Status quo is alive and well in the investment community. Financial advisors all over the world are telling their clients to not change anything in their portfolio because a recent study proves that pulling money from fixed income investments is rarely a good idea. This study, published by Fidelity Investments, shows that from 2008-2010, clients who pulled their retirement money from the investment markets and have never reinvested it are down nearly 7%. In contrast, those who stayed invested are up 22%! This, according to advisers, shows that staying invested is the best way to build wealth.
Although they are correct, studies like this should not be an argument for the status quo. Just because your investment products have worked well in the past doesn’t mean that there aren’t products that could work even better. Sometimes your portfolio needs some reevaluation and with that reevaluation comes looking at new products that may increase the performance of your money without adding an extreme amount of risk. We aren’t recommending any of the below products for you but while you and your financial advisor are looking at how well your money is working for you, take a look at these three products.
High Yield Bonds
Portfolios are often full of highly rated bonds or bond funds with less than impressive yields. Even the lower rated bonds are often safer than stocks so ask your adviser about taking on a little bit more risk with high yield bonds which can sometimes lead to a much higher return.
Investing in a bond that is just below the highest rating could increase your coupon rate drastically (coupon is a fancy bond term for interest rate). How would you like to earn 6% each year simply by taking on only slightly more risk?
Floating Rate Loan Funds
Floating rate loan funds invest in packages of loans that banks have made to companies for purposes like buyouts of other companies. These funds pay a set interest rate and then an additional rate based on the London interbank offered rate, or LIBOR. This allows the interest rate to change frequently
In this economic environment, this fund is popular. Nearly $11 billion has flowed in to floating rate loan funds and a large portion of that comes from everyday consumers. Before investing in these funds, take some time and do a lot of reading. Never invest in something that you don’t understand but it is well within the reach of a consumer with slightly more financial knowledge than some.
Leveraged ETFs and Mutual Funds
If you have ever seen a car jack work, you understand leverage. A small car jack can lift a multi ton automobile off of the ground because it has mechanisms in it that multiplies your effort. Leveraged ETFs do the same thing. Let’s look at a leveraged ETF on the S&P 500. (An exchange traded fund works just like a stock) If the S&P 500 goes up 1%, the leveraged ETF may go up 2% or even 3% depending on the fund. Leveraged funds exist not only in the stock market but also in the mutual fund market as well as others.
Although the returns can be great, the risk is twice or three times the normal amount, so leveraged ETFs might be a bad investment for you. These funds carry the most risk but in the hands of a qualified financial adviser these funds can be an appropriate addition to your portfolio.
Don’t want to take that much risk? Invest in an unleveraged ETF. Using our example above, if the S&P 500 rose 1% your ETF would rise the same amount. (minus a very small fee built in to the fund. This fee is cheaper than the fees you’re paying for your mutual funds)
This is a product that is best suited for investment money that is outside of your normal retirement funds because of the risk associated with them.
Bottom Line
Every investor is naturally hopeful. When they enter an investment they fully expect for it to perform better than they expected. Often times, it’s the opposite. Smart investors focus more on the downside than the upside. Evaluate the risk of losing money and decide if the added risk of these three products are worth the potential reward.
Tom Drake writes for Financial Highway and MapleMoney. Whenever he’s not working on his online endeavors, he’s either doing his “real job” as a financial analyst or spending time with his two boys.