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Are You Tempted By The Allure Of High-Yield Returns?

Seth Jentner05/21/2014

With interest rates on money-market funds, bank accounts and high-quality bonds at 50-year historic lows, many people are seeking safe, high-yield investments.

The Federal Reserve is keeping short-term interest rates near 0%. In this challenging economic environment, people may be falling prey to sales pitches offering high-yield returns. Whether it be high-yield bonds, real-estate investment trusts, fixed annuities offering bonus interest rates, senior notes, or high-dividend preferred stocks, people may be taking on more risk than they realize.

Last week, I received an email offering me “The MarketTwelve Bonus Index™ Annuity.” This annuity will allegedly pay investors a 12% bonus over three years. It also pays agents selling this annuity a commission of 8.5%! Could this be the “silver bullet” for investors and agents alike?

Or perhaps it’s the senior-debt exchange-traded funds offering yields greater than 6%? Perhaps it’s the mortgage real-estate investment trusts offering 12 to 14%?

Remember: “More money has been lost reaching for yield than at the point of the gun.” The fact is: The higher return an investor seeks, the higher the risk. If something sounds too good to be true, it generally is.

My recommendation? Use diversification to help you earn long-term positive returns. Do not concentrate your portfolio in just a few investments, no matter how good the sales pitch sounds. This has been true since the dawn of human civilization. More than 2000 years ago, Solomon wrote: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”

Carefully heed the cautions of your trusted financial advisor.  If you do not have one, you would be well advised to find one.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.