Unless you are a full-time investor—i.e., you don’t rely on a job for your primary income—then your goal is likely to achieve steady income while lowering your risk. But in today’s market, that’s easier said than done.
For one thing, interest rates on bank CDs, money market funds, and even short-term Treasury securities are locked at abnormally low yields.
For example, one-year jumbo CD rates, are just 1.6% while many money market funds pay less than 1%, making life quite difficult for fixed-income investors right now. Other potential threats include soaring federal budget deficits and the chronically weak U.S. dollar.
The once almighty buck continues to lose value against global currencies … DOWN another 14% in the nine months ended September … and if the slide continues at this pace, it could easily lead to higher inflation down the road and potential lost value in EVERY dollar-denominated asset you own.
What options are available for fixed-income investors to deal with these challenges? Here are a few:
- Earn higher current yields from a broad mix of income-producing investments. Consider diversifying into a wider range of income producing securities such as corporate bonds or income securities with longer maturities.
- Capture gains from shifts in global interest rates. The low rates on safe, income-producing securities that we see in other countries is not necessarily as extreme as what we see in the USA, especially with government backed securities. For example, I was earning a fixed, secured 7.85% on a CD in Australia. And usually these securities can be purchased without having to travel to that country (I purchased mine on the Australian bank’s website).
- Provide a hedge against the falling dollar with international fixed income diversification. So, for example, even if you had owned British fixed income securities that were paying the same crummy, low rates that US securities are paying, you would potentially have made an additional 10 percentage points in gains just by fluctuations in the British pound against the dollar!
- Seek out “private” offers to invest / lend money for a business. In this cash strapped economy where bank financing is tight, there is no end to the opportunities you have to invest your cash in a new business venture where someone else is running the business, and you’re just the bank. As a side note, even though we generally feel more comfortable lending money to a friend / family member, try to be objective. You may trust they’re intentions are good, but is this really a good business and are they really the right person to manage it. Recently, for example, a friend of mine lent $250,000 to another private individual (that he had no prior relationship with) to start a McDonald’s franchise. Now, since the guy had long been in the fast-food business and he’s choosing McDonald’s (who has a track record, to say the least) rather than, say, Joe’s Hamburgers, I’d say my friend’s investment is safe.
- Seek out “private” offers to invest / lend money for cash-flowing real estate (office buildings, apartment buildings, long-term rental houses, NOT flipping!). This is certainly my preferred strategy but it always comes with the same warning: make sure the cash flow of the property is adequate to make a payment to you every month. Yes, we want to check the creditworthiness, financial condition, and experience level of the real estate investor you’re partnering with, but we are more interested in the investment itself and whether it is self-funding. No matter how well intentioned he/she is, we want to know that our payments will be coming from the profit of the property, not from the individual’s job income or life savings.
Not for the faint of heart, please don’t go this last one alone. Certainly Great Lakes Secured Investments LLC can provide you with up to five times the income of other fixed, secured investments collateralized by a property whose cash flow easily covers the payment due you every month.
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