Investment Vehicles: High-Yield Potential Can Also Mean Manageable Risk

The past two years in investing have been a reminder of the havoc that a crisis can wreak on our markets. This time around the lesson was driven home a second time just for emphasis, when the debt problems in Europe erupted this past May. Risk-averse capital fled to safe havens. Volatility reached new highs, as did Gold and other precious metals. Stock values plunged, but eventually, fundamentals returned, as did values at a 70% clip. As everyone begins to collect their respective breaths at the moment, it is time to plot a new course for the future and focus on the most worthy investment vehicles that will produce high returns while maintaining acceptable risk profiles.

Traditionally, the thought of high-yield investments conjures up all manner of concerns related to high risk of loss, the potential for an investment scam, or an investment that is so complex in its nature that the average investor is at a disadvantage due to a lack of knowledge or experience. This type of thinking is a holdover of the downside risk potential of the past two years’ of market experience. As markets transform themselves, the wise investor understands that his disciplined approach to investing may need to be modified as well. Since investing is all about managing risk, the best place to start our planning and review process is with the standard risk profile pyramid, depicted in the diagram below:

This familiar depiction of risk above is common in most investment primers. Low risk items are considered steady performers. Middle items require more research and knowledge before approaching, and Summit items require specialized training before anyone should attempt to tread in those waters. The Summit also includes the Forex market, another high-risk trading vehicle that is popular with investors, offers free demo accounts to gain experience with the medium, and free tutorials to help develop a personalized trading strategy that is consistent in its delivery of gains.

Markets have changed, and the one necessary factor to understand at this juncture is that “granularity” has a place in the scheme of things – within each type of investment vehicle, a similar “high/low” risk profile prevails, such that it behooves the investor to search for high-yield opportunities within each sector. For example, consider the following possibilities:

  • BASE Opportunity: Many investors have focused on bonds for years as a safe and high-performing asset. There has been a bond bull-market for the past twenty years, primarily due to declining interest rates. Bondholders have benefited from both appreciation and fixed-income payments. However, the party may be over in this sector. The Fed will be slow in raising rates, but they will rise over time, and for this reason, bonds are a ticking time bomb, primed to depreciate as rates rise. Under this scenario, a high-yield strategy would be to “ladder” high paying CDs from banks, backed by FDIC insurance. As a portion of your portfolio matured each year, it could be rolled over into a higher yielding longer term CD. Safety and security can pay well with this strategy.
  • MIDDLE Opportunity: This sector is as much about diversification as anything else when it comes to mitigating risk. The best vehicles to achieve diversification of late have been with ETFs, or Exchange-Traded Funds. The high-yield opportunities within this family of options include real estate and high-paying dividend stocks. There are a variety of REIT and utility ETFs that can be used for this purpose. Dividends and appreciation work here to your advantage.
  • SUMMIT Opportunity: Forex trading has been one of the most popular investment vehicles to come along in some time, but it does require specialized training and hours of practice to perfect your individual process. However, there is a long-term strategy that does offer high yields to the educated investor without the tedium of a daily trading regimen. The strategy is called the “carry trade”. You invest in one currency where interest rates are high by selling its corresponding pair where interest rates are low. The “AUD/USD” pair is one example. Australia has avoided a recession, and its central bank has to raise interest rates to reduce the heat of its economy. The U.S. economy is mired in deficits and debt, and these fundamentals will keep the currency weak for an extended period of time. A position in Aussie Dollars should appreciate over time and offer interest carry returns. Employing a trailing stop strategy will lock in gains and protect your downside.

Markets have gone through subtle changes during the past few years as risk-averse investors have reshaped the current paradigm. However, learning to search for high-yield opportunities within each investment sector appears to be the latest avenue for long-term success, as long as related risk profiles can be accommodated.