The search for yield meant exploring some fairly remote territory – be it pension funds, hedge funds, private equity funds or the use of more exotic strategies by various managers to generate returns.
Some investors made the mistake of swinging from one trend to the other, ending up with overly concentrated portfolios – like a fashion buyer with a wardrobe full of puffy blue shirts and bell-bottom jeans.
Now, in New Zealand and elsewhere, we again see ads for such products that appear to blur the line between traditional bank deposits and risky property loans. Credit funds, hybrids, high-yield bonds, cryptocurrency, property syndicates and private debt are pitched in glossy ads at investors who formerly might have kept a chunk of their savings in term deposits.
This isn't to say another crisis is around the corner. Still, it does serve as a reminder that during periods of very low interest rates, as we see now, yield-deprived investors can overlook risk in their scramble for return. Just look no further than the mortgagee sale of the $62m Nido property syndicate.
The truth is higher yield does not come free. It is the flipside of different types of risk, some of which may be hard to quantify. Advertisements often exclude failures and amplify successes, making them seem more probable. Not to forget the risk for beginner investors acting unwittingly as part of an exit plan for more sophisticated traders. The recent GameStop's short squeeze saga is a prime example of that.
Of course, not all these advertised products are inherently bad. But it's worth talking through with an adviser about whether they are appropriate for you, given your circumstances, goals and risk appetite.
There are other choices that don't leave you out on the frontier of risk without a compass to get back home – an approach based on long-term evidence and built upon principles that have been tried and tested in many market environments.
Instead of second-guessing the market, this alternative approach involves working with the market, taking only those risks worth taking, holding a broad mix of assets, keeping costs low and managing one's own emotions.
If you don't want to bear additional risk, there is also the choice of moderating your consumption expectations. This obviously can involve some difficult decisions, but if it allows you to sleep better at night it may be worth it.
So instead of chasing returns, an evidence-based approach involves trusting the market to offer the compensation owned to you for taking "systematic" risk to those risks that can't be diversified away.
Wanting high returns is understandable. But an investor need to be wary about some of the promises being made by financial product providers who are taking advantage of the low interest rate environment and the appetite for yield.
Ultimately, your best option is to talk this over with a financial adviser, assess your asset allocation, and see what choices you have available without taking you to uncomfortable areas.
High yield can look shiny on the surface, but you always have to ask what lies beneath.
•Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
•The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
