The search for yield: Knowledge is key

Posted on May 9th, 2013.

In an uncertain world in uncertain times, it seems that more and more folks are searching for a little bit of certainty in the income department. That is – they are now, more than ever before, reducing risk in their investment portfolios and looking for income paying investments. As the population ages and more and more baby boomers begin to get closer to retirement there is a strong likelihood that the demand for income producing investments will continue.

Of course it is this very strong demand for income, which really means there is a glut of money out there to be leant, that has helped push down the yields on income producing investments. If the situation were reversed, like in the 1980s when there were a whole heck of a lot of borrowers pushing up the demand for credit, it would be just the opposite.(:. Same stuff, different bowl I think they say.

Anyhow, the first thing an income seeking investor will do when they go out searching for yield is check the rates on GICs. A quick check of the 5 year GIC rates shows that the yields are somewhere around the 1.5% to 2.5% range. And so when an investor finds this out the reaction will range from mild dismay to utter shock. Some will say “what am I going to do?” This is serious business since a lot of people haven’t saved enough and so are tight.

Well there are many folks who will stick with the GICs even at the low rates of today, not willing to take on any risk. But as I said in my blog post “Keeping all the eggs in any one basket may be costly”, there is always risk. The risk of having a rate that is too low for too long is also real and Mr. GIC could end up running out of money in complete safety.

So now you’re thinking, ok Mr. Smarty pants, what should Mr. GIC do? Well let’s look at the reason that Mr GIC won’t venture out and purchase other investments? My theory is that many investors have a lack of knowledge that leads them to become frozen in fear, and subsequently their results suffer.

Of course, that is one of the reasons I wrote my book, InSync Income, The must read guide to investing for income in Canada. I wanted to share the knowledge that I have gained to benefit others.

The investment community could be doing a better job on the whole of educating investors. The tendency is to tick boxes. GICs  -check, safety -check. There is a fear to educate the clients and say “hey, I know you are worried but let me explain the alternatives”.  I say they should at least understand what they are turning down.

When it comes to investing it is always the same. It is understanding the risk that is important. Once you understand the risk then you have the clarity you need to make an “informed decision”.

And so I would encourage each of you to engage your financial advisor, ask questions and become informed. Read and learn more about these important topics. I am a firm believer in utilizing the services of a financial professional – invest with advice for best results.

Frank Weiler

The income Investor’s Advocate

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