This article about higher yields is quite disturbing to me. It seems that as interest rates have plummeted, the search for higher yields has taken investors to a whole new level.
Rates are low right now – historically low. As rates rise, bond values drop – that’s danger number one to today’s retired investor (specifically), and all investors (generally). This has created a surge in investors seeking higher yielding investments.
What Is A Non-Traded Limited Partnership?
A non-traded limited partnership is simply an investment vehicle designed to package a group of investment assets into a form where individuals can participate in the gains and losses.
The “limited partnership” portion of the name simply refers to the fact that investors liability is limited. Additionally, their voice and opinions on how to manage the underlying assets is limited as well. They don’t have the full liability, and they don’t get a say in how the limited partnership is run or managed.
The “non-traded” portion of the name stems from the fact that these investments don’t have an active or liquid secondary market. To sell ownership units of these investment vehicles, you’ve got to find a buyer. This can be very risky, because the liquidity may or may not be there when you want to sell your position.
Investing For Total Return
Yield is only one component of total return. Yield is the distribution the investment pays directly to you, for example the dividend paid by a stock or stock mutual fund.
Capital gain or growth is the second component. Capital gain is the rise in value from when the investment was purchased to current.
Together, yield and capital growth comprise your total return.
You should always invest for total return, not yield. Chasing yield can lead to perilous financial consequences, because most investors don’t understand their risk level rises in many ways.
The Current Low Interest Rate Environment
In this low rate environment, many investors have sought out higher yielding bonds. They do so in order to increase their cash flow from investments.
These bonds are what we call “junk bonds“. The “junk” part of their name comes into play because the bonds have a high risk of default. This is unlike government bonds and many municipal bonds, which pay a much lower interest rate because their far more likely to pay principal back at the end of the term.
in addition to investing in lower quality bonds, many investors choose to extend maturities on their bond portfolios. Both junk bonds and longer term bonds are risky ventures to say the least, and increase the overall risk level in any diversified investment portfolio.
Higher Yields Through Non-Traded Limited Partnerships
Investors seeking higher yields through non-traded programs such as the REIT’s mentioned – and other direct participation programs – has an entirely new set of risks. While the higher yield may seem attractive, is it right for your portfolio?
Do illiquid investments fit in with your asset allocation model? More importantly, do they help you achieve your financial planning goals?
A higher yield with substantial capital losses may equal out to any other investment designed for overall total return. It may even be worse than any other “normal” investment.
The popularity surge in non-traded limited partnerships is created from a desire to increase payout from a higher yield. This sort of “compartmentalization” is bad for your investment portfolio!
You have assets, they should work for you in concert together. Picking components or pieces of your portfolio and allocating to higher risk investments for the sake of achieving “yield” can backfire.
Non-Traded Limited Partnerships In Summary
CAN these investments prove to be beneficial in an otherwise diversified portfolio? Of course they CAN!
In small portions, it’s entirely possible they may add substantial value depending on your risk profile. Think carefully before investing in illiquid REIT’s and other non-traded limited partnerships. They may seem oh so appealing on the surface, but the downsides are quite prevalent.