Managing Risk & Being Careful While Doing Something Fundamentally Foolish
As old CDs, treasuries and similar very low risk investments continue to mature, one can hear the groans from investors and savers everywhere at the prospect of extremely low rates being offered on new bonds and CDs. In many cases, investors and savers are finding that the rates offered are so low that they cannot accept such low rates and still meet their minimum return required. This problem does not appear to be going away any time soon as central banks all over the world continue to do their utmost to keep rates on safe instruments very, very low. Those who refuse to accept current rates offered on low risk bonds and CDs will continue to have the same quandary for the foreseeable future: what do you do with the money? Many will choose to throw caution to the wind and adopt a strategy that has been the source of untold sums of lost money, chasing yield. This is a dangerous environment in which to do so because lots of people are doing the same thing. As a handy indicator, junk bond funds have been attracting enormous amounts of cash even as yields stay low and Vanguard recently decided to close its junk bond mutual fund to new money after being flooded with cash. Yet many people will chase yield anyway since some are effectively forced to do so due to needing higher returns than they can get from safe instruments. If you choose to chase yield, how can one manage the risk that inevitably arises from this strategy? How does a sensible person add some yield in a judicious fashion?
