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The Risks of Chasing High Yields

5/18/2014

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Q. What are the potential risks of chasing high yield investment products?

A. Whenever an investment product promises big payouts, you should ask what are the downsides? There have to be some downsides, although the specificity could vary with the high yield products.

For example, a closed-end fund could have double digit yield, but if you buy it at a high premium (to its NAV), and a significant portion of its yield is return of capital, you are in for a potential disaster. To check whether a fund is returning principal, look it up at CEFConnect.

Another example, non-traded REITs are popular among investors. However, if you want to bail out, you may find not able to do so at a fair price. Actually, you will be lucky if you could find an objective way to determine the investment's true value. Furthermore, do you realize non-traded REITs are typically sold with hefty upfront charges and pay double digit commissions? To make it back, you can imagine the kind of risky investment projects the REITs will have to pursue.

Ditto Limited Partnerships.
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