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The arena of high yield investments is technically very difficult for many to understand. The reason for this is the “term high yield investments” typically refers to a particular class of bond investment and as a whole, bonds are difficult to fully understand. And this does not relate solely to the inverse relationship between rates and price; it refers to the broader spectrum of bond analysis.

Luckily, there are bond funds available on the market that are not only highly ranked within the industry, but come with an intelligent analysis department that takes all of the hard number crunching and the complex chore of making heads and tails out the myriad of connected economic statistics off of your hands and drops those problems on someone else’s lap (someone who is paid a decent salary until you factor in the overtime).

Now, just because the term bonds is often linked to that attractive arena known as high yield investments does not mean that the risk is limited. Of course, in the most sense risk is minimal as bonds will be rated by independent rating agencies like Standard and Poors and Moody’s. And yes, bonds will have a security value attached to them (compared to common stock which lays no claim on any assets) . And yes, bonds are secured creditors which means they are to be paid ahead of any unsecured claims in the event of liquidation.

But bonds fluctuate. And even the best high yield investments, including the top-ranked bond funds will outperform the overall markets in times of both bull and bear periods. Even these top-ranked bond funds will have beta that exceed the market-standard of 1 (Beta is a measurement of how much a security or investment will fluctuate given changes in the stock market. For example, an investment with a beta of 1 will match the market movement, whereas an investment of 1.2 will  move 1.2 times the movement in the market… so, all things being equal, a market move of 4% will mean a move of 4.8% for the investment with a 1.2 Beta).

Knowing this, many investors still see high yield investments as a fairly risky proposal and opt instead for locked-in, inflexible term deposits at rates that rarely, if ever, exceed the consumer price index, or inflation rate.

The argument here is actually FOR high yield investments, particularly as an alternative to higher risk equity funds and lower risk (are they?) and lower-rate term deposits. The reasons are plenty, but we will touch on a few right here:

>> High Yield Investments are liquid. Just like your equity funds, a high yield bond fund will allow you to liquidate at any time and at no cost (note: this does not include any loads that may or may not be charged by the fund company).

>> High Yield Investments are secured by assets in most cases. Unless you are looking at a junk-bond class of investment, most bonds in this category are acceptable risk, meaning their assets are in place and, usually, contributing to revenues.

>> High Yield Investments are closely monitored by fund companies. Of course, this is speculation, but many top-ranked high yield bond funds will have turnover rates greater than 100%, meaning they turn over their entire portfolio, on average, at least once per year. As well since high yield investments are actually below investment grade, meaning BB or lower, the fund company will review their holdings regularly to ensure the risk of default is minimized. (Remember, this higher risk as deemed by the rating companies is what justifies the high rates paid on these bonds). One particular high yield bond fund hold companies like Ford, Teck Resources and Dole Foods among its Top 10 holdings and none of these bonds pays less than 7.45%

These three arguments are rather convincing for most investors. Companies like Ford, for example, may default on a bond payment but the consequences could mean losing a piece of equipment. With investors fighting for automotive assets (think of Magna, the Russians, etc. to start) it seems unlikely that even a highly specialized piece of equipment could lose enough value that bond holders are stuck with scrap as security.

Regardless, high yield investments provide some indisputable advantages over common equity funds. While there is no ownership claim for bond holders, there is a tangible asset that protects bond holders against complete loss. Additionally, bond holders are normally paid a guaranteed rate of income. In practical terms, high yield investments are often just as liquid as shares or equity funds, meaning that they can be cashed in when the funds are needed, unlike term deposits which most often cannot (not without fees and penalties). Most importantly, high yield investments provide greater income opportunities for investors.

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