Saturday, October 9, 2010

High Yield Investment Opportunities You May Not Know About

 People invest for either of these two reasons:
  • To preserve their wealth or retain the buying power of their hard earned savings;
  • To accumulate wealth or grow their assets.
Whatever their reasons may be, they naturally are always in the look out for high yielding investments. By 
high yielding investments, we mean those that give a higher  percentage of return on their principal than what the banks' certificate of deposits or US treasuries can provide ... those that will more than offset the rate of inflation on their money.

Many of these investors understand that with higher yields come great amount of risks too (the fundamental principle of investment : the higher the risk, the greater the potential for gain)!

Richard Alcantara, Basic AuthorIncluded in this category of high yielding investments are stocks, forex, and commodity futures. These are investments where you may achieve a substantial appreciation in the value of your initial capital over a short period of time. The bad side here is, you may also lose most, if not all of  your money over the same short period of time! This is the reason why seasoned traders would limit their placements on these high yield-high risk instruments to no more than 15% of  their total portfolio value.

With uncertainties continuing to becloud our economy, we are once more seeing an exodus of investors out of the stock markets and into the safest money investments they can find to shelter what’s left of their lifetime savings until the economy stabilizes. These are the investors who want to know the answer to one common question -  
Is there a legitimate high yield investment with low risk for my money?

Lest you fall prey to HYIP (High Yield Investment Programs) scams which are on the rise again, let me tell you that my answer to the above question is a categorical No! No, there is no existing high yield investment program with low or no risk at all. Never touch any investment program guaranteeing you sure profits or assured interest earnings (some of them offering as much as 45% per month), ...not even with a ten foot pole!

There are, however, investment instruments that you may consider including in your investment portfolio which offers moderately high yields and entails lesser risks than the highly volatile stocks, forex, and commodity futures. These are:
  • High Yield Bonds or commonly known as Junk Bonds, so called because these are corporate bonds considered below investment grade at the time of the purchase. They are offered at a higher yield as the only means to attract more investors.
  • Real Estate Investment Trusts (REITs) which may be a publicly or privately held fund that works like a mutual fund whose portfolio is invested on apartments, hotels, office space, retail space, healthcare related properties, mortgages, storage and other types of real estate related property. Rental income from that real estate is generally distributed to the investors.
  • Retirement income funds  which works like a mutual fund too where the investment is actively managed to provide regular retirement income, however, they don't provide guarantees, and therefore you should expect your investment income and balances to fluctuate.
  • Master Limited Partnerships which is a publicly traded partnership that combines the tax benefits of a limited partnership with the liquidity of a publicly traded corporation. MLP's are usually confined to businesses engaged in the use of natural resources such as petroleum and natural gas extraction and transportation.MLPs pay their investors through quarterly required distributions (QRD), the amount of which is stated in the contract between the limited partners (the investors) and the general partner (the managers).The amount of income generated by a master limited partnership will be dependent on the price and volume of the product or service they produce.
Although they entail a lesser degree of risk, one should approach the above listed investments with care and caution ...even with some skepticism and reservations. As in always prior to making important investment decisions, you need to study each one carefully paying attention to details. Only when you are already familiar with the factors that contributes to their returns as well as what may trigger their losses should you consider including them in your investment portfolio. Better still, seek good, professional advice!

There is another new high yield on line investment opportunity you may not even have heard of . It is called Peer-to-Peer Lending (P2P Lending), or  more commonly known as social lending. Through a P2P lenders website, individuals lend and borrow money directly from each other. This eliminates financial intermediaries like banks and credit unions. Peer-to-peer lending was meant to create a personal connection between borrower and lender, and therefore make borrowers more likely to repay their debts than people faced with large obligations to hated, faceless banks.

By removing the bank from the lending process, P2P Lending makes it possible for investors to earn a higher return and for borrowers to get a lower rate on personal loans. You can liken P2P Lending to an online financial community which brings together investors and creditworthy borrowers so that both can benefit financially.

Here is how P2P Lending works:

Prospective investors and borrowers sign up and become a member at a P2P lender's website. This P2P lender acts as an intermediary (it does the recordkeeping, transfers funds among members, etc.) between the investor and borrower. The lending company earns its revenue through fees of, say, 0.5%  to 1.0% of the loan, charged to both lender and borrower.

Based on relatively stringent standards, the P2P lender performs several checks (personal, employment, credit, etc.). As a general rule poor credit risks are automatically cut off and approves only the most creditworthy. Once accepted, a borrower may either be assigned to one of four (five in some) risk categories where he may borrow at the going rate in the risk category he was assigned on that day or, the loan application can be auctioned off to prospective lenders. Based on the pertinent data provided by the borrower and as published by the P2P lender in their website, the interested investors willing to fund the loan application will try to outbid each other by bidding down the interest rate initially set by the borrower.

The investor may, aside from bidding on loans, ask the P2P lender to spread his invested funds among several borrowers. They also have the option to choose on which risk category they are willing to lend. On the average, investors of P2P lenders achieve an average return of 9.5%  with some P2P lenders fixing the rate between 8.2% to 11.9%. Some investors can earn as high as 20% for the riskiest loan since they are free to set their rates in some P2P lending sites.

P2P lending is not without its disadvantages as the lender has very little assurance that the borrower, who traditional financial intermediaries may have rejected due to a high likelihood of defaults, will repay their loan.  However, some P2P lenders minimize their investors' risks by approving only the most creditworthy borrowers while others limit approval only to the top 10%. Other P2P lenders even create a secondary market where loans are re-auctioned of an investor happens to want to have his money back!

Peer-to-peer lending is undoubtedly attractive for income seekers looking for better returns. Peer-to-peer lending allows investors to lend directly to real people, setting the time and interest rate for repayment. Many of the lenders are unsatisfied savers, who can get better returns by lending. Because it is a relatively new industry, one can expect changes to the lending practices and a lot of fine tuning. Despite this drawback, however, P2P continues to gain  wider acceptance and patronage as an innovative way to make money.
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1 comment:

  1. “Is there a legitimate high yield investment with low risk for my money?” Answer: Yes and No. While investments with high risk can bring more money for your buck, it's not necessarily have to be very risky. It all depends on how well you know about investments and the strategies to do it.

    It's like Real Estate. How well you know that the area will be more popular after expanding a town or city's boundary would increase the market value for the houses bought in that area. That depends on its location of course. Risky as things might turn the other way but that's just it.