Increasing Return—A Multitude of Choices
There are many ways investors could try to increase their return, and below we have listed and briefly described a number of these approaches. Some of these products are easily understood while others are quite complex, and not all are appropriate or relevant for every investor. What they do have in common is that they are all products that you might encounter if you are looking for higher returning investments.
High-Yield Bonds
A common method of chasing return is to move from investment grade bonds to high-yield bonds. However, when investors seek more robust returns in high-yield bonds, they are not escaping the fundamental tenet of investing we alluded to earlier—that is, higher returns are associated with higher risk.
High-yield bonds are bonds with lower credit ratings and a higher risk of default. As a result, the bond issuer has to pay a more attractive interest rate to compensate the investor for the additional risk. High-yield bonds can make sense in many portfolios, but remember that the higher yield may come with the increased possibility that you could lose money on your investment. For more information on high-yield bonds, see FINRA's Smart Bond Investing.
Investor Tip—Individual Bonds vs. Bond Funds
If you are trying to increase your yield by investing in a bond mutual fund or Exchange Traded Fund (ETF) as opposed to individual bonds, remember that the value of your investment is not only affected by prevailing interest rates, but also by the willingness of investors to remain in the fund. For example, in a rising equity market, other investors might choose to leave the bond fund and seek higher returns by purchasing equities. As a result, the fund manager could be forced to liquidate bonds at a loss in order to pay out departing investors, which could drive down the value of the fund. So, even though you may have no intention of selling your bond shares, the decision of other investors to sell their positions could impact your overall yield.
For more important information about the differences between holding individual bonds and investing in one or more bond funds, see FINRA's Smart Bond Investing.
