No Risk. No Reward!
High return, no risk. That’s what every investor wants. Placing money in an insured bank account or a nice safe short-term treasury bill nets you little or nothing. There are even negative interest rates for safe investments in some countries, where banks charge you for safety and liquidity. The desire for low-risk returns has made investors vulnerable to dangerous sales pitches and has encouraged foolish behavior in search of yield.
It’s easy to be lured by the potential of income streams from almost 6% to more than 10%. Investors continue to flood “high-yield” bond funds with hundreds of millions every week. High-income streams have apparently blinded them to the real risk of these potentially dangerous products. The term “high-yield” is just a more palatable marketing term than “junk bond.” Yet, junk or below investment grade bonds are the securities used by these funds to achieve their impressive income.
The risky nature of junk bonds was recently exposed by an unfolding investor nightmare within the Third Avenue Focused Credit Fund. One a $2.5 billion fund, it has recently lost more than two-thirds of its assets in almost panic selling. Third Avenue Focused Credit, which is currently yielding more than 11%, is having such a difficult time meeting investor redemption requests that they have stopped taking sell orders from investors and have begun the process of slowly liquidation the remaining assets.
In addition to the credit risks of these poorly rated securities, junk bonds are often very lightly traded. Illiquidity cause values to plummet when a lot of investors try to sell simultaneously. Third Avenue ran headlong into a liquidity trap when shareholders started panicking out of the fund. High returns are high for a reason. As an investor, it is your responsibility (or that of your adviser) to scrutinize and understand the types of risk that generate the returns you enjoy.
As a responsible investor, you must stop deluding yourself about high yielding investments. Higher returns ALWAYS mean higher risk. It doesn’t matter what you have been told or what you would like to believe. To make money on your money you MUST take risk, and risk means the real possibility of suffering losses. So, you need vet either your investments or your investment adviser carefully. A safe and honest investment will never promise high returns with low risk. An honest, fiduciary investment adviser will never claim to be able to provide wealth with little or no risk.
