Chris Nichols, author of The Real Truth About Your Money, is a wealth adviser who primarily deals with investors ages 50 to 65 who want to save for retirement and earn more than the yield of high interest savings accounts. "I often hear them frustrated over the extremely low yields from their savings accounts, money markets and CDs. In fact when the subject comes up they start to laugh at how pathetic these rates are. I often get the question, 'What can I do to get more interest?' Depending on the person's goals, financial objectives and risk tolerance, there are several alternative investments that yield significantly higher than your typical savings account."
Risk Versus Reward
How to earn more interest on your money. Nichols says the key to investing wisely is following two rules: 1) Make sure the investment meets your tolerance for risk; and 2) Make sure it helps you accomplish your goals.
"A lot of people are going to high-risk investments because money markets and savings are so low. They see a 8-10% rate, but they don't look at the downside. They could lose 10%, 20% — even 50%. If you don't need 9%, why take the risk?" For a client who's retiring and only needs a 3% yield to round out Social Security, pension or other income, Nichols doesn't recommend bigger yield, bigger risk investments. "People say why not get more interest. That's okay only if you want to take that risk."
Among higher-risk, higher-reward investments, he often recommends these three:
Real Estate Investment Trusts "REITs yield 5%-7%, and you can get up to 9% on your investment. They often pay monthly or quarterly income, which is nice if you're retired." Nichols favors REITs that specialize in medical facilities. "With the new health care law, everybody is going to be insured. Demand for hospitals, nursing homes and other facilities will increase. The health care sector is where you see growth. It's not recession proof but it is recession resistant." On a scale of 1-10, Nichols puts the risk of REITs at a 5 or 6.
Master Limited Parnerships "MLPs are essentially investments in the energy sector – oil or natural gas. We also see some mineral rights opportunities. Historically, MLPs yield 6-8%. You can buy an ATF which is a fund that owns a variety of MLP companies. If one goes bad, that spreads the risk. If you want to invest in this sector, I think the best bet is an exchange traded fund that invests in MLPs." What's the downside? These funds are quite volatile. In bad markets, have lost 20-40%. Nichols puts the risk at 8 or 9.
Invesment Pools "If you look back at banking regulations over the past five years, there have been issues about lending to businesses. A small or medium size business needs capital to grow or expand. Say they need a $10 million loan, and the bank will only give them $5 million. This has created opportunities for fund companies to create investment pools. The business pays a higher interest rate than a bank rate, but they're willing to pay because they have no other option. For investors, there can be deals that yield 7% over, say, 6-8 years." Nichols advises shopping for senior secured funds, which which means if the business that the fund has loaned money to goes bankrupt, the fund has the first lien. "When GM went bankrupt, stockholders and bondholders lost their shirts, but senior secured notes got 100% of their capital back." He puts the risk of these investment pools at 4 or 5, adding that there's a liquidity risk because you have to tie up your money for a time (the fund will usually buy back shares but at a penalty).
"Most investors don't even know these investments exist," Nichols says, adding that for the right investor, they're worth looking at.
For more information about REITs, MLPs, investment pools and other higher interest investments that can help you save for retirement, Nichols' company website can help.
