Bill Singer has written an excellent piece in Forbes that offers good cautionary advice for income-starved investors. The piece resonates beyond the U.S. and is certainly highly relevant to Malaysian investors.
Interestingly he also addresses the difficulty that market regulators have in balancing the need to keep a fair and orderly open market where the investor should beware and act rationally against the necessity of policing the market for highly fluffy investment products that promises much but are dodgy on delivering actual yields. Read on---
Beware of Alternative Higher Rates of Return For Your Fixed Income Portfolio
The other day, the folks at the North American Securities Administrators Association (‘NASAA”) issued a press release:NASAA Cautions Investors Not to Stumble When Interest Rates Fall Flat (February 1, 2012). After reading the release, I feel pulled in two diametrically opposite directions when trying to write this column. There’s a lot of good stuff in the release, but there’s also a lot of bad stuff. I start off with “On the one hand . . .” but inevitably swing over to “On the other hand . . .” So — let’s get on with it.
On the One Hand
On the one hand, NASAA issues an absolutely valid, worthwhile, and intelligent warning:
Following the Federal Reserve’s announcement that interest rates are expected to remain low until at least late 2014, the North American Securities Administrators Association (NASAA) today cautioned investors to beware of risky or outright fraudulent investments promising higher yield or returns.
That’s truly great advice – and couldn’t be more timely! Kudos to the state and provincial regulators at NASAA!
With interest rates barely in the single digits and likely to stay there for some time, a lot of folks are antsy. If you factor in a modest degree of inflation, some fixed income products are actually losing ground and technically costing you money to own them. The problem with that somewhat dicey logic is that you then have to consider whether there is a safe alternative to earning a pittance on your bonds or similar investments. In anticipation of such investor ruminations, NASAA offered this quote:
“Investors running away from low yields on fixed investment products risk stumbling into the arms of unscrupulous salespeople promising low risk and high returns,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities. “Don’t chase the offer of high yield or returns into a dead-end investment.”Herstein said that state and provincial securities regulators are concerned that individuals who depend on fixed income investments, particularly seniors, may be tempted to turn away from their slower growing but safe investments to alternative investments without understanding the risks and terms.
