In today’s economic environment, safety is at a premium but bank account rates remain at historical lows. This is persuading many investors to look for higher yields with their safe money. In some of these situations, they are finding products that are advertising a 7-9% return.
We found a real-world example described in this Bloomberg article that should make you think twice about higher-yielding “fixed” investments. The article provides a clear picture of how stretching for yield in a bond investment can leave you wondering why you just took a 30% loss.
The Truth About High Return and Guarantees
Many of these so called “safe, high-yielding” investments are made up of Structured Notes, Derivatives, and CMS curve notes. As explained in the article, these are all complicated derivative type investments being pitched as safe alternatives to bond investments. Many retirees now are being seduced into purchasing these products without fully understanding the risks involved. Structured note sells alone are up 58% from last year as people look for ways to earn more than what they would earn in their bank account because of the rock bottom bank account rates.
Another area of these products to investigate is the increased fees being charged by those who sell them. One of the products described in the write-up earned a fee of 5.1% in which half was used to compensate the brokers selling the convertible bond. This is nearly 5 times the average expense ratio of your average mutual fund.
Make sure you ask questions about any investment you are considering and remember if it sounds too good to be true…it probably is.
Photo Credit: im pastor rick
