For many people, the ultimate goal for their retirement account is to put it in the position where it has as much room to grow as possible. With this goal in mind, a high-yield fund makes a lot of sense but you need to look at the entire picture to really get a good idea of whether or not this is the best option for your portfolio.
There are definitive pros and cons to high-yield funds and you should consider these aspects before you put your money into one.
Benefits
The biggest benefit of a high-yield bond is that there is the potential to earn a larger return on your investment over time when compared to other investment options. As the saying goes, with high risk comes a high reward.
This is a good option for people who would like to increase their investment account in a fairly short time frame. This is also important to note if you feel as though the low interest market has not been helping you grow your investment over time. Of course, the low interest options are safer in terms of risk, but you will not get as much of a potential return on your investment. This makes a high-yield fund a good option for people who would like to see a larger growth in their portfolio and it does not even have to be a longer term investment.
You can keep your money in these funds for a year or two, then transfer them back to a more reliable fund for continued growth.
Risks
As previously mentioned, with high rewards, you have to be willing to face a high risk. There is no guarantee with any type of investment. However, with high-yield funds, there is even more risk associated with them.
Because of this, it is not ideal to place all of your money in high-yield funds. Instead, it is more recommended that you place approximately 30% of your portfolio into this type of investment. This will allow you to risk a little bit of your money while still maintaining less risk in other areas.
Also, it is important to keep in mind that you do not have to maintain this high risk for a long time in order to see the benefits. You should keep an eye on these investments and move them around every few years. There is a scary drawback to a high-yield fund but only if you risk all of your money into the fund.
By diversifying your portfolio, you can afford to run the risk to gain the reward.
High-Yield Funds vs. High-Yield Bonds
You do not want to make the mistake of confusing a high-yield fund and a high-yield bond, because it could lead you to completely losing part of your portfolio.
There is a much higher risk associated with a high-yield bond, because that means you are investing the portion you have dedicated to it completely in one company. A high-yield fund is different, because it includes many different bonds and you are not reliant on one bond to be successful. If one goes under and loses a lot of money, you still have a lot of other bonds in the fund to help you gain money and alleviate that risk.
While a high-yield fund is still a more risky investment option, it is not nearly as risky as a high-yield bond on its own. If you are considering investing in high-yield options, then you do not want to make this grave mistake. One wrong move, and you could lose your entire investment that you have worked so hard to build up over the years.
It is simply not worth that much risk to invest completely in a high-yield bond as opposed to a fund.
Knowing all of this basic information can help you determine if a high-yield fund in the best thing for your portfolio. Either way, it is recommended that you stay away from a high-yield bond because if it flops, then all the money you have invested in it will also be gone. That is simply too risky on its own and it is never a good idea to put all of your eggs in one basket.
Remember that diversification is the key to success, and hedging your bets can make adding a high yield fund to your portfolio a good option.
Regards,
Ethan Warrick
Editor
Wealth Authority
