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A question I am asked frequently when discussing retirement; how much should I have saved? Some “experts” claim you need to replace 80% of your pre-retirement income, while other marketing campaigns by financial services companies want us to believe that we need close to $1 million or even more.
The true answer to this question is that it depends. Every situation is different in the following ways:
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While browsing Yahoo Finance this week, a particular article caught my eye, “Regulators Alarmed by Risky Loans, But Don’t Know Who Holds Them.”
The risky loans these regulators are worried about are called leveraged loans, and prominent voices in finance and economics have been echoing a similar sentiment for the past several years.
Bonds and loans are essentially the same. We as investors can loan our money to a government, bank, or corporation for a period of time, receive a fixed interest rate, and our money back at the end of the term. US government bonds are considered risk free while corporations are given a credit rating based on their financials, just like all of us.
A leveraged loan is a type of loan taken by a company with a low credit rating. If the economy experiences a rough patch, loan defaults could rise, causing losses for their investors. For context, an Oppenheimer mutual fund that invested in risky bonds and loans declined 82% during the 2007-09 financial crisis.
Why then are investors putting their money into these risky loans?
Simply put, investors are “reaching for yield.” Frustrated with only a 2% return on a US government bond, investors are taking on additional risk for higher returns. This “reaching for yield” helped fuel the subprime mortgage crisis that led to the 2007-09 financial crisis.
Quality is really important within investment portfolios, and bonds are meant to be vehicles of capital preservation while providing income and liquidity to investors. Boring yes, but essential to a diversified portfolio, especially for a retiree taking income.
There are no leveraged loans in any Kane Financial managed portfolios. I truly believe bonds should be bonds, and any risk in a portfolio should come from owning shares of a company.
If you have outside investments and you are not sure about the credit quality of the bonds and loans in the portfolio, please contact the office as I’d be glad to review this for you. Investments titled “High Yield, Junk, or Senior Loan” are considered higher risk investments.
Have a great week and please don’t hesitate to contact the office with questions!
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The Cannabis industry has been experiencing exploding growth as the drug continues to be decriminalized across the US, and its medical uses are expanding into more treatment programs for individuals.
This begs the question, should you invest in this young, but growing industry? I took a deep dive into this question earlier this week through the lens of an Investment Advisor, looking into one of the most popular investments in this space, Alternative Harvest (MJ).
This investment is an index fund made up of roughly 40 publicly traded companies in the cannabis space, here are a few of my observations.
It a certain sense, this reminds me of the 1990s when the internet was first introduced. While there were several companies that rewarded early investors, many others ran out of money and/or didn’t have a sustainable business model. A couple of the most successful companies to come out of the internet era were the ones that were able to adapt and pivot through strong leadership. Amazon started out selling books online, while Netflix was shipping DVDs to customers through the mail.
While several of these companies could turn out to be good investments, I would shy away from investing in high demand, new industries, and companies without track records of sustained earnings and profits. There is just so much risk associated with these companies, I would prefer to stick with the companies in the S&P 500.
I hope this is helpful, as always if you have any questions please don’t hesitate to contact me at the office. Have a great weekend!