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April 28, 2012

Are you looking to increase yields?

There seems to be an increasing number of articles about how to increase returns.  Too many of the articles do not discuss the additional risk.  The March 2012 edition of the Morningstar Advisor looked at Tactical Funds.  Their conclusion in 2010 when they previously studied this topic was that “…these funds generally failed to deliver better risk-adjusted returns, or downside protection, than a traditional index portfolio split 60%/40% between stocks and bonds, respectively.”  This study, as of December 31, 2011, “…found that very few tactical funds generated better risk-adjusted returns than the Vanguard Balanced Index’s over the extended time period.”  That is, their”… extended study found scant evidence that these funds delivered on their goal of delivering competitive returns with a smoother ride.” 
Since their study only found a several tactical funds were successful in reaching their goal.  investors should be selective in considering such funds.
Another approach was the subject of an article in today’s The Wall Street Journal.  The article discussed some of the risks with different approaches.  The discussion consider retired investors.  “The best places to look for yield and safety…are long-term, high-grade bonds and certificates of deposits…”  “But long-term holdings pose problems for investors in their 70s or 80s.”
High quality bonds or CDs with “death puts” are getting increased interest.  The yields are significantly higher than shorter term investments.  “The biggest risk is that the issuer …defaults”.  Another risk is that some of these bonds are callable.  The put option on some issues are effective until the bond is held for 6 or 12 months.
When looking to increase your yield be sure to do your due diligence.  You should be sure to understand the risks.  Of course make sure that they are consistent with your needs.

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