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High Yield Investments

Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

We’ve collected everything you need to know about high yield investments. Just read on to learn more.

What are high yield investments?

High yield investments are investments that promise to make a lot of money in a relatively short period of time. Sound like too-good-to-be-true get rich quick schemes? Lots of “investments” that promise such results certainly are. In fact, a certain type of ponzi scheme is actually called a high-yield investment program (HIYP) and unsurprisingly, HIYPs tend to enrich only those who start them. One such offender, called ZeekRewards, started by a county music DJ and nursing home magician named Paul Burks, promised investment returns of 1.5% per day but instead bilked 1 million investors out of their money before it was shut down in 2013. The takeaway, besides not entrusting your money nursing home magicians? Criminals seek out less sophisticated investors looking to score big, quickly, so anyone considering high yield investments needs to be especially cautious to avoid becoming a mark for unscrupulous players.

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That said, there are legitimate high yield investments, but none are sure things. The concept of risk premium states that people need to get paid for taking risks, otherwise they’d never do it. So if people expect to get paid a lot, they also need to risk a lot and high yield investments all come with substantial risk. So, if your hair hasn’t turned white, you’re not running for the hills and you’re still in the market for high yield investments opportunities, we’ll lay out your best options.

Best high yield investments

“Best” is a tricky word. Your particular age, net worth and financial circumstances will determine the exact right investment, but all of the high yield investments we’ll discuss here should only be considered by those with the stomach for a lot of volatility—and the possibility of losing much, or even all of your investment. We’ll only include legitimate high yield investments here; if you want to lose your money through an old fashioned pyramid scheme, you’ll need to shop elsewhere.

In fairness to each high yield investment, we won’t pick favorites and will just list them alphabetically.

1. Direct investment in startups.

You’ve probably heard stories about a guy who gave Jeff Bezos 300 bucks in 1994 and now owns a continent. Or a grandma who invested all her savings into Theranos—and now lives in her Buick. Startups are “either home runs or they’re strikeouts,” New York based securities lawyer Gregory Sichenzia told U.S. News recently, so anyone investing in them should be aware that they run the risk of losing every cent they invest. The risks and rewards of startup investment generally correlate with the stage of your investment. Those who put money in the seed round of a company are more likely to lose their entire investment (with a small chance to score huge) than someone investing in a company in its late stage round just before it goes public. These investments used to be harder to find and less available to small investors, but thanks to a 2012 law signed in the US by then President Barack Obama that loosened the restrictions on crowdfunding for startups, investing in private companies is easier than it’s ever been and available to basically any level investor. Vetting startups is no small task, so companies like SeedInvest have entered into the fray, promising that they will help small investors find startup opportunities, but only with companies that have had their tires thoroughly kicked. (They say they accept less than 1% of applicants.) Besides the potential of losing your money, the other downside of this kind of investment is in most cases, your money will be tied up until the company is acquired or goes public. One way of gaining exposure to the potential upsides of startups while not going all in on one specific company is to invest in one or more publicly traded venture capital firms.

2. High yield bonds.

Bonds are often associated with safety, the part of an investment portfolio that provides a buffer when stocks take a dive. In fact, certain kinds of bonds can be just as risky, or even riskier than stocks. Bond yield is determined by how likely it is that an issuer will pay their debts on time, if at all. Bonds with a high credit rating are called “investment grade,” and tend not to pay bondholders all that much. Bonds that are issued by companies with a lousy track record, or no track record, are called non-investment grade but are often referred to as junk bonds. Those seeking to invest in high yield bonds may choose to buy individual junk bonds through a broker, though this method has a high degree of difficulty given the complexity of selecting one. Investors seeking to approach the kind of returns individual high yield bonds offer, but with some added investment diversification, might instead choose to invest in a mutual fund or ETF investing in dozens or even hundreds of them.

3. IPOs.

You know how you could have made a ton of money fast? By owning a mess of LinkedIn stock on the first day it was offered at $45 a share and selling it later that same day at over $94 a share. You know how you could have taken a bath? Trying that same move with Twitter, Blue Apron or Lyft. IPOs obviously offer a lot of upside and risk. When IPOs are plotted, investment banks discount the stock price about 10-15% from the price they hope they’ll actually trade at once the public gets a crack at them. But as Uber demonstrated, after 14% of its IPO price evaported during its first two days of trading, the best laid plans of mice and men (and stock underwriters) often go awry. Besides the risk, the other problem with IPOs is that for the most part, unless you’re incredibly rich or besties with a higher up in the company, you won’t be able to participate in IPOs. You’ll instead have to join the rest of the rabble on the first day of trading, a point at which the markets will have already determined what the stock is actually worth—reducing the probability of overnight riches.

4. Mortgage REITs.

You might have heard of REITS (real estate investment trusts) before, but they’ve probably never struck you as particularly aggressive investments. Indeed, the REITs you’ve probably heard of are equity REITS, and they own and bundle many, many income-producing properties into a company in which you might invest. Mortgage REITs, however, are a different animal altogether; they’re companies that bundle mortgages, not properties, together, so the income they generate tends to be from interest, rather than rent. Just like equity REITs, mortgage REITs must distribute 90% of their annual earnings to shareholders, in the form of dividends. The reason mortgage REITs tend to be high-yield and pretty risky is that they are highly leveraged, meaning that their business model relies on borrowing money. Remember the sub-prime mortgage crisis? Well, some mortgage REITs are filled with mortgage-backed securities that may not be lending to the most dependable borrowers—hence the high yield.

5. Peer to Peer Lending.

Every watch a mob show like The Sopranos and hear the gangers talking about “shylocks” making short term loans at an extraordinary high invest, or “vig”? This is usury—a crime—but a legit take on this lending practice can be found through so called P2P loans, a process of one party loaning another some money without the involvement of banks or credit unions. P2P loans, unlike bank loans, are often unsecured, meaning borrowers won’t have to pledge collateral for approval. The higher yield loans will come with a higher risk that the borrower will not be able to keep up their end of the bargain and default. Companies like prosper.com have disrupted the peer to peer business, making it relatively simple to find investment opportunities in lending.

6. Options investing.

Investing in options is essentially paying to place a bet that a stock will rise over a certain specified period of time. It’s called an option because you’re not required to, but rather have the option to buy the underlying security within a certain time period at a predetermined price. You buy this right at cost that’s called the premium. There are big upsides if you possess an agreement to buy a security at a price that’s significantly lower than it’s trading. The danger is that if the stock or security moves in the wrong direction, and you’ve invested heavily in premiums, your options could be worthless and you could lose your entire investment.

Other high yield investments

Not to give short shrift to this pair of investments, but they’re a bit more esoteric than what we’ve covered above, and as such, may be best for only the most sophisticated investors.

  • Closed-End Funds. Closed-end funds (CEFs) are a cousin of ETFs in that they trade on exchanges, but unlike them, CEFs issue a finite number of shares and once they’ve issued them, they’re legally prevented from issueing more. Like mortgage REIT’s, CEFs’ frequent reliance on investing strategies involving leverage magnify both potential risks and rewards.

  • Master Limited Partnerships. An investment vehicle that’s been around since the early 1980s, master limited partnerships (MLPs) provide a way for investors to earn returns through investment in real estate or, more commonly energy infrastructure like pipelines. MLPs, like closed end funds, trade alongside ETFs on public exchanges. MLPs are structured a little like partnerships and a little like corporations and their oft-cited downside is that they are considered less liquid than many other types of investments. MLPs, for reasons explained in this article, became less tax-advantageous for investors in the US thanks to some changes in the tax code in 2018 and have since waned in popularity.

Last Updated May 14, 2020

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