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Please skip to the bolded part if you don't want to read the details. I have been investing for myself in different avenues for a few years now. Although I don't consider myself an expert by any means; I believe I'm well versed and can do better in investing then most professionals out there. I noticed that one of the biggest demand areas where the needs are not being filled by professionals is the fixed rate investment area. Most fixed rate investments have ridiculously low returns (.5-2% max) and many of the ones offering you 2% lock you in for a half a decade or more (with stiff penalties for early withdrawal). Even on this board you literally have people asking all the time about safe fixed rate investments that pay a good amount of interest.
Although you cant find anything better then the above inside the US; there are options outside the USA. Most of these are high risk investments that I would never touch. However, I have found a very niche product. An international bond most people don't know about that has very low risk. I want to start an investment firm solely focused on selling this bond. I'm probably a few years from starting this firm but I'm just curious to the interest level of people. Considering that many investors on CD board are savvy; how interested would you be in a bond that offers the following:
-guaranteed return of 6.5% on an international bond (offered by the government of a country).
-3 year term bond
-No penalties for early withdrawal, only the interest you receive is affected: Before then end of first year you get no interest on the amount withdrawn. Before then end of the 2nd tear you get 5.5% interest on money withdrawn instead of 6.5%. And before the 3rd year you get 6% interest. There are no other penalties.
-The bond is sold in US dollars. I think by far this is the biggest advantage of this bond. Most international bonds are risky due to currency fluctuation. Since this bond will be sold in US dollars; this guarantee means you have 0% risk of losing any money due to currency fluctuation. Its like investing in US government bonds but with a very high rate of return and low term years.
-The only fee my firm would charge is 1% of the interest. I would not charge any hidden fees, no maintenance fee on your principle, no complicated structured fees etc. like many mutual funds charge. For example, if someone invested $100K they make 6.5K/year. I would only charge $1K of that interest as my fee. That's it, a simple fee that is transparent and simple to understand.
Would this be an investment that's attractive enough for you to seriously consider adding it to your portfolio?
I own a high-yield bond fund (Vanguard's VWEAX). Its ER = 0.13%. It is a fund, so it is diversified. It currently has a distribution yield of 5.5%. Less return than yours, but since diversified, also less risky.
What you are describing does not sound like a bond. A bond is a marketable security but your investment sounds more like a fund. I would want to see the prospectus and especially the credit rating and risks. There really is no such thing as a free lunch and a cornerstone of investing is the higher the return, the higher the risk. So something is not being revealed here.
I own a high-yield bond fund (Vanguard's VWEAX). Its ER = 0.13%. It is a fund, so it is diversified. It currently has a distribution yield of 5.5%. Less return than yours, but since diversified, also less risky.
What you are describing does not sound like a bond. A bond is a marketable security but your investment sounds more like a fund. I would want to see the prospectus and especially the credit rating and risks. There really is no such thing as a free lunch and a cornerstone of investing is the higher the return, the higher the risk. So something is not being revealed here.
Yes I'm familiar with the fund your talking about. However, there is a distinction between that fund and what I'm offering. That fund is NOT a guaranteed fixed rate return. In fact, last year the return was only 2.48%. Just a bit better then a CD. Furthermore, you can lose money in that fund. Very unlikely but its still possible. Also, the minimum investment amount is $50K. Which takes it out of reach for many investors. My fund would let you invest with as little as $1K. So it would be accessible to most people. So basically they are not even comparable based on the fact that Vanguard is not a fixed rate guaranteed fund.
On a side note, its not really fair to compare the ER of vanguard to my fee. Vanguard is charging 88% lower then the industry average. Which puts the average ER of that category at 1.08%. People are still investing at that ER level so my fee is not out of line. And keep in mind that ER charges a percentage of THE ENTIRE AMOUNT you invest. I'm only charging 1% of the 6.5% PROFIT as a fee. At no time will I ever touch a single dollar of the principle a client invests. That alone significantly saves people a ton of money.
As far as the details of the country and rating; I'm purposely leaving it out. This is a public forum and I don't want to give out potentially valuable information for someone else to profit off of. But everything I stated about the bond is accurate. I will say this about the country, its not one with a horrible credit rating with a future outlook of "negative." Its a stable country with a growing economy. When I start the firm I would obviously disclose full details to any potential clients regarding the country and bond before any investment on their part.
Last edited by griffon652; 07-10-2016 at 11:21 AM..
I would probably pass based on the information presented. If I knew the goverment I might be a little more interested but this sort of sounds like a to good to be true propitiation so I would pass because I would be afraid I am missing something.
Your fee is certainly low. If I earned $100 interest you would charge me $1 for the fee. Seems like you would have a hard time paying the bills of your firm if this was the only product. This low fee would also be a sign that I should probably not invest since I do not see how you can operate the business.
Yes I'm familiar with the fund your talking about... In fact, last year the return was only 2.48%.
The total distributions for VWEAX from 2015 = $0.356. I paid $5.90 for it several years ago. So, my return for 2015 = 6.0%. I buy and hold so changes in NAV are unimportant to me.
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As far as the details of the country and rating; I'm purposely leaving it out.
That is understandable but you have to likewise understand that I for one cannot really say whether I would invest in it since I don't know the details.
The total distributions for VWEAX from 2015 = $0.356. I paid $5.90 for it several years ago. So, my return for 2015 = 6.0%. I buy and hold so changes in NAV are unimportant to me...
I would never buy and hold something like VWEAX. And I would never trade it either (mutual funds aren't made for trading) You think diversified junk is safe just because it's diversified? This fund was down about 40% from peak (2005) to trough (2008). That's enough to make anyone throw up - including me. Perhaps you have a cast iron stomach?
Note that VWEAX has 90+% of its assets in junk. About 48% in higher quality junk. And 42% in really low quality junk. Again - I don't think junk is safe just because it's diversified.
Also - it is not impossible that there will come a time down the road when - due to turbulent markets - funds like this - whether mutual funds or ETFs - will be "gated". Like we've seen with some UK property funds in the last couple of weeks.
BTW - your return (as opposed to the amount of cash you receive) depends on the nature of the distributions. Income - capital gains - return of principal.
I am kind of surprised reading how many people here have so much money invested in junk. There was a time not so long ago when Fidelity wouldn't even offer to sell me a brokered 10 year CD yielding 6% because Fidelity though it was too risky . Robyn
You think diversified junk is safe just because it's diversified? This fund was down about 40% from peak (2005) to trough (2008).
Perhaps you are not familiar with HY bond investing. Here is the scoop.
For a long term investor the main risks of HY bonds are: (1) defaults, which results in a permanent loss of NAV, (2) liquidity, which will be a big problem if the investor needs to cash-out when the fund is down, and (3) interest rate risk.
(1) Is mitigated through diversification and good screening of the bonds. There will always be some defaults so you just don't want all your eggs in one basket. As to screening, Vanguard has historically had a very good track record in minimizing loss of NAV through defaults. I can live with the default rate they have; it is the cost of a high return.
(2) Liquidity can be managed by making sure the investor has enough liquid assets to cover emergencies, down markets, etc. I do that and I am sure anyone who understands HY bonds does also.
(3) Interest rate risk can never be avoided; it is common to all bonds and bond funds. I live with it by investing in short duration bonds.
The 40% dip you mentioned does not affect me. Distributions are still paid and I do not need to liquidate the fund so I have no reason to sell it. The dip in NAV is meaningless to my goals, which is an income stream.
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BTW - your return (as opposed to the amount of cash you receive) depends on the nature of the distributions. Income - capital gains - return of principal.
Hmm. Not really. Return is return. There may be some tax issues if held in a taxable account (LTCG are taxed differently than interest), but the same is true for any bond fund.
Last edited by TwoByFour; 07-10-2016 at 08:38 PM..
I would never buy and hold something like VWEAX. And I would never trade it either (mutual funds aren't made for trading) You think diversified junk is safe just because it's diversified? This fund was down about 40% from peak (2005) to trough (2008). That's enough to make anyone throw up - including me. Perhaps you have a cast iron stomach?
Note that VWEAX has 90+% of its assets in junk. About 48% in higher quality junk. And 42% in really low quality junk. Again - I don't think junk is safe just because it's diversified.
Also - it is not impossible that there will come a time down the road when - due to turbulent markets - funds like this - whether mutual funds or ETFs - will be "gated". Like we've seen with some UK property funds in the last couple of weeks.
BTW - your return (as opposed to the amount of cash you receive) depends on the nature of the distributions. Income - capital gains - return of principal.
I am kind of surprised reading how many people here have so much money invested in junk. There was a time not so long ago when Fidelity wouldn't even offer to sell me a brokered 10 year CD yielding 6% because Fidelity though it was too risky . Robyn
Well are we back testing now? Past performance what? Let's not falling into hypocrite status. Fwiw vweax out performed the hy category during the down turn and after
I would probably pass based on the information presented. If I knew the goverment I might be a little more interested but this sort of sounds like a to good to be true propitiation so I would pass because I would be afraid I am missing something.
Your fee is certainly low. If I earned $100 interest you would charge me $1 for the fee. Seems like you would have a hard time paying the bills of your firm if this was the only product. This low fee would also be a sign that I should probably not invest since I do not see how you can operate the business.
Thanks for the "too good to be true comment." Thats actually the type of feedback I was looking for. Thats where my fund will be different. I actually have something most people think is "too good to be ture" so I know I will be able to be successful in finding many investors. Especially when I present information to let investors see that it is a legitimate invest.
Btw you confused my fee structure a bit. I'm charging 1% of the 6.5% interest the bond earns a year. Meaning if someone invested $10K the bond would earn them $650/year. I would take $100 of that. So I would certainly make money while not drowing the investor with fees. So the ER is .93%. However, this wouldnt be a typical ER because the fund would be designed in a way where I never take any ER out of the principle invested. ER would only be charged on the interest.
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. Robyn
