10 years on and we are still facing low interest rates on savings and mediocre bond returns that pay peanuts on your invested money. The only bonds still paying around 9, 10, 11 percent or higher are either high risk, bordering on junk status, or carry some sort of currency risk as they are issued in much more volatile currencies. Of course you can always put some money to work following a high risk strategy, but you have to ask yourself whether you want to gamble a large portion of your money.
Thus, what are the options for an individual investor? One investment option is certainly shares, a high interest paying convertible bonds linked to a stable company, ETFs, or property. But each asset class comes with its own advantages and disadvantages. Some require a high principal, others, such as property, might take years before they produce any positive cashflow, others carry specific risks that not everyone is willing to accept.
In order to shed some light on what investments are available and for the more risk averse, let's go through the different asset classes. Investments that are still viable options for individual investors in times of continued low interest.
If you are an avid reader of Captain Finance, you know I'm a proponent of shares for multiple reasons. Driven by the developments in recent years with quantitative easing, the dramatic changes in the bond market, shares have been the number one asset. A viewed shared by many institutional and retail investors as reflected in the extensive bull market since March 2009. Back in the day, that is, before the world entered the era of zero, or even negative, interest rates, I was also a strong proponent of the bond market. It was easy to find healthy companies paying 10% and more for borrowing your money. Today great opportunities in the bond market are much harder to come by and generally require a higher level of risk
But shares also carry their own risks. From volatile prices to reductions in dividend payments. The latter point can easily be counteracted with little research. It is relatively simple to determine whether or not the company you are buying shares in will still continue pay a dividend. The only drawback are relatively high prices. Stocks are, when regarded as a whole, quite expensive. Of course there is always the historical argument that P/E ratios are average historically speaking, but any bull market will see its correction and bear market phases. Nonetheless, with few alternatives, stocks have been the primary option for investors. This is not to say that share prices may not continue their upward trajectory, but you may have to live with times of falling prices before seeing a rebound. And rebound any good investment will. Shares fall and climb, long-term any good investment will see a higher share price. Take for instance inflation. With every every year of inflation your share investment will, optimally increase as much in value. Just as your coffee gets more expensive every year, your holidays or clothes, inflation drives up prices. Even if your share investment merely returns the rate of inflation, you are already better off than leaving it in a savings account.
However, as an investor you want to earn more than just the rate of inflation. Thus, finding little gems, whether that is high dividend paying stocks, companies paying special dividends, or promising companies that are undervalued, share investments tend to still be one of the best options for any investor eager to have their money work for them.
Warren Buffett once recommended ETFs to his wife and expanded that advice to most average investors. If you fancy less work and just want to follow a market or a certain sector, ETFs are a good option. Who would argue with the most successful investor? Whether you choose a dividend paying one or an ETF that reinvest your dividends depends on your preference. Regardless a good ETF is a good and simple alternative to aid your investment career.
As long as you make sure that the fees are kept to a minimum, that is, no more than a maximum of .15 percent (but that's just my personal benchmark), an ETF offered by a good provider such as vanguard should easily return you a multiple of a savings account. Expect to earn something in the region of 5% upwards. The same rules as for any investment apply: do your research, do not buy an ETF when its price is too high, do not sell simply because it briefly dips into the red. A good ETF will still earn you dividends and eventually rebound. Let the money do the work for you.
Here we are, good old property. A fantastic investment option. It, however, requires a hefty principal before you can even get started. Unless you are very experienced negotiating with banks and able to strike some sort of deal in that your lender requires little or no security, you will likely need a large sum to get started as a property investor. The thing about property is also that it takes quite a lot of time (unless you are betting on rising prices or are into flipping a property) before your investment will turn a positive cashflow and has reached a level that makes it worthwhile selling the apartment or house. While properties are probably one of the two main pillars with shares in building wealth, they do require some more work. Not only from a financial and research perspective, but also properties require dealing with tenants. But the return of properties as an investment is a multiple of what you will get elsewhere.
If you are neither into putting in the hard work, researching and finding good investment properties, doing the hard work involved in flippig and dealing with contractors and tenants, an investment in a property firm might be a good alternative. Either way, your return should be in the high single or double digits.
Here's my conondrum with convertible bonds. While I love bonds as an investment, convertible bonds have their drawbacks. Bonds are undoubtedly a great investment. Find a good company, lend them money, and reap the benefits every payment date (usually annually). While it sounds fantastic, the only issue is that you will be hard pressed to find a good and stable company that will pay high interests in return for you lending them money. Just as stable governments, good companies such as General Electric, Siemens, Total, and the likes have no trouble in finding money from investors. With current interest rates still nowhere near their historical averages, many investors will choose a meager return in lieu of merely having their money sit in their accounts. This applies in particular to institutional investors that have to put their funds to work for their clients. For any private investor, this is likely not an option as the fees involved in trading bonds will eat up any interest you may get for the money you lent the company.
This leaves very few options if you want to make money with bonds. One would be to buy bonds in companies that stand on rather shaky financial feet and hope that they will be able to pay you back your money, and the interest for that matter.
Another option would be to invest in convertible bonds. A word of caution. Convertible bonds are not as straightforward as regular bonds, as they come with a condition. Usually, when the price of the underlying share drops below a certain point, the bonds convert into shares. Thus, although you initially lent money to a company for an agreed rate paid on a regular basis and the full repayment of your principal at the end of the term, you may end up as a shareholder in the company. This is regardless of whether you think their business model appeals to you as a shareholder or not. You will thus not receive back your principal, but be left a shareholder of the company you lent money to. This may or may not work out for you, but beware.
It is thus advisable to only buy, if this is your cup of tea, convertible bonds from companies that you would be happy to hold shares in. There's no fixed trigger point. Every convertible bond will have a different buffer before your bonds convert into shares.
These are the primary four options that will be easily accessible to most private investors. There are certainly others, such as peer-to-peer lending, that may pay good returns, but for larger sums their viability may only be limited.
All that is left to say is: Good luck on your investment journey and enjoy the many dividends.