When you are employed, you are working for your money. In retirement, you begin the stage in your life where your money must work, which changes the investing dynamic considerably – primarily as it relates to suitability. This article is offered to reveal and articulate the risks, dangers and advantages of reaching for yield.
By Chuck Carnevale (fastgraphs.com/)[The commentary above and below are edited excerpts from the original article* as posted on SeekingAlpha.com which can be read in its entirety HERE.]
The change in the individual’s investing dynamic primarily relates to suitability.
- When a person is younger and earning a paycheck, it can make sense to employ more aggressive growth-oriented investing strategies. Both time, and ideally, a steady paycheck are working in your favor. If you make investing mistakes along the way, as most everyone does, you have the luxury of time and fresh capital coming in to bail you out.
- In contrast, when a person matures and enters their retirement years, the capital they have accumulated is logically more precious. Consequently, preservation of the capital that you have spent a lifetime accumulating often does, and should, take precedence over making more…
Risk & the Retiree
I am not simply suggesting that age in its own right should automatically change your investing dynamic – that a person automatically loses their edge or acumen simply because they have become older – because the central issue is time, not advanced age.
One of the most important benefits with investing is time in the investment. Compounding is a powerful investment attribute; however, it is an attribute that functions best over long periods of time. In the same vein…I am not suggesting that retired investors should avoid taking any risk with their investment portfolios. Frankly, all investing entails a certain amount of risk. Therefore, avoiding all risk is literally impossible. On the other hand, I am a believer in taking only calculated and thoroughly reasoned risks that are commensurate with your financial situation or status…
You can, to a great extent, mitigate the risk…[however] by clearly understanding what they are, where they come from and how they can be controlled. At the end of the day, and as it relates to all investing, there is no substitute for comprehensive research and due diligence. Knowledge is power for every investor in every stage of their life.
To summarize, it is often okay – and even appropriate – for retired investors to assume a certain amount of risk. However, it’s critically important that the risk taken is clearly understood, and even more importantly, continuously monitored. Perhaps there is no area of investing where these principles more appropriately apply than in the high-yield investing arena. Therefore, this article [scroll down to the sub-title Common Sense and Reaching For Yield to begin] is offered to reveal and articulate the risks, dangers and advantages of reaching for yield… [The article discusses a variety of aggressive high-yield investments and gives examples (with analysis) of investments in each category.]
Summary and Conclusions
As indicated in this article, there are many high-yield investment opportunities that investors can consider. However, high yield alone does not tell the whole story. Each of the major high-yield asset classes offers numerous risks that should be carefully considered before laying your money down. There can be great advantages to investing in high-yield securities when things are going well. On the other hand, when things get bad, they can get very bad, and it can happen very quickly. Consequently, I suggest only the most sophisticated or diligent retired investors include high-yield securities in their retirement portfolios.
If you reach too high for yield, you have to be careful you don’t fall off the roof.
Related Articles from the munKNEE Vault:
To help give you additional insight into your attitude toward risk, we’ve compiled a list of questions that together look at risk from a broader perspective than what typical questionnaires tend to address.
In search of the best places to invest your money in the fourth quarter of 2015, I put together recommendations from a group of Barron’s-ranked financial advisors [who are] deemed [to be] the top 1% in their industry. Here are their recommendations:
In this article I present 12 dividend growth stocks that are fairly valued and offer above-average earnings and dividend growth potential.