Wind energy generates almost 10% of U.S. electricity and in a land of endless plains that appears likely to increase. Unlike some emerging technologies, wind energy is also a relatively mature market, so there are several options for public stocks, equity-related investments, materials, bonds and even real estate. Here are a few things to know about investing in the future of wind. To know if it’s right for you, consider working with a financial advisor.
Why Wind Could Be a Good Investment
The economy of the United States and much of the western world is gradually decarbonizing. Since the industrial revolution, every major economy has come to depend on fossil fuels because of one key feature: portability. However, concerns about climate change has led some governments to subsidize alternatives to fossil fuels, and wind is one such alternative.
Power generation is one part of the economy that has been adapted to wind energy, thanks to advances in many fields, from conducting materials to capacitor batteries. It is now possible to build a power grid that can easily and efficiently transfer electricity from where it was generated to where it’s needed. The portability advantage of hydrocarbon-based fuels remains a bottleneck in some industries, most notably in aerospace and vehicles where it is still easier to put gas in a tank than electrons in a battery. However, where the electric grid is concerned fossil fuels increasingly look like the dinosaurs they once were.
How to Invest in Wind
There are multiple ways you can consider investing in wind. Here are a few different options.
1. Stocks
Of the emerging energy sources, wind is currently the largest. If you want to invest in this sector, one of the first places to go is through stocks, funds and related investments. There are several ways to invest in wind energy through stocks. Most notably, you can invest in companies that build turbines and other essential equipment for building wind farms. You can invest in companies that generate and sell wind energy. Or you can invest in an exchange-traded fund (ETF) or mutual fund built around this industry as a whole.
For investing in the companies that build equipment, you can consider looking for major manufacturers like TPI Composites (TPIC), Vestas Wind Systems (VWDRY) or General Electric (GE). All of these firms and many more, build the turbines, engines and other major components necessary to make the large generators that provide wind energy. Note that neither these nor any other assets listed in this article should be taken as specific investment recommendations. These are simply representative companies working in the space.
By contrast, you can look for companies like NextEra Energy (NEE) that actually generate electricity through wind farms. For companies like this, the business model is to produce wind energy and sell this electricity back to public utilities.
Finally, you can invest through equity-based funds and indices. This means either ETFs or mutual funds that focus their investments in and around the wind energy space. While these are rare, ETFs like the Global X Wind Energy ETF (WNDY) are good examples. Or you can look into the ISE Clean Energy Global Wind Energy Index (GWE), which tracks the wind energy market at large, giving you essentially an S&P 500 for the wind.
2. Real Estate
You can also invest in wind energy by investing in the underlying land. Like solar power, a wind farm requires a very large footprint. Some communities will build turbines, even entire farms, and that land has to come from somewhere.
At the same time, the transition to renewable energy sources will require a new and upgraded power grid. This will involve building large transmission towers, substations and other infrastructure across the country, all on land that someone will have to purchase or lease. All of this creates an opportunity for real estate investment and speculation.
While this requires more legwork, occasionally real estate investment firms will coalesce around this investment area through REITS. By researching emerging trends in the real estate market, you can look for real estate investment opportunities that buy mortgages and real estate related to wind farms.
3. Bonds
You can invest in wind projects by investing in the underlying debt. Bonds in this field tend to come in two categories. First, you can invest in the bonds sold by wind energy companies as they grow and expand. As with all corporate debt, this will tend to pay a higher rate of interest than Treasury or municipal bonds.
In addition to the creditworthiness of the company itself, your investment will also be secured by the fact that this is an asset-intensive industry. Even if the company fails, it will still hold large property and real estate assets with which to make debtors hold.
Second, you can invest in government bonds for projects to build wind farms. These will typically be municipal bonds for local governments looking to expand their alternative energy footprint. As a result, they will tend to pay less interest but have significant tax advantages. Bond investments in this space should be pursued on an individual basis.
4. Side Investments
Finally, as with all emerging technologies, you can side-invest in this industry. Side investing refers to investing in the materials and products that technology needs to succeed. As the industry grows, those related fields will profit as well. In the case of wind energy, there are several fields to consider, but perhaps the most important two areas are next-generation power lines and next-generation batteries/capacitors. Like most non-fossil fuel energy sources, to succeed wind energy must solve two problems.
First, it must efficiently transmit energy from the (generally remote) farms where wind energy is produced to the communities where it is needed. This will require companies to build and maintain new high-capacity power lines and it will require next-generation conduction materials to efficiently carry that much electricity without significant loss.
Second, the wind grid must store energy for when the wind isn’t blowing. This means creating large batteries that can store excess energy during times of high generation and consume that energy during low periods.
This is an area that requires research, in part because it is vast. New companies are emerging to develop carbon materials and semi-superconductors for building power lines. Batteries are sometimes built out of cobalt and rare earth capacitors and sometimes they are built out of caves in a mountain. Investors looking to get into this space will need to research exactly what the right investment is at the right time before trying to jump in.
But, for investors looking to make a higher-risk/higher-reward investment, the right choices have the potential to score huge. Alternative energy conversion will require a near-total rebuild of the power grid, making some people very rich.
The Bottom Line
Wind energy is a relatively mature technology, but one that is growing quickly. Investors can get into this field through traditional stocks or funds or by investing in many of the assets and materials that this industry will rely on to succeed.
Alternative Energy Investment Tips
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Don’t just think about what to buy, think about where to buy. Let’s start by reviewing which states are leading the charge when it comes to renewable energy.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
When Robert submitted this, he advised, “File this under the ‘long and tedious but important’ category. It might need pictures of cats.” So, once again, J.D. has obliged with photos of one of his cats.
Want to have more money and pay less in taxes? It’s easy! Just call this number and send in your three easy payments of — no, wait. Actually, all you have to do is learn a little about asset location. No, not asset allocation — asset location: deciding which assets should go in which accounts. A recent surge of Roth assets, thanks to the increasing availability of the Roth 401(k) and the wave of conversions that occurred last year, makes this a particularly timely topic.
Wait! Don’t leave! Though a little tedious, this is an important subject.
To understand asset location, you need to remember that most investors have accounts that receive different tax treatment, such as the following:
A traditional tax-deferred account, like a traditional IRA or traditional 401(k): Contributions may be tax-deductible, and the investment growth and income isn’t taxed until money is withdrawn. Those withdrawals will be taxed as ordinary income — the highest tax rate most Americans pay. It ranges from 10% to 35%.
A Roth IRA or Roth 401(k): Contributions aren’t tax-deductible, but withdrawals are tax-free (as long as you follow the rules).
A taxable, non-retirement account: The taxation of an account that isn’t an IRA or employer-sponsored retirement account (e.g., a 401(k)) varies. Interest from bonds and CDs as well as short-term capital gains are taxed as ordinary income, but qualified stock dividends and long-term capital gains are taxed at lower rates, currently between 0% and 15%.
Studies have shown that making the right choices about which investments belong in which accounts can increase an investor’s after-tax wealth by 15% to 20% over a lifetime. So what are those “right choices”? They can be summed up by five basic rules.
Rule #1: Keep Taxable Bonds and Certificates of Deposit in Tax-Deferred Accounts
If you hold these investments outside of a traditional IRA or 401(k), the interest is fully taxable at ordinary income rates. You essentially hand over a good portion of the return each year to Uncle Sam and Sister State, leaving less to grow through the years.
Rule #2: Consider Keeping Bonds With Tax Advantages in Taxable Accounts
Some bonds have their own built-in tax advantages. Treasuries are exempt from state and local taxes, and municipal bonds can be exempt from all taxes — federal, state, and local. If you place muni bonds in a traditional IRA, however, you lose the tax advantages.
Unless you live in a state with high taxes, it likely still makes sense for you to hold your Treasuries in your tax-deferred account, especially if you’re years away from retirement. However, it rarely makes sense to buy municipal bonds in your tax-advantaged retirement accounts. The only exception is if you’re buying bonds that are trading below par value (the price at which they were originally issued) and you expect the price to rise, leading to a capital gain. While the interest from government-issued bonds might have tax benefits, a capital gain — for example, the $100 profit you made if you bought the bond at $850 and sold it later for $950 — is fully taxable if held outside of an IRA or 401(k).
Hold off the tax man by putting the right investments in the right accounts.
Rule #3: In Taxable Accounts, Favor Stocks With Little to No Dividends and Those You’ll Hold for Many Years
Let’s say two investors put $50,000 in the exact same stock and hold it for a decade. The stock doesn’t pay a dividend and earns an average of 8% annually. Investor A holds the stock in his traditional IRA, and Investor B holds it in her taxable brokerage account. A decade later, here’s the value of each account and the taxes each investor has paid through the years (at this point, they haven’t sold the stock yet):
Investor A holds the stock in a traditional IRA. The pre-tax value of the account is $107,946 and Investor A has paid no taxes on the gain — yet.
Investor B holds the stock in a taxable brokerage account. The pre-tax value of the account is $107,946, and Investor B has paid no taxes on the gain — yet.
Surprise! The values of the investments and the taxes paid (i.e., none) are exactly the same, even though Investor B held the stock in a “taxable” account. That’s because when you buy and hold stocks, especially ones that pay little to no dividends, you have built-in tax deferral.
But what happens when these investors sell their stocks to spend the proceeds in retirement? Assuming they’re both in the 25% tax bracket, Investor A will have to pay a 25% tax rate on everything he withdraws from the IRA, whereas Investor B will pay just a 15% long-term capital gains rate — and only on the profit. If they each liquidated the investment and withdrew the cash from the accounts:
Investor A would pay $26,987 in taxes and have $80,960 remaining.
Investor B would pay $8,692 in taxes and have $99,254 remaining.
As if more after-tax wealth weren’t enough, there are other benefits to holding equities in your taxable account:
If shares drop below what you paid for them, you can harvest the losses by selling the shares and using the capital loss to reduce taxes. Of course, you can do that with any type of investment, but stocks present more opportunities since they’re more volatile.
If you hold dividend-paying foreign stocks in your taxable account, you can claim the foreign tax credit for any taxes assessed by the country in which your stock is headquartered. However, you can’t claim the credit if you hold the stock in an IRA or 401(k).
Investments in a taxable account receive a stepped-up cost basis upon the owner’s death. Say a person buys stock for $10,000, and its value grows to $50,000. When he dies, this person bequeaths the stock to his daughter. Her new cost basis will be $50,000; she will not owe taxes on the $40,000 of capital appreciation.
A less fatal way to escape paying capital gains taxes is by donating appreciated stock held in a taxable account to a qualified charity. Bonus: The donation can also be deducted on your tax return.
While all these benefits sound good, the tax efficiency of holding equities in a taxable account relies on your buying and holding for years and keeping dividends to a minimum. What do you do for high-yielding stocks or those you trade more frequently? Read on!
Choosing the right accounts lets you keep more of your money.
Rule #4: For Your Roth, Choose High-Growth, Tax-Inefficient Investments
When it comes to deciding what to put in this tax-free account, keep two principles in mind:
Generally speaking, the assets in your Roth should be the last you withdraw in retirement. Studies indicate it’s best to first tap your taxable accounts, then your traditional tax-deferred accounts, and your Roth last.
Which account do you hope will be the biggest when you retire? The one with the best tax advantages, of course. That’s the Roth, since withdrawals are tax-free.
Given those two principles, the ideal investments for your Roth are those that have the greatest return potential, especially if they’re tax-inefficient. Historically, small-cap value stocks have posted the highest returns, and because of their generally higher turnover and higher dividends, the mutual funds that invest in that sector are among the most tax-inefficient — so these would be good candidates for a Roth. You could also use the account for any other active-trading strategies or real estate investment trusts, which pay a high yield but have dividends that aren’t eligible for the lower qualified-dividend tax rate.
Also note that Roth assets are the best kind for your heirs to inherit, since they’ll also enjoy tax-free growth. If leaving a legacy is important to you, then the Roth has an investment time horizon that extends beyond your lifetime; thus, it can theoretically hold riskier assets.
Rule #5: Retirement Changes Asset Location a Bit
Once you retire, if you plan to invest in high-yield stocks for the income, it makes sense to hold them outside of a tax-deferred account to take advantage of the lower tax rate on qualified dividends. It’s less important where you hold the bonds that produce interest you plan on spending, since that interest will be taxed as ordinary income no matter what (muni bonds excepted).
When you’re ready to retire, you may want to mix things up a bit.
Remember: It’s Not What You Make, It’s What You Keep
Smart asset location also means you’ll pay fewer taxes. The higher your taxable income, the less likely you are to qualify for certain tax breaks. Also, once you begin receiving Social Security, the more you earn, the more likely your benefits will be taxed, and the more likely you’ll pay higher Medicare premiums.
So while paying attention to your asset location won’t double your portfolio overnight, it will pay off for decades to come — perhaps even after you’ve headed off to the Antiques Roadshow beyond the pearly gates.
Asset Location at a Glance
Here’s a quick summary of which investments to keep in which accounts:
Roth accounts: Small-cap stocks; REITs; active-trading stock strategies; high-turnover and/or high-yielding funds, especially if they have above-average growth potential.
Traditional tax-deferred accounts: Corporate bonds; Treasuries (especially TIPS); high-yielding and slower-growth stocks; diversified commodities funds; investments listed in the Roth category above if your Roth accounts aren’t very big or you don’t have a Roth.
Taxable, non-tax-advantaged accounts: Low- or non-yielding stocks you plan to hold for several years (decades, even); low-turnover stock funds (e.g., many index funds and ETFs as well as “tax-managed” funds); municipal bonds; U.S. government savings bonds or I-bonds; maybe Treasuries if escaping state income taxes is important to you.
Note: This article uses current federal tax rates, which will continue through 2012. Tax law will certainly be different a few years from now, but I think it’s a good bet that some current principles — such as long-term capital gains rates will be lower than ordinary income rates, and that municipal bonds will have tax advantages — will continue.
When it comes to investing, you have two big decisions to make: What to buy, and where to buy it. As for the former, you have all kinds of choices: cash, bonds, stocks, funds, real estate, and a piece of carpet from Elvis’ jungle room (yes, I have a piece — at least, that’s what the guy who sold it to me said it was). Regarding the latter, most people have just three general options: a traditional retirement account, a Roth retirement account, and a regular investment account. This article is about the second category — how to make the most of your investment accounts.
Stop the Sprawl
If you’re like many investors, you have accounts spread throughout the financial services industry: an IRA or two here, a brokerage account there, perhaps a 401(k) still with a former employer. If you’re married, your spouse probably has a lineup to match. By consolidating as many of those accounts as you can with a single provider, you’ll unclog your mailbox and make tax time easier — and you can even make your portfolio fatter, thanks to these advantages:
Find a better balance. Determining your asset allocation can be tough when you have to look at lots of statements. Rebalancing across several accounts gets tricky; for example, you can’t sell the bonds in your 401(k) to buy stocks in your IRA.
Move money out of mediocre (or worse) accounts. This is especially true of money left in retirement plans from former employers, which often have limited investment choices at high costs.
Get extra services and discounts. Financial companies lure big accounts with lower fees, plus planning services such as a portfolio analysis or access to a Certified Financial Planner.
Find the Best Provider
Choosing a company that deserves the honor of holding your nest egg depends on your style of investing. Here are guidelines based on your investments of choice:
Mutual funds: You can use a single fund family or go with a fund “supermarket” (such as Fidelity, Schwab, or TD Ameritrade) that offers access to thousands of funds from many families. The former is the simplest and possibly the cheapest. The latter offers far more selection.
Funds and individual stocks: Check out the big brokerages that allow you to buy stocks as well as choose form thousands of funds. Look for reasonable stock commissions and a lineup of no-load funds labeled “NTF,” for “no transaction fee.” The Fool’s Broker Center compares the options from several providers.
Stocks and ETFs: Look for the cheapest trades. Many brokerages, including Fidelity, Schwab, and Vanguard, offer free trades on some ETFs.
To Roth or Not to Roth?
By investing after-tax money in a Roth account, you trade a tax break today for one tomorrow, as your earnings and withdrawals will be tax-free. Here’s a rule of thumb: If you’ll be in the same or a higher tax bracket when you retire, go with the Roth.
There is no longer an income limit for converting traditional accounts to Roths. The converted amount gets added to your taxable income in the year you make the move, so if your traditional account is down significantly and you’re contemplating changing it to a Roth, you may want to convert some while the account is down. (Check out this article to hear from several financial planners about why a Roth conversion might make sense, though the option to spread the tax bill over two years was available only in 2010.)
The Right Investments in the Right Accounts
Don’t overlook the art of asset location — deciding which investments to put into which types of accounts. You want to put the most tax-inefficient investments in the accounts that have the most tax advantages. Here’s a summary of what should go where:
Roth accounts: Stocks with a higher potential return (such as small-cap stocks and emerging-marking stocks) and real estate investment trust (REITs).
Traditional tax-deferred accounts: Slower-growth stocks, commodities funds, Treasury inflation-protected securities (TIPS), and bonds (though, given historically low yields, the argument for keeping bonds in an IRA is not as compelling as it used to be).
Taxable, non-tax-advantaged accounts: Low-yield stocks you plan to hold for several years, low-turnover stock funds (such as many index funds and ETFs), municipal bonds, and savings bonds and I bonds.
Those are general guidelines, and can be affected by several factors, such as when you’ll need the money and your ability to pick the stocks that will have the higher return (a difficult task, indeed). For example, keep money that you need before age 59 ½ out of retirement accounts since early withdrawals from an IRA or 401(k) may result in a 10% penalty (though there are exceptions). But they’re a good starting point.
Have a Recommendation?
As for which brokerage, fund company, or online bank to choose, I’ll leave that to you readers. Have any particularly good or bad experiences? Are you happy with whomever’s holding your money? Let us know.
Final note: Don’t forget to get your free Slurpee today! You see, today is my birthday, and in honor of my Womb Liberation Day, 7-11 stores are giving away free 7.11-ounce Slurpees from 11 a.m. to 7 p.m.
Once every six months, whether I need to or not, I meet with my investment adviser from Fidelity. I’ve been doing this for five years, and have come to value the experience as truly educational. On Tuesday, for instance, my new adviser Michael talked me through some income planning.
My financial life has been turbulent over the past few years:
First, I was deep in debt and struggling.
When Get Rich Slowly began to grow, I paid off my debt and accumulated cash.
When I sold Get Rich Slowly, I invested the windfall in index funds and municipal bonds.
When Kris and I divorced, she received the municipal bonds.
When I bought my condo, some of my index funds were converted into real estate.
For years, my income and expenses have been all over the map with no semblance of normalcy and no consistency. Now, at last, things are settling into something of a routine and I can think about planning for the future. Since June, I’ve once again been tracking every penny I spend in order to get a clear picture of my financial situation.
In my meeting with Fidelity, I explained to Michael that my income is smaller than it has been since the 1990s. Between writing gigs and interest income on three business loans, I make less than $2000 per month. (I’m also being paid about $1000 per month principal on those three loans, which I treat as income even though it’s not. It’s more like savings.)
My monthly spending is reasonable except that I spend a lot on travel. My income (including principal on the loans) would come close to covering my expenses if I didn’t take two big trips (and several small trips) every year. But I do take those trips, and that adds $2000 per month to my expenses.
So far, I’ve subsidized my travel by slowly drawing down cash savings, but those funds will be gone by the end of 2014. It’s time to start thinking about the future. If I choose to maintain this sort of lifestyle, how will I fund it? Michael and I talked about the options.
Note: Mr. Money Mustache thinks I should just slash my spending. He interviewed me about this recently by email, and may write about it soon.
One path, of course, is to make more money, and that’s my top choice.
At any time, I could return to the traditional work force. It might be fun to do so, but I’d rather earn more from my writing. I could pick up paid gigs writing about personal finance — I don’t get paid for my work at Get Rich Slowly, and I’ve resigned from my column at Entrepreneur magazine effective next month — but I’ve found that getting paid to write about money takes the joy out of it. I could write another financial book; in fact, I’m doing so right now. Or I could change my focus to fiction, which holds a certain appeal. (I plan to take a fiction writing class starting in January.)
Another path is to start a side business. Or two.
I told Michael about my desire to open a money store where I’d sell books and magazines, hold classes about budgeting and investing, and offer one-on-one counseling. Or I could try to make money from another blog. I have several great domains and ideas on the back-burner, including a couple I could do with Kim. Or I could start some other of business. I do not lack for ideas!
Michael suggested another way to fund my lifestyle: “For a while, until you’re making full-time income again, you could take systematic withdrawals from your portfolio. You wouldn’t need to take a lot. Just enough to cover the difference between your existing income and expenses.”
He showed me Fidelity’s guide to retirement income investing, which includes a simple calculator that computes “potential sustainable monthly withdrawals” from a portfolio based on a starting balance, asset allocation, and life expectancy. In other words, you tell it how much you have and how long you expect to live, and the calculator tells you — at a “90% confidence level” — how much income your portfolio could give you for the rest of your life.
If we assume you’ll live until 80, for instance, and have a balanced portfolio (50% stocks, 40% bonds, 10% cash):
If you’re 30 years old and have $100,000 saved, there’s a 90% chance that your portfolio would produce $291 per month, adjusted for inflation.
If you’re my age — 44 years old — and have $1,000,000 saved, there’s a 90% chance that your portfolio would produce $3348 per month.
If you’re 60 years old and have $250,000 saved, there’s a 90% chance that your portfolio would produce $1202 per month for the next twenty years.
After playing with the numbers for a few minutes, I’d come up with a plan.
I like my lifestyle. It’s comfortable but not extravagant. Still, I’ve become lazy. It’d be good for me to exercise my frugality muscles a little more. I can cut back on food, for one. (My food expenses have been high for the past two years because I eat out a lot and I shop at a fancy supermarket.) I can also find ways to travel more economically by focusing on domestic travel instead of going abroad.
Meanwhile, I’ll fund my spending with income and cash savings for as long as possible. Also, I’ll strive to increase my income from writing (through the book I’m working on) and a couple of targeted websites (including at least one that I do with Kim). As a last resort, I’ll tap into my investments to subsidize my lifestyle, as Michael suggested. But I shouldn’t have to worry about that for a couple of years. By then, I hope to have established equilibrium!
Not everything in my meetings at Fidelity is useful. I don’t care about the hot new funds, and I’m not interested in annuities. But each time I talk with an adviser, I learn something new, and I think that’s the point.
It’s easy to get wrapped up in the day-to-day details of our own lives. We get mired in the minutia of our finances so that sometimes we miss the forest for the trees. Plus, it’s an objective third party can always see things we don’t, helping us to explore options we might not otherwise have considered.
The report below was prepared by my firm and is part of ongoing effort to provide investors important information on auto sector bonds. My firm LPL Financial does not cover individual bonds but hope the following may help with your investment decision making.
On March 30, President Obama and the Auto Task Force declared that viability plans submitted by both Chrysler and GM did “not establish a credible path to viability”. GM is being provided 60 days of working capital to develop a more aggressive restructuring and credible plan while Chrysler has 30 days to work an agreement with Fiat or face bankruptcy proceedings. The news raises the risk of GM filing for bankruptcy in mid- to late-May and bankruptcy risk increased today (April 1) following a NY Times story indicating President Obama believes a quick, negotiated bankruptcy is perhaps the best path.
GM Bonds
For bondholders, GM’s viability plan had included a reduction of debt to two-thirds but the rejection means that bondholders will have to endure deeper cuts. GM bonds dropped several points on the news since the rejection introduces new uncertainty as to how to how much bondholders would receive either via bankruptcy or a debt exchange as both Ford and GMAC have already done. GM senior bondholders had been striving for 50 cents on the dollar while GM was targeting a price in the low 30s (roughly the two-thirds reduction). Prior to the Obama Administration’s announcement GM intermediate and long-term debt traded between 20 and 30 cents on the dollar. So the two-thirds reduction was roughly already priced in but bonds dropped several points given the new uncertainty that bondholders could receive less. GM intermediate and long-term debt is currently trading in the 10 to 17 range.
For bondholders the decision boils down to sell now or wait for more favorable pricing as a result of either bankruptcy or a government led restructuring. Even a government led restructuring may not be as quick and easy as government rhetoric indicates. A March 31, Wall Street Journal points out that prior “pre-packaged” bankruptcies still average seven months in duration, a fair amount of time to go without receiving interest payments.
And this time is likely no different as bondholders will argue their claim versus other parties particularly the UAW. In 2003 GM issued bonds to help make up for a pension shortfall. At the time, the $13 billion deal was the largest bond issue in history. Bondholders essentially helped GM help the UAW and this point will not go without debate.
While its unlikely bondholders get wiped out, they should expect to receive no more than 10 to 30 cents on the dollar absent a prolonged battle in bankruptcy court that turns out favorably. And income-seeking investors should be aware that bondholders will likely receive the bulk of compensation in the form of stock, not bonds, in a newly restructured GM.
Ford Bonds
Ford Motor Corp bonds benefited from the news as the elimination of one or more of the big three was viewed positively for what looks to be one of the survivors. Long-term Ford bonds still remain deeply depressed at 28 to 30 cents on the dollar, reflecting still high levels of risk to Ford, but are up roughly 10 points over the past month according Trace reporting. Ford Motor Credit Corp (FMCC) bonds were unchanged to only slightly higher. FMCC bonds are viewed as having as higher recovery values in the event of bankruptcy. Ford’s recently completed debt exchange increased its liquidity but should car sales remain at such depressed levels, bankruptcy still remains a longer-term risk. For now, bondholders are focusing on increasing sales as a result of a Chrysler or GM bankruptcy. Longer-term a leaner and more efficient GM may have a competitive advantage to Ford. So Ford still faces substantial risks in addition to those posed by a weak economy.
GMAC Bonds
GMAC is a separate legal entity from GM and should GM file bankruptcy, or be subject of a government-led restructuring outside of bankruptcy court, it does not entail an automatic bankruptcy filing for GMAC. On the surface, a bankruptcy or restructuring would be a negative for GMAC but it depends on which path GM takes. Should GM file chapter 11 bankruptcy it would need to line up private investors for Debtor-in-Possession (DIP) financing. DIP financing is interim financing that provides needed cash while a company is in the process of restructuring. Given the still credit constrained environment such financing would likely be difficult if not impossible to obtain. In such an environment consumers are unlikely to purchase GM cars, justifiably concerned over future viability. A government supervised restructuring, where the Treasury would provide financing while GM restructures, would likely lessen or eliminate that effect as consumers continue to purchase GM autos knowing the entity would still exist in some form. Given GMAC’s reliance on GM auto sales, anything to promote sales would be beneficial.
On that note, the US government announced it would guarantee the warranties of GM vehicles during the restructuring period. This news coupled with President Obama’s statement that, “We will not let our auto industry simply vanish” suggests that some form of GM will exist in the future. Both are positives for continued auto sales during a restructuring. Furthermore, it appears that GMAC, and its role in assisting consumer financing, remains a key tool for the government in efforts to turn around the economy. In late 2008 and early 2009, GMAC reached important milestones by 1) receiving Federal Reserve approval to become a bank holding company and 2) shortly after, receiving a $6 billion capital injection from the US Treasury. Unlike many banks, GMAC prepared to boost lending by lowering minimum FICO scores for loan qualification to 621 from 700. It appears that GMAC has become an important vehicle for Treasury to foster consumer lending. Concurrent with the events above GMAC concluded a debt exchange that reduced its debt load (a requirement for bank holding company status), extended bond liabilities, and subordinated other bond claims. The debt exchange enabled GMAC to post a profit for the fourth quarter but removing the extraordinary item GMAC lost $1.3 billion for the quarter.
Bonds have come under pressure again following the GM/Chrysler news but remain above the lows for the quarter. Still, current bond prices, particularly those maturing beyond one-year, reflect a significant probability of default. In the cash market, GMAC’s benchmark 6.75% due 12/14 closed March 30 at a 45 price, according to Trace, suggesting a 40% probability of default if one assumes a 30 cent on the dollar recovery (Moody’s forecast for high yield bonds). Credit Default Swap (CDS) spreads are bit more bearish and require a 31% upfront payment, an increase from
Despite all the bankruptcy news, a couple of potential positive developments could benefit GMAC. To our knowledge, GMAC has yet to borrow from the Fed. As a bank holding company it could gain access to the Fed’s discount window and even pledge auto loans as collateral. GMAC could also have access to the FDIC’s Temporary Liquidity Guarantee Program (TGLP) and issue bonds at very low government guarantee rates. These liquidity sources could amount to $10 to $80 billion in additional liquidity but remain untapped as of yet.
Lastly, the newly launched Term Asset Lending Facility (TALF) included auto loans as one of the lending areas it directly seeks to improve. The TALF should be a source of liquidity for both GMAC and FMCC.
GMAC Smartnotes
GMAC Smartnote pricing has been particularly depressed due to market illiquidity. While Smartnotes contain an estate feature, they were issued in small denominations on a weekly basis. Their small size makes them elatively illiquid, particularly in the current environment where bond dealers are reluctant to hold bond inventory let alone illiquid bonds. As a result, GMAC Smartnotes trade, in some cases much lower in price than similar non Smartnote GMAC bonds.
For example, the GMAC Smartnotes 6.75% due 6/2014, a very similar bond to the benchmark issue (same coupon rate but 6-months shorter in maturity) listed earlier has recently traded between 26 and 29 according to Trace reporting, a dramatic difference. GMAC bonds remain a high-risk play due to its dependence on GM and the potential path of any restructuring. The potential path of any GM restructuring (Ch. 11 vs. government led), whether GMAC receives additional capital injections from the Treasury, and the severity of the economic downturn will play a role in GMAC bond pricing. These many moving parts, including a politically influenced government role, make handicapping future bond performance difficult at best.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing.
Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Municipal Bonds are subject to availability and change in price; subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price.High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.Stock investing involves risk including loss of principal.
The yield on the 2-year Treasury note continued to decline last week and finished the week at a lower yield than at the start of 2009. The fact the 2-year Treasury yield is now lower on a year-to-date basis is startling considering the robust performance of riskier investments such as Corporate Bonds, High-Yield Bonds, Commodities, and even stocks. On the surface, a new low for the year on the 2-year note would indicate a budding flight-to-safety rally. However, there are several rational reasons for the drop in 2-year Treasury yields, none of which are related to heightened risk aversion among investors about a renewed economic downturn.
T-Bill Supply Reduction
The most dominant factor has been a notable reduction in T-bill supply. In mid-September the Treasury announced it was not going to re-issue $185 billion in maturing T-bills originally issued as part of the Supplementary Financing Program (SFP). The SFP was launched during the fourth quarter of 2008 to assist bond market liquidity during the height of the financial crisis. With bond market liquidity vastly improved and the Treasury Department looking to extend the average maturity of outstanding debt, the Treasury decided to let all but $15 billion of SFP T-bills simply mature. The result was a 10% reduction of the T-bill market as the last SFP T-bill matured in late October.
The drop in supply comes at the wrong time as we approach year-end funding needs. As year-end approaches, banks and other institutions prepare to tidy up balance sheets by purchasing T-bills and other high quality short-term investments. To avoid illiquid trading conditions over the holidays, this process often begins before Thanksgiving. The commercial paper market, essentially the corporate version of a T-bill, is substantially reduced as a result of de-leveraging and disappearance of special purpose financing vehicles (SPVs), thereby leaving a greater-than-usual emphasis on T-bills as the vehicle of choice. Demand to fund over year-end is already reflected in zero yields on all T-bills that mature in January. Additionally, money market assets have decreased, but at $3.3 trillion they represent a hefty source of steady buying power.
The Fed is Your Friend
A friendly Federal Reserve has also been a key driver of the 2-year yield. The Fed continues to emphasize the “extended period” language when referring to the Fed funds rate. Last week, Fed Chairman Ben Bernanke, speaking before the NY Economic Club, once again reiterated that the Fed funds rate would remain low for an “extended period”. His remarks made absolutely no reference to the removal of monetary stimulus or taking steps to more proactively reduce cash in the financial system.
Most Fed speakers have reiterated Bernanke’s message with cautious remarks about removing stimulus too soon. Recently, St. Louis Fed President Bullard suggested the Fed may wish to keep the option open on bond purchase programs beyond March 2010 and when asked about timing for the first rate increase, Chicago Fed President Evans remarked “into at least the middle of 2010,” and the fi rst increase might not come until “late 2010, perhaps later in terms of 2011.” Fed fund futures pricing, one of the better gauges of Fed rate expectations, indicate the first rate increase will come at the September FOMC meeting. Previously Fed fund futures indicated the first rate increase would occur at the June FOMC meeting.
Where’s the Two Year Rate?
The decline of the 2-year note yield to 0.73% still keeps it in a range we roughly consider fair value. The 2-year maintains a tight relationship with the target Fed funds rate. Typically, when the Fed is on hold, the 2-year yield has traded 0.50% to 1.00% above the Fed funds rate. With target Fed funds currently 0.0% to 0.25%, the current 2-year yield is roughly in line with historical ranges. It is not uncommon for the 2-year yield to be lower than the Fed funds rate when the market expects a rate reduction. Although there is clearly no room for a lower Fed funds rate, the 2-year yield could drop further if the market truly believed that the economy was weakening again or that other monetary stimulus was forthcoming.
Domestic banks and foreign central banks have also played roles in a lower 2-year Treasury yield. Weak loan demand has left domestic banks with excess money reserves. With cash yielding next to nothing, banks are investing in longer-term securities such as the 2-year note. Short-term securities are much less sensitive to interest rate changes and when the Fed emphasizes it is on hold for longer, the risk in holding such a position is reduced.
Foreign central banks have purchased 2-year Treasuries as part of a renewed effort in currency intervention. The decline in the US dollar to its lowest point of the year has prompted concern from foreign governments whose economies are dependent on exports to the U.S. Foreign governments, via their central banks, have recently attempted to prop up the dollar via the purchase of short-term Treasuries.
The decline in the 2-year Treasury note yield to levels witnessed during the peak of the financial crisis has certainly caught the attention of investors. The drop in the 2-year yield has been particularly notable given the strong performance of riskier investments in 2009. However, several factors including a decline in T-bill supply, the Fed reiterating its “extended period” message, excess bank reserves, and foreign buying, have worked together to push the 2-year to its lowest levels of the past 12 months. These factors, and not a renewed flight-to-safety buying on renewed economic worries, have been responsible for the drop in 2-year Treasury yields.
IMPORTANT DISCLOSURES
This was prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,
consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.
Mortgage-Backed Securities are subject to credit risk, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment
risk, and interest rate risk.
Municipal bonds are subject to availability, price and to market and interest rate risk is sold prior to maturity.
Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax.
Federally tax-free but other state and local taxed may apply.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
Stock investing involves risk including possible loss of principal.
If you’ve been paying attention to the news within the past few months, you’ve likely been hearing a lot about the rise of the robo-advisor.
Robo-advisors is the term given to any number of automated investing services that have popped up in recent years that aim to make investing easier, more affordable and in some instances negate the need for a traditional financial or investment advisor.
While their investment recommendations vary to some degree, many of them use algorithms based on Modern Portfolio Theory (MPT) to aid in choosing diversified investments and asset allocation based on your risk tolerance. MPT helps to maximize expected return for your portfolio based on your risk profile.
While I still think that some people could benefit from working with a human financial planner one on one, I do think that for most investors using an automated investing service makes a ton of sense.
Today I thought I would do a review of Wealthfront, one of the top and most well respected automated investing services available today.
UPDATE: Sign up for Wealthfront via this exclusive Bible Money Matters link to get $5,000 managed for free:
Sign up for Wealthfront and get $5,000 managed for free
Wealthfront History
Wealthfront launched their automated investment service in 2011 and the company is currently based in Redwood City, California. In 2012 Wealthfront launched a daily tax-loss harvesting service. From 2013 to 2014 the company went through some tremendous growth, growing by over 450% in one year. By 2019 Wealthfront now has more than $12 billion of assets under management.
Wealthfront never holds your portfolio when you invest with them, they just manage it. The portfolio is actually held with Royal Bank of Canada.
How Does Wealthfront Work?
When you sign up for Wealthfront you start by completing a questionnaire that is aimed at determining your risk tolerance. Once your risk tolerance is determined asset allocations are set that will remain the same regardless of how much you have invested.
The portfolios are based on a mix of 6 – 8 asset classes that includes both U.S. and international stocks and bonds. They invest mainly via the following ETFs, although that is subject to change.
U.S. Stocks (VTI)
Foreign Stocks (VEA)
Emerging Markets (VWO)
Real Estate (VNQ)
Dividend Stocks (VIG)
Emerging Market Bonds (EMB)
Municipal Bonds (MUB)
CorporateBonds (LQD)
US TIPS (SCHP)
Natural Resources (XLE)
When you invest with Wealthfront your diversified asset allocation will depend on the tax status of your account (taxable or tax deferred), and what is the most tax efficient method of investing for you.
In essence, you’ll get a highly diversified, low cost portfolio that is suited to your level of risk, time horizon and other factors.
Signing Up For Wealthfront
Signing up for Wealthfront is a quick process. Here’s what you’ll need to do.
Once you begin the signup process it will first have you go through a risk tolerance assessment.
Once you’ve answered all the questions, it will give you a quick rundown of what assets and allocation that they would suggest for you, in both a taxable account and retirement account.
If everything looks OK, you’re ready to open your account.
Available account options with Wealthfront include:
Standard taxable account
Joint investment account
Trust account
Traditional IRA
Roth IRA
SEP-IRA
Wealthfront 529 College Savings Plan
Once you choose which account type you want and hit continue, it will take you through the process of entering all of your basic information including:
Full name
Address
Birth date
Phone number
Social security number
Income
After filling out the basics it will ask you to fund your account. Your options for funding the account include:
Bank transfer (3-5 business days to get started)
Wire transfer (1 business day to get started)
Account transfer (5-10 business days)
Once you submit your application and confirm your email address you just have to wait for your account to be approved. After approval you can login to your account dashboard to confirm transfers, view your account summary, view your plan, transactions, documents and more.
Wealthfront Features
So what are some of the features that you get when you open a Wealthfront account?
Proven passive investing strategy that gives you a diversified portfolio
So what do you invest in when investing with Wealthfront?
We invest with an equity orientation to maximize long-term returns. Each of our selected asset classes is represented by a low cost, passive ETF. We continuously monitor and periodically rebalance your portfolio to maximize your chance of investment success for the long run. We also attempt to minimize your taxes by analyzing the taxes likely to be generated by any given asset class, and then allocating different asset classes in taxable and non-taxable (retirement) portfolios. We use Modern Portfolio Theory (MPT) to identify the ideal portfolio for each client.
Your portfolio will consist mainly of low cost ETF index funds that will be tailored to your risk tolerance, with intelligent dividend reinvestment and regular portfolio rebalancing. It is fully diversified. For a complete look at the Wealthfront strategy you can check it out here.
Wealthfront offers a broad suite of tax efficient passive investment products. These strategies are known as PassivePlus, and in the past have mainly been available only to high dollar investors. Wealthfront didn’t invent these strategies, but it’s team of PhDs led by reneowned economist Burton Malkiel, along with their investment technology has made these products available to anyone. Among the strategies included in PassivePlus:
Tax loss harvesting: Tax-loss harvesting essentially takes investments that have declined in value and selling them at a loss, generating a tax deduction. The tax deduction helps to reduce your taxes. Wealthfront’s service allows daily tax harvesting to be possible, which can help to maximize gains versus a traditional year end tax loss harvesting. This service is available at no extra cost to investors.
Stock-level Tax-Loss Harvesting: Available for no extra cost to taxable accounts over $100,000, Stock-level Tax-Loss Harvesting is an enhanced form of Tax-Loss Harvesting that looks for movements in individual stocks within the US stock index to harvest more tax losses and lower your tax bill even more.
Risk Parity: Available for an additional 0.03% to taxable accounts over $100,000, Risk Parity is an alternative methodology to allocate capital across multiple asset classes, much like Modern Portfolio Theory (MPT), also known as mean-variance optimization. Historically, Risk Parity has generated better returns for a given level of portfolio risk than the more common MPT.
Smart Beta: Available for no extra cost to taxable accounts over $500,000, Smart Beta is an investment feature designed to increase your expected returns by weighting the securities in the US stock index of your portfolio more intelligently.
Wealthfront also invests in index funds which tend to have little turnover, and as such will likely realize lower capital gains taxes. They also use dividends to rebalance your portfolio throughout the year, lowering capital gains. They optimize asset classes and allocations depending on whether an account is taxable or tax advantaged.
No commission fees
With Wealthfront you’re never going to pay fees for purchase of the ETFs in your account.
Other Wealthfront Feature Updates
Wealthfront is constantly innovating, and has had a myriad of other updates in the past year or so, all designed to make investing easier, more efficient, and to bring you better returns. Here are a few of the features and functionality that set them apart.
Free Financial Planning: The new free financial planning experience, unique to Wealthfront, using the Path planning engine.
Tailored Transfers: Instead of selling everything at once, use our tailored transfer process to migrate your investments tax-efficiently over time.
Portfolio Line of Credit: This line of credit is available for any Wealthfront client with an Individual or Joint Wealthfront account valued at $100,000 or more. There’s no set up – if you’re an eligible Wealthfront client then you already have access. Your line of credit is secured by your diversified investment portfolio, so current rates are as low as 3.25-4.5% depending on account size – lower than most HELOC loans. Borrow the amount you need up to 30% of account value, when you need, for whatever you want. Repay on your own schedule.
Free Automated Financial Planning
In December of 2018 Wealthfront became the first robo-advisor to offer software based financial planning for free to anyone through their app or on their website. Some other services will offer planning to clients, but usually at a premium, and only through a call with a CFP on the phone.
With Wealthfront’s financial planning tools you can connect to your existing financial accounts in a few minutes, and then by tracking your actual spending and saving patterns to help you figure out how your financial future may look.
It helps you to figure out how much you need to save now to reach your future goals, and helps you to determine if you’ll be able to live the same lifestyle you live now, in retirement.
The free financial planning help takes the guesswork out of figuring out if your hoped for future is even attainable based on your current spending and saving patterns. It helps you take a look at “what-if” scenarios, and help you figure out what the impact of a raise at work, or saving more every month might be.
The free automated financial planning service is like having a personal financial planner, but without the need for a bi-annual meeting at an expensive office with a planner that hardly pays attention to your needs. Here’s a look at it from Wealthfront:
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Home Planning In Financial Planning Software
The financial planning software brings clients out of the window-shopping phase of home buying and into planning and saving with the help custom advice and recommendations. The Path advice engine uses third party data on home prices and mortgage rates combined with your financial information to provide an accurate estimate of what you can expect to afford when ready to purchase a home — whether it’s six months or five years from now.
The home affordability estimate given by the tool even accounts for expenses beyond the mortgage, such as closing costs, property taxes, maintenance, and insurance.
College Planning In Financial Planning Software
In addition they also now have a College planning tool that looks at every important aspect of college planning and deliver a complete, personalized assessment.
It will allow you to choose a college that your child may attend, enter some personal data about yourself, after which it will calculate the financial aid you can expect to receive at that school. Then you can setup how much to save, and see the effect of adding more to your savings. At the end you can link it to your Wealthfront 529 College Savings Plan!
The Wealthfront 529 College Savings Plan
This is another investment account unique to Wealthfront. They offer one of the lowest cost 529 plans from an advisor, that offers more diversification for higher returns. (Many plans offer a very limited range of investment options).
A recent Sallie Mae study shows that more and more parents are saving for college, but are nowhere near prepared to meet their goals because they are saving solely through savings accounts earning less than 1% interest. The Wealthfront 529 College Savings Plan was created to help change this, to help parents grow their child’s college savings, while minimizing the amount of risk based on your level of risk tolerance.
Wealthfront’s 529 uses 20 different glide paths, tailored to match both the beneficiary’s age, as well as the account owner’s financial situation and risk tolerance. Our glide paths transition asset allocations much more continuously, which again means you may be less likely to be hurt by market movements.
This is definitely something to check out if you’re interested in saving for your child’s education.
Wealthfront Cash Account
Wealthfront recently implemented a great new tool for savers. If you’ve got cash you want to keep out of the market and low risk, but you still want to earn a good amount of interest on it, the Wealthfront Cash Account might be just what you’re looking for.
The cash account is an FDIC insured account (up to $1 million dollars, 4 times the traditional bank insurance), that charges no fees and has only a $1 minimum.
At the time we updated this article it’s currently earning 2.57% APY. This makes their APY the highest on the market according to Bankrate, so if you’ve got extra cash laying around it makes their account a no brainer to sign up for.FDIC insured AND the best rate.
The Bankrate industry average savings rate is only 0.10%, so you can now earn over 25x more than the national average on cash balances!
It’s fast and easy to setup your cash account, it takes just minutes. Definitely worth checking out – whether you already have a Wealthfront account or not.
Fees, Charges & Minimums For Wealthfront
What are the fees that you’ll have to pay for the Wealthfront investment service? The good news is they offer some extremely competitive rates.
Wealthfront charges a monthly advisory fee based on an annual fee rate of 0.25%. The only other fee you incur is the very low fee embedded in the cost of the ETFs you will own that averages 0.15%.
Fees
You pay the following fees to Wealthfront:
So if you have $10,000 in your account and you signed up via our link, you’ll have no charge for the first $5,000, and a 0.25% fee on the second $5,000.
When you sign up you’ll also have the chance to refer other users to the service to earn $5,000 more per user in free asset management, beyond the first $5,000. If you know enough people who want to sign up, you could definitely increase the amount managed for free very quickly!
Account Minimums
An account with Wealthfront does come with a minimum balance.
Our account minimum is $500, which entitles you to a periodically rebalanced, diversified portfolio of low cost index funds enhanced with our daily tax-loss harvesting service (for taxable accounts).The account minimum required to qualify for our Stock Level Tax-Loss Harvesting is $100,000.
So to open an account, you’ll need a minimum of $500. Why not start with $500, and then fully fund your Roth IRA for the year ($5500 for 2018)?
There is also a minimum withdrawal of $250, and you can’t withdraw below the account minimum of $500.
If you withdraw all of your funds it will transfer your money and close your account for you, with no exit fees.
Wealthfront – Great Low Cost Investment Advisory Service
When I first heard about Wealthfront a few months ago, I wasn’t sure if it would be a service that I could recommend. After doing my due diligence, however, I believe they’re a great service that would be perfect for a lot of people.
Wealthfront is the only robo advisor who offers investment management, financial planning and banking-related services through their software. Anyone can open a Wealthfront investment account and receive a personalized, globally-diversified investment portfolio and access a variety of tax-efficient services.
I’d highly recommend giving them a chance if you’re looking for an easy place to start investing – that will work for you over the long haul.
Sign up for Wealthfront and get $5,000 managed for FREE
In Best Low-Risk Investments for 2023, I provided a comprehensive list of low-risk investments with predictable returns. But it’s precisely because those returns are low-risk that they also provide relatively low returns.
In this article, we’re going to look at high-yield investments, many of which involve a higher degree of risk but are also likely to provide higher returns.
True enough, low-risk investments are the right investment solution for anyone who’s looking to preserve capital and still earn some income.
But if you’re more interested in the income side of an investment, accepting a bit of risk can produce significantly higher returns. And at the same time, these investments will generally be less risky than growth stocks and other high-risk/high-reward investments.
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Determine How Much Risk You’re Willing to Take On
The risk we’re talking about with these high-yield investments is the potential for you to lose money. As is true when investing in any asset, you need to begin by determining how much you’re willing to risk in the pursuit of higher returns.
Chasing “high-yield returns” will make you broke if you don’t have clear financial goals you’re working towards.
I’m going to present a large number of high-yield investments, each with its own degree of risk. The purpose is to help you evaluate the risk/reward potential of these investments when selecting the ones that will be right for you.
If you’re looking for investments that are completely safe, you should favor one or more of the highly liquid, low-yield vehicles covered in Best Low-Risk Investments for 2023. In this article, we’re going to be going for something a little bit different. As such, please note that this is not in any way a blanket recommendation of any particular investment.
Best High-Yield Investments for 2023
Table of Contents
Below is my list of the 18 best high-yield investments for 2023. They’re not ranked or listed in order of importance. That’s because each is a unique investment class that you will need to carefully evaluate for suitability within your own portfolio.
Be sure that any investment you do choose will be likely to provide the return you expect at an acceptable risk level for your own personal risk tolerance.
1. Treasury Inflation-Protected Securities (TIPS)
Let’s start with this one, if only because it’s on just about every list of high-yield investments, especially in the current environment of rising inflation. It may not actually be the best high-yield investment, but it does have its virtues and shouldn’t be overlooked.
Basically, TIPS are securities issued by the U.S. Treasury that are designed to accommodate inflation. They do pay regular interest, though it’s typically lower than the rate paid on ordinary Treasury securities of similar terms. The bonds are available with a minimum investment of $100, in terms of five, 10, and 30 years. And since they’re fully backed by the U.S. government, you are assured of receiving the full principal value if you hold a security until maturity.
But the real benefit—and the primary advantage—of these securities is the inflation principal additions. Each year, the Treasury will add an amount to the bond principal that’s commensurate with changes in the Consumer Price Index (CPI).
Fortunately, while the principal will be added when the CPI rises (as it nearly always does), none will be deducted if the index goes negative.
You can purchase TIPS through the U.S. Treasury’s investment portal, Treasury Direct. You can also hold the securities as well as redeem them on the same platform. There are no commissions or fees when buying securities.
On the downside, TIPS are purely a play on inflation since the base rates are fairly low. And while the principal additions will keep you even with inflation, you should know that they are taxable in the year received.
Still, TIPS are an excellent low-risk, high-yield investment during times of rising inflation—like now.
2. I Bonds
If you’re looking for a true low-risk, high-yield investment, look no further than Series I bonds. With the current surge in inflation, these bonds have become incredibly popular, though they are limited.
I bonds are currently paying 6.89%. They can be purchased electronically in denominations as little as $25. However, you are limited to purchasing no more than $10,000 in I bonds per calendar year. Since they are issued by the U.S. Treasury, they’re fully protected by the U.S. government. You can purchase them through the Treasury Department’s investment portal, TreasuryDirect.gov.
“The cash in my savings account is on fire,” groans Scott Lieberman, Founder of Touchdown Money. “Inflation has my money in flames, each month incinerating more and more. To defend against this, I purchased an I bond. When I decide to get my money back, the I bond will have been protected against inflation by being worth more than what I bought it for. I highly recommend getting yourself a super safe Series I bond with money you can stash away for at least one year.”
You may not be able to put your entire bond portfolio into Series I bonds. But just a small investment, at nearly 10%, can increase the overall return on your bond allocation.
3. Corporate Bonds
The average rate of return on a bank savings account is 0.33%. The average rate on a money market account is 0.09%, and 0.25% on a 12-month CD.
Now, there are some banks paying higher rates, but generally only in the 1%-plus range.
If you want higher returns on your fixed income portfolio, and you’re willing to accept a moderate level of risk, you can invest in corporate bonds. Not only do they pay higher rates than banks, but you can lock in those higher rates for many years.
For example, the average current yield on a AAA-rated corporate bond is 4.55%. Now that’s the rate for AAA bonds, which are the highest-rated securities. You can get even higher rates on bonds with lower ratings, which we will cover in the next section.
Corporate bonds sell in face amounts of $1,000, though the price may be higher or lower depending on where interest rates are. If you choose to buy individual corporate bonds, expect to buy them in lots of ten. That means you’ll likely need to invest $10,000 in a single issue. Brokers will typically charge a small per-bond fee on purchase and sale.
An alternative may be to take advantage of corporate bond funds. That will give you an opportunity to invest in a portfolio of bonds for as little as the price of one share of an ETF. And because they are ETFs, they can usually be bought and sold commission free.
You can typically purchase corporate bonds and bond funds through popular stock brokers, like Zacks Trade, TD Ameritrade.
Corporate Bond Risk
Be aware that the value of corporate bonds, particularly those with maturities greater than 10 years, can fall if interest rates rise. Conversely, the value of the bonds can rise if interest rates fall.
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4. High-Yield Bonds
In the previous section we talked about how interest rates on corporate bonds vary based on each bond issue’s rating. A AAA bond, being the safest, has the lowest yield. But a riskier bond, such as one rated BBB, will provide a higher rate of return.
If you’re looking to earn higher interest than you can with investment-grade corporate bonds, you can get those returns with so-called high-yield bonds. Because they have a lower rating, they pay higher interest, sometimes much higher.
The average yield on high-yield bonds is 8.29%. But that’s just an average. The yield on a bond rated B will be higher than one rated BB.
You should also be aware that, in addition to potential market value declines due to rising interest rates, high-yield bonds are more likely to default than investment-grade bonds. That’s why they pay higher interest rates. (They used to call these bonds “junk bonds,” but that kind of description is a marketing disaster.) Because of those twin risks, junk bonds should occupy only a small corner of your fixed-income portfolio.
High Yield Bond Risk
In a rapidly rising interest rate environment, high-yield bonds are more likely to default.
High-yield bonds can be purchased under similar terms and in the same places where you can trade corporate bonds. There are also ETFs that specialize in high-yield bonds and will be a better choice for most investors, since they will include diversification across many different bond issues.
5. Municipal Bonds
Just as corporations and the U.S. Treasury issue bonds, so do state and local governments. These are referred to as municipal bonds. They work much like other bond types, particularly corporates. They can be purchased in similar denominations through online brokers.
The main advantage enjoyed by municipal bonds is their tax-exempt status for federal income tax purposes. And if you purchase a municipal bond issued by your home state, or a municipality within that state, the interest will also be tax-exempt for state income tax purposes.
That makes municipal bonds an excellent source of tax-exempt income in a nonretirement account. (Because retirement accounts are tax-sheltered, it makes little sense to include municipal bonds in those accounts.)
Municipal bond rates are currently hovering just above 3% for AAA-rated bonds. And while that’s an impressive return by itself, it masks an even higher yield.
Because of their tax-exempt status, the effective yield on municipal bonds will be higher than the note rate. For example, if your combined federal and state marginal income tax rates are 25%, the effective yield on a municipal bond paying 3% will be 4%. That gives an effective rate comparable with AAA-rated corporate bonds.
Municipal bonds, like other bonds, are subject to market value fluctuations due to interest rate changes. And while it’s rare, there have been occasional defaults on these bonds.
Like corporate bonds, municipal bonds carry ratings that affect the interest rates they pay. You can investigate bond ratings through sources like Standard & Poor’s, Moody’s, and Fitch.
Fund
Symbol
Type
Current Yield
5 Average Annual Return
Vanguard Inflation-Protected Securities Fund
VIPSX
TIPS
0.06%
3.02%
SPDR® Portfolio Interm Term Corp Bond ETF
SPIB
Corporate
4.38%
1.44%
iShares Interest Rate Hedged High Yield Bond ETF
HYGH
High-Yield
5.19%
2.02%
Invesco VRDO Tax-Free ETF (PVI)
PVI
Municipal
0.53%
0.56%
6. Longer Term Certificates of Deposit (CDs)
This is another investment that falls under the low risk/relatively high return classification. As interest rates have risen in recent months, rates have crept up on certificates of deposit. Unlike just one year ago, CDs now merit consideration.
But the key is to invest in certificates with longer terms.
“Another lower-risk option is to consider a Certificate of Deposit (CD),” advises Lance C. Steiner, CFP at Buckingham Advisors. “Banks, credit unions, and many other financial institutions offer CDs with maturities ranging from 6 months to 60 months. Currently, a 6-month CD may pay between 0.75% and 1.25% where a 24-month CD may pay between 2.20% and 3.00%. We suggest considering a short-term ladder since interest rates are expected to continue rising.” (Stated interest rates for the high-yield savings and CDs were obtained at bankrate.com.)
Most banks offer certificates of deposit with terms as long as five years. Those typically have the highest yields.
But the longer term does involve at least a moderate level of risk. If you invest in a CD for five years that’s currently paying 3%, the risk is that interest rates will continue rising. If they do, you’ll miss out on the higher returns available on newer certificates. But the risk is still low overall since the bank guarantees to repay 100% of your principle upon certificate maturity.
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7. Peer-to-Peer (P2P) Lending
Do you know how banks borrow from you—at 1% interest—then loan the same money to your neighbor at rates sometimes as high as 20%? It’s quite a racket, and a profitable one at that.
But do you also know that you have the same opportunity as a bank? It’s an investing process known as peer-to-peer lending, or P2P for short.
P2P lending essentially eliminates the bank. As an investor, you’ll provide the funds for borrowers on a P2P platform. Most of these loans will be in the form of personal loans for a variety of purposes. But some can also be business loans, medical loans, and for other more specific purposes.
As an investor/lender, you get to keep more of the interest rate return on those loans. You can invest easily through online P2P platforms.
One popular example is Prosper. They offer primarily personal loans in amounts ranging between $2,000 and $40,000. You can invest in small slivers of these loans, referred to as “notes.” Notes can be purchased for as little as $25.
That small denomination will make it possible to diversify your investment across many different loans. You can even choose the loans you will invest in based on borrower credit scores, income, loan terms, and purposes.
Prosper, which has managed $20 billion in P2P loans since 2005, claims a historical average return of 5.7%. That’s a high rate of return on what is essentially a fixed-income investment. But that’s because there exists the possibility of loss due to borrower default.
However, you can minimize the likelihood of default by carefully choosing borrower loan quality. That means focusing on borrowers with higher credit scores, incomes, and more conservative loan purposes (like debt consolidation).
8. Real Estate Investment Trusts (REITs)
REITs are an excellent way to participate in real estate investment, and the return it provides, without large amounts of capital or the need to manage properties. They’re publicly traded, closed-end investment funds that can be bought and sold on major stock exchanges. They invest primarily in commercial real estate, like office buildings, retail space, and large apartment complexes.
If you’re planning to invest in a REIT, you should be aware that there are three different types.
“Equity REITs purchase commercial, industrial, or residential real estate properties,” reports Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University and co-author of several books, including The Tools and Techniques Of Investment Planning, Strategic Value Investing and Investment Banking for Dummies. “Income is derived primarily from the rental on the properties, as well as from the sale of properties that have increased in value. Mortgage REITs invest in property mortgages. The income is primarily from the interest they earn on the mortgage loans. Hybrid REITs invest both directly in property and in mortgages on properties.”
Johnson also cautions:
“Investors should understand that equity REITs are more like stocks and mortgage REITs are more like bonds. Hybrid REITs are like a mix of stocks and bonds.”
Mortgage REITs, in particular, are an excellent way to earn steady dividend income without being closely tied to the stock market.
Examples of specific REITs are listed in the table below (source: Kiplinger):
REIT
Equity or Mortgage
Property Type
Dividend Yield
12 Month Return
Rexford Industrial Realty
REXR
Industrial warehouse space
2.02%
2.21%
Sun Communities
SUI
Manufactured housing, RVs, resorts, marinas
2.19%
-14.71%
American Tower
AMT
Multi-tenant cell towers
2.13%
-9.00%
Prologis
PLD
Industrial real estate
2.49%
-0.77%
Camden Property Trust
CPT
Apartment complexes
2.77%
-7.74%
Alexandria Real Estate Equities
ARE
Research Properties
3.14%
-23.72%
Digital Realty Trust
DLR
Data centers
3.83%
-17.72%
9. Real Estate Crowdfunding
If you prefer direct investment in a property of your choice, rather than a portfolio, you can invest in real estate crowdfunding. You invest your money, but management of the property will be handled by professionals. With real estate crowdfunding, you can pick out individual properties, or invest in nonpublic REITs that invest in very specific portfolios.
One of the best examples of real estate crowdfunding is Fundrise. That’s because you can invest with as little as $500 or create a customized portfolio with no more than $1,000. Not only does Fundrise charge low fees, but they also have multiple investment options. You can start small in managed investments, and eventually trade up to investing in individual deals.
One thing to be aware of with real estate crowdfunding is that many require accredited investor status. That means being high income, high net worth, or both. If you are an accredited investor, you’ll have many more choices in the real estate crowdfunding space.
If you are not an accredited investor, that doesn’t mean you’ll be prevented from investing in this asset class. Part of the reason why Fundrise is so popular is that they don’t require accredited investor status. There are other real estate crowdfunding platforms that do the same.
Just be careful if you want to invest in real estate through real estate crowdfunding platforms. You will be expected to tie your money up for several years, and early redemption is often not possible. And like most investments, there is the possibility of losing some or all your investment principal.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
10. Physical Real Estate
We’ve talked about investing in real estate through REITs and real estate crowdfunding. But you can also invest directly in physical property, including residential property or even commercial.
Owning real estate outright means you have complete control over the investment. And since real estate is a large-dollar investment, the potential returns are also large.
For starters, average annual returns on real estate are impressive. They’re even comparable to stocks. Residential real estate has generated average returns of 10.6%, while commercial property has returned an average of 9.5%.
Next, real estate has the potential to generate income from two directions, from rental income and capital gains. But because of high property values in many markets around the country, it will be difficult to purchase real estate that will produce a positive cash flow, at least in the first few years.
Generally speaking, capital gains are where the richest returns come from. Property purchased today could double or even triple in 20 years, creating a huge windfall. And this will be a long-term capital gain, to get the benefit of a lower tax bite.
Finally, there’s the leverage factor. You can typically purchase an investment property with a 20% down payment. That means you can purchase a $500,000 property with $100,000 out-of-pocket.
By calculating your capital gains on your upfront investment, the returns are truly staggering. If the $500,000 property doubles to $1 million in 20 years, the $500,000 profit generated will produce a 500% gain on your $100,000 investment.
On the negative side, real estate is certainly a very long-term investment. It also comes with high transaction fees, often as high as 10% of the sale price. And not only will it require a large down payment up front, but also substantial investment of time managing the property.
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11. High Dividend Stocks
“The best high-yield investment is dividend stocks,” declares Harry Turner, Founder at The Sovereign Investor. “While there is no guaranteed return with stocks, over the long term stocks have outperformed other investments such as bonds and real estate. Among stocks, dividend-paying stocks have outperformed non-dividend paying stocks by more than 2 percentage points per year on average over the last century. In addition, dividend stocks tend to be less volatile than non-dividend paying stocks, meaning they are less likely to lose value in downturns.”
You can certainly invest in individual stocks that pay high dividends. But a less risky way to do it, and one that will avoid individual stock selection, is to invest through a fund.
One of the most popular is the ProShares S&P 500 Dividend Aristocrat ETF (NOBL). It has provided a return of 1.67% in the 12 months ending May 31, and an average of 12.33% per year since the fund began in October 2013. The fund currently has a 1.92% dividend yield.
The so-called Dividend Aristocrats are popular because they represent 60+ S&P 500 companies, with a history of increasing their dividends for at least the past 25 years.
“Dividend Stocks are an excellent way to earn some quality yield on your investments while simultaneously keeping inflation at bay,” advises Lyle Solomon, Principal Attorney at Oak View Law Group, one of the largest law firms in America. “Dividends are usually paid out by well-established and successful companies that no longer need to reinvest all of the profits back into the business.”
It gets better. “These companies and their stocks are safer to invest in owing to their stature, large customer base, and hold over the markets,” adds Solomon. “The best part about dividend stocks is that many of these companies increase dividends year on year.”
The table below shows some popular dividend-paying stocks. Each is a so-called “Dividend Aristocrat”, which means it’s part of the S&P 500 and has increased its dividend in each of at least the past 25 years.
Company
Symbol
Dividend
Dividend Yield
AbbVie
ABBV
$5.64
3.80%
Armcor PLC
AMCR
$0.48
3.81%
Chevron
CVX
$5.68
3.94%
ExxonMobil
XOM
$3.52
4.04%
IBM
IBM
$6.60
5.15%
Realty Income Corp
O
$2.97
4.16%
Walgreen Boots Alliance
WBA
$1.92
4.97%
12. Preferred Stocks
Preferred stocks are a very specific type of dividend stock. Just like common stock, preferred stock represents an interest in a publicly traded company. They’re often thought of as something of a hybrid between stocks and bonds because they contain elements of both.
Though common stocks can pay dividends, they don’t always. Preferred stocks on the other hand, always pay dividends. Those dividends can be either a fixed amount or based on a variable dividend formula. For example, a company can base the dividend payout on a recognized index, like the LIBOR (London Inter-Bank Offered Rate). The percentage of dividend payout will then change as the index rate does.
Preferred stocks have two major advantages over common stock. First, as “preferred” securities, they have a priority on dividend payments. A company is required to pay their preferred shareholders dividends ahead of common stockholders. Second, preferred stocks have higher dividend yields than common stocks in the same company.
You can purchase preferred stock through online brokers, some of which are listed under “Growth Stocks” below.
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Preferred Stock Caveats
The disadvantage of preferred stocks is that they don’t entitle the holder to vote in corporate elections. But some preferred stocks offer a conversion option. You can exchange your preferred shares for a specific number of common stock shares in the company. Since the conversion will likely be exercised when the price of the common shares takes a big jump, there’s the potential for large capital gains—in addition to the higher dividend.
Be aware that preferred stocks can also be callable. That means the company can authorize the repurchase of the stock at its discretion. Most will likely do that at a time when interest rates are falling, and they no longer want to pay a higher dividend on the preferred stock.
Preferred stock may also have a maturity date, which is typically 30–40 years after its original issuance. The company will typically redeem the shares at the original issue price, eliminating the possibility of capital gains.
Not all companies issue preferred stock. If you choose this investment, be sure it’s with a company that’s well-established and has strong financials. You should also pay close attention to the details of the issuance, including and especially any callability provisions, dividend formulas, and maturity dates.
13. Growth Stocks
This sector is likely the highest risk investment on this list. But it also may be the one with the highest yield, at least over the long term. That’s why we’re including it on this list.
Based on the S&P 500 index, stocks have returned an average of 10% per year for the past 50 years. But it is important to realize that’s only an average. The market may rise 40% one year, then fall 20% the next. To be successful with this investment, you must be committed for the long haul, up to and including several decades.
And because of the potential wide swings, growth stocks are not recommended for funds that will be needed within the next few years. In general, growth stocks work best for retirement plans. That’s where they’ll have the necessary decades to build and compound.
Since most of the return on growth stocks is from capital gains, you’ll get the benefit of lower long-term capital gains tax rates, at least with securities held in a taxable account. (The better news is capital gains on investments held in retirement accounts are tax-deferred until retirement.)
You can choose to invest in individual stocks, but that’s a fairly high-maintenance undertaking. A better way may be to simply invest in ETFs tied to popular indexes. For example, ETFs based on the S&P 500 are very popular among investors.
You can purchase growth stocks and growth stock ETFs commission free with brokers like M1 Finance, Zacks Trade, Wealthsimple.
14. Annuities
Annuities are something like creating your own private pension. It’s an investment contract you take with an insurance company, in which you invest a certain amount of money in exchange for a specific income stream. They can be an excellent source of high yields because the return is locked in by the contract.
Annuities come in many different varieties. Two major classifications are immediate and deferred annuities. As the name implies, immediate annuities begin paying an income stream shortly after the contract begins.
Deferred annuities work something like retirement plans. You may deposit a fixed amount of money with the insurance company upfront or make regular installments. In either case, income payments will begin at a specified point in the future.
With deferred annuities, the income earned within the plan is tax-deferred and paid upon withdrawal. But unlike retirement accounts, annuity contributions are not tax-deductible. Investment returns can either be fixed-rate or variable-rate, depending on the specific annuity setup.
While annuities are an excellent idea and concept, the wide variety of plans as well as the many insurance companies and agents offering them, make them a potential minefield. For example, many annuities are riddled with high fees and are subject to limited withdrawal options.
Because they contain so many moving parts, any annuity contracts you plan to enter into should be carefully reviewed. Pay close attention to all the details, including the small ones. It is, after all, a contract, and therefore legally binding. For that reason, you may want to have a potential annuity reviewed by an attorney before finalizing the deal.
15. Alternative Investments
Alternative investments cover a lot of territory. Examples include precious metals, commodities, private equity, art and collectibles, and digital assets. These fall more in the category of high risk/potential high reward, and you should proceed very carefully and with only the smallest slice of your portfolio.
To simplify the process of selecting alternative assets, you can invest through platforms such as Yieldstreet. With a single cash investment, you can invest in multiple alternatives.
“Investors can purchase real estate directly on Yieldstreet, through fractionalized investments in single deals,” offers Milind Mehere, Founder & Chief Executive Officer at Yieldstreet. “Investors can access private equity and private credit at high minimums by investing in a private market fund (think Blackstone or KKR, for instance). On Yieldstreet, they can have access to third-party funds at a fraction of the previously required minimums. Yieldstreet also offers venture capital (fractionalized) exposure directly. Buying a piece of blue-chip art can be expensive, and prohibitive for most investors, which is why Yieldstreet offers fractionalized assets to diversified art portfolios.”
Yieldstreet also provides access to digital asset investments, with the benefit of allocating to established professional funds, such as Pantera or Osprey Fund. The platform does not currently offer commodities but plans to do so in the future.
Access to wide array of alternative asset classes
Access to ultra-wealthy investments
Can invest for income or growth
Learn More Now
Alternative investments largely require thinking out-of-the-box. Some of the best investment opportunities are also the most unusual.
“The price of meat continues to rise, while agriculture remains a recession-proof investment as consumer demand for food is largely inelastic,” reports Chris Rawley, CEO of Harvest Returns, a platform for investing in private agriculture companies. “Consequently, investors are seeing solid returns from high-yield, grass-fed cattle notes.”
16. Interest Bearing Crypto Accounts
Though the primary appeal of investing in cryptocurrency has been the meteoric rises in price, now that the trend seems to be in reverse, the better play may be in interest-bearing crypto accounts. A select group of crypto exchanges pays high interest on your crypto balance.
One example is Gemini. Not only do they provide an opportunity to buy, sell, and store more than 100 cryptocurrencies—plus non-fungible tokens (NFTs)—but they are currently paying 8.05% APY on your crypto balance through Gemini Earn.
In another variation of being able to earn money on crypto, Crypto.com pays rewards of up to 14.5% on crypto held on the platform. That’s the maximum rate, as rewards vary by crypto. For example, rewards on Bitcoin and Ethereum are paid at 6%, while stablecoins can earn 8.5%.
It’s important to be aware that when investing in cryptocurrency, you will not enjoy the benefit of FDIC insurance. That means you can lose money on your investment. But that’s why crypto exchanges pay such high rates of return, whether it’s in the form of interest or rewards.
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17. Crypto Staking
Another way to play cryptocurrency is a process known as crypto staking. This is where the crypto exchange pays you a certain percentage as compensation or rewards for monitoring a specific cryptocurrency. This is not like crypto mining, which brings crypto into existence. Instead, you’ll participate in writing that particular blockchain and monitoring its security.
“Crypto staking is a concept wherein you can buy and lock a cryptocurrency in a protocol, and you will earn rewards for the amount and time you have locked the cryptocurrency,” reports Oak View Law Group’s Lyle Solomon.
“The big downside to staking crypto is the value of cryptocurrencies, in general, is extremely volatile, and the value of your staked crypto may reduce drastically,” Solomon continues, “However, you can stake stable currencies like USDC, which have their value pegged to the U.S. dollar, and would imply you earn staked rewards without a massive decrease in the value of your investment.”
Much like earning interest and rewards on crypto, staking takes place on crypto exchanges. Two exchanges that feature staking include Coinbase and Kraken. These are two of the largest crypto exchanges in the industry, and they provide a wide range of crypto opportunities, in addition to staking.
Invest in Startup Businesses and Companies
Have you ever heard the term “angel investor”? That’s a private investor, usually, a high net worth individual, who provides capital to small businesses, often startups. That capital is in the form of equity. The angel investor invests money in a small business, becomes a part owner of the company, and is entitled to a share of the company’s earnings.
In most cases, the angel investor acts as a silent partner. That means he or she receives dividend distributions on the equity invested but doesn’t actually get involved in the management of the company.
It’s a potentially lucrative investment opportunity because small businesses have a way of becoming big businesses. As they grow, both your equity and your income from the business also grow. And if the business ever goes public, you could be looking at a life-changing windfall!
Easy Ways to Invest in Startup Businesses
Mainvest is a simple, easy way to invest in small businesses. It’s an online investment platform where you can get access to returns as high as 25%, with an investment of just $100. Mainvest offers vetted businesses (the acceptance rate is just 5% of business that apply) for you to invest in.
It collects revenue, which will be paid to you quarterly. And because the minimum required investment is so small, you can invest in several small businesses at the same time. One of the big advantages with Mainvest is that you are not required to be an accredited investor.
Still another opportunity is through Fundrise Innovation Fund. I’ve already covered how Fundrise is an excellent real estate crowdfunding platform. But through their recently launched Innovaton Fund, you’ll have opportunity to invest in high-growth private technology companies. As a fund, you’ll invest in a portfolio of late-stage tech companies, as well as some public equities.
The purpose of the fund is to provide high growth, and the fund is currently offering shares with a net asset value of $10. These are long-term investments, so you should expect to remain invested for at least five years. But you may receive dividends in the meantime.
Like Mainvest, the Fundrise Innovation Fund does not require you to be an accredited investor.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
Final Thoughts on High Yield Investing
Notice that I’ve included a mix of investments based on a combination of risk and return. The greater the risk associated with the investment, the higher the stated or expected return will be.
It’s important when choosing any of these investments that you thoroughly assess the risk involved with each, and not focus primarily on return. These are not 100% safe investments, like short-term CDs, short-term Treasury securities, savings accounts, or bank money market accounts.
Because there is risk associated with each, most are not suitable as short-term investments. They make most sense for long-term investment accounts, particularly retirement accounts.
For example, growth stocks—and most stocks, for that matter—should generally be in a retirement account. While there will be years when you will suffer losses in your position, you’ll have enough years to offset those losses between now and retirement.
Also, if you don’t understand any of the above investments, it will be best to avoid making them. And for more complicated investments, like annuities, you should consult with a professional to evaluate the suitability and all the provisions it contains.
FAQ’s on High Yield Investment Options
What investment has the highest yield?
The investment with the highest yield will vary depending on a number of factors, including current market conditions and the amount of risk an investor is willing to take on. Generally speaking, investments with the potential for high yields also come with a higher level of risk, so it’s important for investors to carefully consider their options and choose investments that align with their financial goals and risk tolerance.
Some examples of high-yield investments include:
1. Stocks: Some stocks may offer high dividend yields, which is the annual dividend payment a company makes to its shareholders, expressed as a percentage of the stock’s current market price.
2. Real estate: Investing in real estate, either directly by purchasing property or indirectly through a real estate investment trust (REIT), can potentially generate high returns in the form of rental income and appreciation of the property value.
3. High-yield bonds: High-yield bonds, also known as junk bonds, are bonds that are issued by companies with lower credit ratings and thus offer higher yields to compensate for the added risk.
4. Private lending: Investing in private loans, such as through peer-to-peer lending platforms, can potentially offer high yields, but it also carries a higher level of risk.
5. Commodities: Investing in commodities, such as precious metals or oil, can potentially generate high returns if the prices of those commodities rise. However, the prices of commodities can also be volatile and subject to market fluctuations.
It’s important to note that these are just examples and not recommendations. As with any investment, it’s crucial to carefully research and consider all the potential risks and rewards before making a decision.
Where can I invest my money to get high returns?
There are a number of places you can invest your money to get high returns. One option is to invest in stocks, which typically offer higher returns than other investment options. Another option is to invest in bonds, which are considered a relatively safe investment option.
You could also invest in real estate, which has the potential to provide high returns if done correctly. Finally, you could also invest in commodities, such as gold or silver, which can be a risky investment but can also offer high returns.
What investments can I make a 10% return?
It’s difficult to predict exactly what investments will generate a 10% return, as investment returns can vary depending on a number of factors, including market conditions and the performance of the specific investment. Some investments, such as stocks and real estate, have the potential to generate returns in excess of 10%, but they also come with a higher level of risk. It’s important to remember that past performance is not necessarily indicative of future results, and that all investments carry some degree of risk
The role of municipal bond insurance continues to decline in the municipal market, with insured bonds comprising only 11% of year-to-date new issuance through July.
Ambac, one of the largest bond insurers, was downgraded further into “junk” territory in July, and of the ten municipal bond insurers, only three maintain a financial strength rating of AA or higher.
Some positive news may lie on the horizon for investors seeking the highest rated municipals bonds, but it is unlikely insurance will return to the pre-crisis role it played in the municipal market.
While the diminished role of insurance is a negative, we believe it is not enough to offset positive aspects driving performance of the municipal bond market.
The role of bond insurance continues to decline in the municipal market, with insured bonds comprising only 11% of year-to-date new issuance through July.
Prior to the start of the financial crisis in 2007, municipal bond insurers backed roughly half of the entire municipal market.
In 2008, municipal bond insurers began to lose their AAA ratings status, as projected losses on complex mortgage-backed securities led to downgrades from both Moody’s and S&P. For bond issuers, insurance from a company with less than a AAA rating offered little value.
The percentage of newly issued insured bonds dropped to 18% in 2008 and to 11% so far in 2009 according to Bloomberg.
More Junk in the Municipal Realm
Negative headlines continued in July as Ambac, one of the four largest bond insurers, was downgraded further into “junk” territory. Ambac’s ratings were reduced to Caa2 by Moody’s and to CC by S&P, and the downgrades have forced the company to postpone plans to separate its municipal insurance business from its structured mortgaged-backed securities business into a new, more viable company. Of the major municipal bond insurers, only three maintain a rating of AA or better. In table 1, “Credit Watch” indicates a possible rating change in the coming weeks or months; “Outlook” indicates the likely longer-term ratings direction over the next six to twelve months; and “Developing” implies that any change (positive, negative, or none) is possible.
Moody’s has taken a particularly harsh path towards the municipal insurers, stating that a municipal-only insurance model is not viable. Although the ratings agency’s reasoning has been less than clear and perhaps politically motivated, Moody’s believes a AAA-rating is unobtainable for any company given the uncertainty inherent in their business models.
Market impact from negative news, such as the Ambac headlines, has become more muted in 2009. Most insured bonds were already trading in relation to their underlying ratings. The insurers actually took great care with their municipal business (unlike their mortgage business in many cases) and focused on higher quality issuers. Roughly 90% of insured bonds carry an underlying rating of A or better, so insurer downgrades below A have caused fewer corresponding bond downgrades. So although Ambac’s downgrade did result in some subsequent bond downgrades, the ratings on the majority of Ambac insured bonds were unaffected. An insured municipal bond is rated at the higher of the insurer’s rating or its underlying rating (the rating based solely on the municipality’s credit profile).
What’s next for Municipal Bond Insurance?
Since there is no economic value from bond insurance unless it results in at least an A rating for the bond, many of the insurers rated below BBB are now in “runoff” mode. In runoff, the insurers do not underwrite new business (as is the case with Ambac) and simply collect money on insurance premiums already written. Over several years, the insurer hopes that premiums will be enough to offset potential losses on all claims and then attempt to reestablish the business or simply return any excess proceeds to equity and/or bondholders.
An insurer is still liable to pay claims (i.e., a default or missed interest payment) even if in runoff, since they maintain some claims paying ability. Given the potential mountain of claims against the existing capital base (particularly from those subject to sub-prime mortgage exposure), it is uncertain whether these insurers will be able to meet future claims. A bond insurer is required to make up any missed interest payments, but principal repayment, in the case of default, is not made until maturity or until bankruptcy is resolved, whichever comes first.
Potential positives
A potential new insurer and possible new federal legislation could be positive developments for investors seeking the highest quality municipal bonds. Municipal and Infrastructure Assurance Corporation (MIAC), backed by investment bank Macquarie Group and private equity firm Citadel, is attempting to enter the market over coming months as a AAA-rated, municipal bond only insurer. Increasing the pool of AAA-rated bonds would bring in more investors to the municipal market.
The House Financial Services Committee has proposed two bills to be voted on this fall that could affect municipal bond ratings:
The Municipal Bond Fairness Act would require the rating agencies to rate municipal bonds more consistently with other bonds, such as corporate bonds. Since investment grade municipal bonds have exhibited a much lower default rate than comparably rated corporate bonds, this requirement could result in one to two-notch upgrades for thousands of municipal bonds. Moody’s was set to implement such a plan last fall but indefinitely postponed the implementation due to the credit crisis and recession.
The Municipal Bond Insurance Enhancement Act would create a federal financial guarantor to reinsure bonds backed by municipal only insurers. However, the proposed dollar amount of $50 billion is relatively small and could have a limited impact.
Even if these events come to fruition, we don’t expect bond insurance to return to its pre-crisis status. The municipal bond market continues to forge ahead regardless.
We think the rally in municipal bonds will continue, even with insurance questions lingering, but at a more gradual pace. The diminished role of municipal bond insurance is one reason why municipal valuations remain cheap by historical norms despite the impressive rally so far this year. Even without insurance, however, high-quality municipal bonds have exhibited very low default rates. The municipal market continues to benefit from a favorable supply-demand balance, attractive valuations, and the prospect of higher tax rates. Taken together these factors should outweigh insurance woes. On a longer-term basis, the expiration of the Bush tax cuts in 2010 alone could more than offset the lack of insurance and be a catalyst to still higher municipal bond valuations.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Neither LPL Financial nor any of its affiliates make a market in the investment being discussed nor does LPL Financial or its affiliates or its officers have financial interest in any securities of the issuer whose investment is being recommended neither LPL Financial nor its affiliates have managed or co-managed a public offering of any securities of the issuer in the past 12 months.
Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fi xed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. High Yield/Junk Bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors. GNMA’s are guaranteed by the U.S. government as to the timely principal and interest, however this guarantee does not apply to the yield, nor does it protect against loss of principal if the bonds are sold prior to the payment of all underlying mortgages.
Muni Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and state and local taxes may apply.
Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlines in the prospectus.
Stock investing involves risk including loss of principal.
We often hear stocks and bonds mentioned together as if they’re pretty much the same thing.
But are they? Not really.
In fact, it might even be that most people understand stocks even better than bonds. After all, relatively few people own bonds individually.
So, what is a bond, and how may it fit in your overall investment portfolio?
So, What Is A Bond, Exactly?
Bonds are securities representing debt obligations, usually issued by either corporations or governments.
They’re normally issued in denominations of $1,000 and pay interest twice each year. What’s more, the interest rate is fixed for the duration of the bond.
And if the bond is held to maturity, the investor will be paid the full face amount of the security.
As an example, if you purchase a bond for $1,000, with an interest rate of 4% and a term of 20 years, you will be paid $40 per year – $20 every 6 months – until the bond is paid in full 20 years later.
Bonds are much like certificates of deposit, except that they are issued by institutions other than banks, and have much longer terms. They also lack the FDIC insurance coverage that comes with bank-issued CDs.
Bonds are long-term securities, with terms greater than 10 years.
However, investors often lump any type of fixed income investment into the bonds category.
That can include securities with a term of anywhere from a few months to 30 years.
What Types of Bonds are There?
There are 3 primary types of bonds:
Corporate
US Treasuries
Municipal Bonds
Let’s take a look at each.
Corporate Bonds
These are bonds issued by publicly traded corporations and often listed on public exchanges. They can be used for a variety of business purposes, including paying off old debt, expanding operations, raising extra cash, or even acquiring competitors.
They’re generally considered less safe than US Treasuries and pay a higher rate of interest as a result.
Exactly how much interest they’ll pay will depend upon their bond rating, as issued by large bond rating services, such as Moody’s or Standard & Poor’s.
Bonds with ratings of BBB through AAA are considered the safest and rated as investment grade.
Lower rated bonds once referred to as “junk bonds”, are now called “high yield bonds”, and pay much higher rates of interest. Naturally, such bonds are also more likely to default and considered riskier.
Corporate bonds can generally be purchased through investment brokerage firms. They’re typically bought in denominations of $1,000, but you may have to buy a minimum of 10 bonds, or $10,000. Both purchase and sale will generally involve a small commission.
US Treasury Securities
US Treasury Securities come in a wide variety of terms. Technically speaking, only one security is actually a bond, which is the US Treasury bond. But just to clear up any confusion, we’ll discuss the various types of US Treasury securities that are available.
US Treasury Bonds. These are the longest term treasuries, with a maturity of 30 years. They are available in denominations of as little as $100 and pay interest every six months.
US Treasury Bills. These are the shortest term treasuries, with maturities ranging from a few days up to 52 weeks.
They can be purchased in denominations of $100, but are bought at a discount.
For example, you might purchase a Treasury bill for $99, which you will redeem at maturity for $100. The additional $1 paid represents interest paid on the security.
US Treasury Notes. Notes have maturities of 2, 3, 5, 7, and 10 years. They pay interest every six months and are available in denominations of $100.
Treasury Inflation-Protected Securities (TIPS). These are interest bearing treasuries that also increase your principal based on changes in the consumer price index (CPI). They come with maturities of 5, 10, and 30 years. The interest paid is lower than Treasury securities with comparable terms, but the principal additions are meant to keep the value of the security up with inflation.
US Savings Bonds. Available as EE and E savings bonds, they are available in denominations of $25 and earn interest for up to 30 years. There is also the I Savings Bond, which like TIPS, increases the principal value of the security based on changes in the CPI.
Where to Buy US Treasury Securities
All US Treasury Securities can be purchased, held, and redeemed through the US Treasury department’s web portal, Treasury Direct. They can also be purchased through investment brokerage firms, though there may be a nominal fee for both purchase and sale.
Municipal Bonds
These are bonds issued by local governments, including states, counties, municipalities, and their various agencies.
They have the advantage of not being subject to federal income tax. And if you are a resident of the same state where the bonds are issued, the interest will also be free from state income tax.
However, if you live in a different state, the interest will be taxable in your state of residence, if it has an income tax.
Municipal bonds can generally be purchased through investment brokerage firms, and once again for a small commission on both purchase and sale.
For those looking to get started in bond-investing, Worthy Peer Capital is a good place to start.
What are the Benefits of Bonds?
Bonds have two basic benefits, at least compared to stocks.
The first is relative safety. While stock prices fluctuate, bonds are repaid at the full face value if they are held to maturity. This makes them a solid diversification away from stocks.
Holding a certain percentage of your portfolio in bonds can reduce the overall volatility and has been shown to improve long-term investment results.
The second benefit is steady income.
The interest paid on bonds is a contractual obligation. Unlike dividends, which can be either reduced or eliminated by the issuing institution, the interest rate set on a bond upon issue is guaranteed until maturity.
This provides the bondholder with a steady source of income, even while stocks may be fluctuating in value.
There’s a third benefit bonds have in common with stocks, and that’s the potential for capital appreciation. It has to do with changes in interest rates.
Let’s say you purchased $10,000 of a certain bond with a 5% interest rate.
Two years later, prevailing interest rates fall to 4%. The value of your bond increases to $12,500, which gives it a 4% yield.
You then sell the bonds and collect a $2,500 capital gain on the transaction.
What are the Risks of Bonds?
Despite the advantages of holding bonds, they’re not without risks. There are two primary risks.
Issuer default. This is a bigger concern with corporate bonds. A company can fall on hard times, and default on its debts. Not only would you lose the interest income, but the principal as well. There are different ways this can play out. In a corporate bankruptcy situation, you may receive partial value of the bonds.
But in an extreme situation, the bonds may be declared completely worthless.
Since they are issued by the US government, Treasury securities are considered immune from default. Municipal bonds do have a slight possibility of default, but in fact, defaults have been very rare on these securities historically.
Interest rate risk. In the last section, we talked about the possibility of bonds providing capital gains if you purchase a bond then sell it into a market with lower interest rates. But the opposite can happen if interest rates rise.
Let’s reverse the example given earlier. You purchase $10,000 in bonds paying 4%. Two years later the prevailing rate on bonds is 5%. You sell the bonds at $8,000, which is the principal value that will produce a 5% return. In the process, you take a $2,000 capital loss.
This is referred to as interest rate risk – the risk that the value of your bonds will fall if interest rates rise.
The major disadvantage with bonds is that they have an inverse relationship with interest rates. Rising rates equal falling values while falling rates equal rising values.
You should also be aware that US Treasury bonds are also subject to interest rate risk, even though the principal value of the bonds is guaranteed at maturity.
So far we’ve been talking about purchasing individual bonds.
But you can also invest in bonds through bond funds. Bonds are sold through funds, just the way stocks are. Each is a portfolio of bonds held in a single investment unit. The fund may hold hundreds of different bond issues and will be run by an investment manager.
It’s important to understand that there is a wide variety of bond funds. In fact, you can choose a fund based on your own investment preferences.
For example, you can invest in a bond fund that holds only US Treasuries, municipal bonds, or corporate bonds. You can also invest in funds that hold foreign bonds.
Some very specialized bond funds invest only in securities with limited terms.
For example, a bond fund may hold sureties due to mature within 5 years.
That can include five year Treasury notes, but it can also include 20 year corporate bonds due to mature within 5 years. Investors often choose shorter-term bond funds to minimize or eliminate interest rate risk.
You can also invest in bond funds that hold only non-investment grade bonds (bonds with ratings below BBB). These funds are riskier than the ones that hold higher-quality bonds, but they provide higher interest rate returns.
An investor may take a small position in a high-interest bond fund to increase overall yield on a larger bond portfolio.
Bond funds offer professional management, as well as greater diversification.
However, they typically charge commissions, known as “load fees”, that can range between 1% and 3% of the fund value.
You can invest in bond funds through investment brokers, or through large mutual fund companies like Vanguard and Fidelity.
How Much of Your Portfolio Should You Hold in Bonds?
Virtually everyone who invests should have at least some money invested in fixed income investments, including bonds.
They provide greater stability in an investment portfolio and are particularly valuable during downturns in the stock market. Not only are they more likely to retain their value in a market decline, but they’ll also pay interest income along the way.
But there’s much debate about exactly how much you should hold in bonds. Different factors have to be considered, including your age, your investment time horizon, and your market risk tolerance.
But there are some formulas that reduce the allocation percentage to a mathematical equation.
One that’s grown popular in recent years is 120 minus your age. For example, If you’re 40 years old, 80% (120 minus 40) of your portfolio should be held in stocks, while 20% should be held in bonds.
If you’re 60, then 60% (120 minus 60) should be held in stocks and the remaining 40% in bonds.
The formula might not be entirely fool-proof, but it at least accounts for your age and investment time horizon.
For example, notice that as you get older, the bond portfolio percentage increases.
This is consistent with what investment managers typically recommend. The closer you get to retirement, the lower your stock exposure should be.
It doesn’t really take risk tolerance into account, but you can use the formula as a starting point, then adjust the allocations based on your own personal tolerance.
Final Thoughts on What is a Bond
So there you have a high altitude view of bonds.
As you can see, bonds are probably more complicated than most people believe. They come in different shapes and sizes and are issued by various entities. Each has its own strengths and limitations.
Armed with just a general understanding of bonds, you should be able to appreciate the need to hold at least some part of your portfolio in them. Most investors don’t hold individual bonds since it’s difficult to adequately diversify.
Bond funds are usually the better choice for small investors, particularly if you’re interested in specialized bonds, like municipal bonds or high yield bonds.
One final word on bonds…if you’re looking for an asset that’s totally safe, bonds may not qualify.
They are subject to the risks discussed above, despite being less risky than stocks.
But if you want complete safety for at least part of your portfolio, then you’ll need to look at CDs, money markets, and high yield savings accounts.