Are you looking to increase income from your investments?
Has your Adviser recommended a range of ‘High Yield’ or ‘High Income Bond Funds‘?
If the answer is yes to either of these you could have problem on your hands, let me explain.
You want a higher income in order to supplement your retirement or other income, Building Society deposit rates are at an all time low and you take advice from someone who knows – A Adviser (they could be working as an IFA, or even for a Bank or Building Society) and they recommend a range of one or more High Yield Bond Fund.
These funds offer you an income of 4% or more and are regarded as ‘safe’ by them. Problem is they are so wrong.
Over the last couple of years we have seen spiraling (upwards) investment returns which means that everyone is looking to invest in this medium and they continue to grow in price and continue to be recommended by Advisers. Who in my experience don’t ever attempt to magnify the hidden downsides of these products, simply because many don’t really understand how the market moves.
In Jan 2011 the Economist Magazine was warning of a ‘bubble’ and as I write this (Mar 2013) the World and his Dog are quietly starting to raise awareness of the issue. According to the Daily Telegraph – Coutts (the famous Private Bank – for whom I have worked in the past) is warning it’s clients that there is a clear bubble in play within these markets and a burst could well be imminent.
Definition of a bubble (Source Wikipedia)
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation.
The evidence for a bubble is all around only it seems to have been missed by many Advisers and we have seen these collapses before in 79/80 and 2004 so they are not new.
If you need to obtain a return of 5% or more on your investments and are risk adverse you may well be of the opinion that the recommendation in front of you is the right one, however if you were to face capital losses of 30% or more in the coming six months your opinion may well change and that is a very real and growing threat – just look at the Cyprus issue along with the rest of the Euro crisis to get a feel for what is likely to happen in investment markets.
As always with investment planning this story is already in the mainstream news and there is ample time for your Advisers to make recommendations about a switch to a safer area of investment and you will need to heed this advice, if they have not made any recommendations you are left with an even bigger problem – finding a new Adviser.