through some top myths today’s investors need to realize aren’t true anymore.

First, a diamond may mean forever, but buy and hold isn’t.  You shouldn’t just buy a stock and close your eyes.  Occasionally, good companies have badly performing stocks.  Instead of “buy and hold” investors should “buy and pay attention.”  You should carefully select your positions based on the information at hand, but be sure to have a well-thought out exit plan before you buy the stock.

Second, performance isn’t the only thing that matters….and I’m not just saying that because I’m a guy. Historical performance is worth noting, but it’s not, as they say, indicative of future performance.  We do believe, however, that performance does persist – there is investment momentum.  What matters more than past performance? Simply put, volatility, tax considerations and overall asset allocation should be equally considered. It’s paramount to create a portfolio that compliments your long-term investing goals. Remember that the ones that shoot up fast are also the ones that crash quickly. Volatility is a two way street.

Listen to ways your investments could be more successful on our podcast: 2 Guys & Your Money Episode 15: Top 5 Ways to Improve Your Investment Returns

Third, charts don’t only make sense for professionals.  Some people believe only “technical traders” use charts or that they’re somehow outdated relics from a bygone era.  Not true.  Charts can tell investors a great deal about what’s going on in the markets and with any particular holding.  Charts aren’t crystal balls – but they can help you manage risk. How much volatility has a position had in the past? How does today’s price compare with past prices? When does the position pay dividends? How has this position grown relative to its peers? All of these are easily answered by reviewing a few charts.

Finally, don’t try to always buy at the bottom.  This one’s really dangerous.  How do you know it’s the bottom?  Investors are egotistical beasts; we think that because it looks like the stock/bond/real estate/whatever is going to turn around, our few dollars are boing to be perfectly placed. We’ve seen investors buy stocks at $10 that once were $100, only to find out that they were not even close to the bottom.  Remember two things: 1) you’re nobody in the market, and your brain is too small to call the bottom of the market (sorry if that offends you); and 2) investment prices fall for a reason. If a position is “on sale,” it’s important to know why it’s fell before you make a bet that it will rise again from the ashes. The person who buys a stock that’s near its yearly low is betting their purchase is going to be the reason it turns around.  Unless you’re Warren Buffet, I wouldn’t be too sure.

The biggest rule when it comes to investing is not to try to ”win big” but rather “lose small.”  Manage and know your risk before establishing a position and you’ll go a long way toward becoming a more successful investor.

Old Savings Bonds Might Be Your Most Valuable Investment

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It’s Thursday. I’m grabbin’ some coffee while OG takes the driver’s seat….

Recently, a client emailed me a peculiar list of dollar amounts and dates. Each was followed by a one or two letter symbol.

What the heck?

Finally the lightbulb went off – this was a list of US Savings Bonds we’d discussed months earlier that she’d “found” in her safety deposit box. Her question: What to do with all those bonds?  Cash them in?  Keep them?

 

The Savings Bond Conundrum

 

Clients raise this question at least once every couple months – and I’ll bet as more and more baby-boomers head into retirement the frequency is only going to increase.  For some reason, people seem to think analyzing savings bond interest is a complicated financial problem that only the best advisors can solve.  Nothing could be further from the truth – let me show you exactly how I determine whether to keep or cash in each bond.

Small Numbers of Bonds

If you own only a few bonds, I’d recommend using the US Treasury’s savings bond calculator. This tool helps you  quickly estimate the value, interest accumulated, yield, next interest payment date, and final payment date.  All you’ll need is the issue type (E, EE, or I), face amount, and the month and year.  All of that information is found on the face of the bond.

Lots of Bonds?

If you’re the Donald Trump of savings bonds, or if you want to track the bond’s value over longer periods, you should download the government’s Savings Bond Wizard tool found at http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm.  The Savings Bond Wizard allows you to save the file and refresh it each month with the most updated values. Here you can store information about each of your bonds and easily compare interest rates and the total value of your savings bond empire.

Is Your Bond Still Making Money?

Here’s a tip: don’t hold on to bonds that no longer pay interest.

After thirty years, US Savings Bonds mature and the government shuts you off like a disinherited trust fund baby.  Most bonds reach their face value somewhere between 12 and 15 years after issue and continue to pay interest until year 30.

It’s foolish to keep a bond past 30 years.  Don’t do it.

One client brought in a savings bond that stopped paying interest before Kennedy was president! Imagine how much money that’s cost him.

 

The Moment of Truth

After you’ve used all of your fingers and toes (AND one and a half neighbors’ fingers and toes) to determined whether or not it’s still paying interest (let’s assume it is), now it’s judgment time:

Can you invest the proceeds at a better rate of return than you’re receiving from the government?  

The yield on your savings bond is risk free.  Those two words are hard to beat.  I’ve seen bonds from the 80’s paying 6%. Can’t beat that. I’d keep those.

Final Step

Set a reminder to review your bonds again a few years down the line.  If you have a bond or two that you’d like to redeem, schedule it in advance.  Don’t forfeit interest because you procrastinated.  Keep an updated bond inventory and review it periodically just as you would any other part of your portfolio.

Savings bonds are one of the best ways to lock in guaranteed interest – especially if you have some from ten or twenty years ago.  Many clients are surprised when I tell them to keep their bonds; sometimes it’s in their best interest to do so!  Many times people think savings bonds are a waste of time and money. My take:  In today’s low interest rate environment yesterday’s bonds may just be a gold mine.

My Experience in Landlording 101, or I’m Not Donald Trump

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I’ve been renovating my rental property this week and haven’t had enough time to pick a Blog Post of the Week! Instead, you get obscure ramblings from an over-caffeinated blogger….I’ll have a Blog Post of the Week! again next week for you. Have a great weekend!

I Never Wanted To Be A Landlord

When I was an advisor, I’d hear horror stories from my clients with tenants. Early on I learned that I probably didn’t have the stomach for some of the negotiation and strong-arming that it takes to work with tenants. I prefer REITs for my real estate exposure.

But, after my home didn’t sell when we moved to Texas, I realized that I had two choices: short sale or try my hand at tenants. I opted for choice #2. I wasn’t completely green. I’d read extensively about landlord/tenant contracts, strategies and tactics so I could be useful to clients. While “fun” might not be the right word, it’d be educational to try it first hand.

The surprise? I didn’t know how much I’d like it.

I’m no Donald Trump and am still too much of a pushover. I want to be a little more callous with my tenants because they realize they can get away with stuff (and do). An example: my tenant the last three years was late with her rent EVERY MONTH. The good news is that I wrote a $100 late fee into the contract, which she gladly paid EVERY MONTH. I got used to her checks two weeks late and came to enjoy the $1,200 extra income from her.

Lessons Learned From Landlording

Is landlording a word? Probably not (Pages doesn’t think so….), but I’m running with it. That’s the kind of rebel I am.

  1. Don’t rent a furnished place unless you’re okay with everything being ruined OR you write penalties into the contract. None of our furniture matched our new house (of course, that would be made too much sense….), so we left most of the furniture there. My tenant, a school teacher, was excited about getting a home with nice stuff. Imagine my surprise three years later when my sofa, living room chair and desk were all destroyed. She apologized a ton, but no cash exchanged hands.
  2. Bolster your reserves or keep credit handy for surprises. We had a water leak, tree fall down, bathroom fan breakdown and flooding in the basement. If I didn’t have a reserve, there would have been trouble.
  3. Either live close to your rental or find reliable help. There are many people who will collect rent, fix up the house or manage the property, but most aren’t very good (according to my clients who were in real estate). You need great help or have to do as much work as possible yourself. I live halfway across the country from my rental, but have a great handyman, Dave, who is a quick call away, charges reasonable fees and responds lightening fast. To make sure he’s happy, I pay him the SECOND his bill arrives (that’s overstatement, but you know what I mean).
  4. Try to complete each “fix it” project yourself at least once, even if you’re going to find help.
  5. Remember that it’s a relationship with your tenant. My main goal is to have my tenant stay in the house. I’ve tried to make sure the house is well-maintained and I’m accessible so my tenant stays around. That said, I also need to keep up with economics. I’ve looked at rental prices in the area and raised the rent once in the past three years. I was poised to raise it again before I found out she had to move out (through no fault of mine…her son wants her to stay in his house while he’s away on business for two years. I can’t beat “free rent.”)

Are you a landlord? Have you rented from a good or bad landlord? Share your success or horror stories in the comments!

Photos: For Rent: Charleston’s The Digitel

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High Yield vs. Other Investing Categories in Pretty Pictures

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When words don’t work, I’ll emulate my buddy PK at the DQYDJ blog and resort to graphics when explaining your investing options. Since I can’t personally be bothered to create any type of creative chart, I’ll instead use a graph that I  received from a friend.

Before we peruse this particular investing chart, I should introduce it, like a big star explains the movie clip:

People worry often about risk when investing. You should. It doesn’t make sense to risk your portfolio without knowing what type of return you’ll receive.

As an example, one of the riskiest investment classes is art. I know and you know that your dogs-playing-poker is probably a timeless classic, but beauty is definitely in the eye of the beholder on that one. Unfortunately, if you paid $10k for your Velvet-Elvis-and-the-Eagle rug, that’s probably considered a capital loss.

Here is the risk/reward profile of high yield vs. other asset classes:

 

Chart of Risk and Return

 

People are generally shocked when they see the risk/reward profile of high yield bonds. Is it true that JUNK BONDS are significantly less volatile than large-cap stocks?

Yup.

High yield bonds aren’t much more volatile than 10-year treasuries (which, ironically, have been more volatile than investment-grade bonds)?

Yup again. I knew people who came to this website are flippin’ brilliant.

Maybe now is a good time to review my posts last week on the topic of high yield bonds:

Off topic: Check out German stocks. Lots of volatility, plus those people wear black socks with sandals. I don’t know what those two points put together says, but it sure feels awkward.

 

How about you? Does this chart surprise you? Can you see my love affair with high yield? Make you laugh? Improve your outlook on life?

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