Chasing Yield

Many investors and financial advisors get caught in the chase to obtain higher yield on their investments. Yield refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. Simply put, yield is the income return on an investment.

Whether the investor is pursuing a higher dividend yield on a stock or a higher coupon yield on a bond, with higher yields come greater risks. Usually, the higher yield is an indication that there is increased credit risk, among other risks, associated with the ability of the company to pay interest or dividends on the security.

There are mutual funds and other types of investment products that seek to obtain higher yield from the portfolio’s holdings. The high yield or yield plus strategy usually involves holding a mix of high yield securities like mortgage back securities, high yield corporate bonds (sometimes referred to as “junk bonds”), and dividend paying stocks.

The SEC recently charged Charles Schwab with making misleading statements and deviating from the concentration policy of the Schwab YieldPlus Fund.

The Schwab YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and more than 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007 and 2008. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.

Investing in high yield oriented investments has risks that should be explained to the investor. As the Schwab YieldPlus Fund shows, investment strategy drift combined with dramatic changes in market conditions can result in significant losses. Just because an account or an individual investment has decreased in value does not necessarily mean that a financial adviser has acted inappropriately. At Crary Buchanan, we provide consultations concerning negligence arising from improper financial advice. We invite you to call us to discuss your rights and remedies under the law.

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