Not a week goes by that I don’t get a question from a client, or several, inquiring about the best places to go for yield. We all remember the “good old days” when a 10 year Treasury Bond yielded 4-5% (mid 2000’s) to say nothing of the 10%+ yields of the early 80’s. As of this morning, yields are closing in on 1.5% continuing a steady decline over the last 15 years. Money markets pay little if any interest and CD rates are the lowest I have seen in my 20+ years in the business.
All of this search for yield has led some investors into other asset classes based on the promise of increased yield. Master Limited Partnerships (MLP), high yield bonds (aka junk bonds), alternative investments, REITs, International Bonds, etc. These are just a few of the investments that I have seen cited as vehicles to utilize in the search for more yield. And while they may offer that much sought after increase in yield, they almost always do so with significantly increased risk. None of these assets should ever be confused with Treasurys. They are as different as apples and oranges and should be treated as such.
Which is not to say that any of those investments are “bad” investments. High yield bonds may (or may not) be a good investment for an investor and they may even have an appropriate allocation in one’s portfolio. But that allocation should not replace less risky assets simply because one is seeking additional yield. There is a reason they offer additional yield: the market requires compensation for the increased risk associated with them. That risk can come in many forms but it is assuredly present.
So what is the solution in this low yield environment? Unfortunately, there really isn’t a magic bullet. Sure we can seek out the best possible yields available or perhaps keep our holdings shorter-term if we believe rates will inevitably rise. We can also reposition some of our equity holdings to those paying consistent dividends. But all of this has to be done through the prism of an investor’s overall financial plan to be sure we are not taking on additional risk chasing that yield. That is why developing a sound financial plan and sticking to it is so critical to an investor’s success.
Bottom line is if something seems to good to be true it probably is. This axiom holds as true in investing for yield as in the rest of life.