When you read or discuss fixed income investments there are a number of words that routinely get tossed around in conversation such as “safe”, “reliable”, “income”, “stable” and “predictable”; the usual that someone would expect. Rarely are words such as “aggressive” or “risky” used in a positive way with investors openly conveying their low appetite for risk when investing in fixed income investments and alternatives.
I received a handful of E-Mails last week from readers related to my admission on the Financial Webring Forum (FWF) that I had bought more shares of a recently new positions the ADR preferred shares of the National Bank of Greece (NBG.PR.A). To many this went outside my normal disciplined and conservative value investing approach and with all the perceived risks in the Greek economy at this present time the move was to many “out of character.”
To be honest I make these moves from time to time as a sort of quasi-contrarian value approach when fear is built into the price of an otherwise valuable company and I’m being compensated appropriately for the risk I’m taking on. If an investor knows the risk they’re taking, can identify or quantify that risk and is still willing to take a chance on the investment then doing so poses no greater risk to a diversified portfolio than investing all of one’s assets into only 2-3 individual investments.
Fixed income doesn’t have to be about safe, boring and expected returns when the majority of one’s portfolio (such as the fixed income component of my RSP) is invested in very conservative and safe bonds. Placing 5-10% of a portfolio into a more risky strategy could mean you lose a little of your return when investments don’t pan out but for an young investor (I am currently 29) that additional risk may provide additional return that can be then used to continue buying conservative fixed income investments.
In the case of NBG.PR.A I’m being paid in excess of 12.5% on a preferred share in a company that I don’t believe holds any more default risk than any other european bank. I might lose my entire investment (4.2% of my fixed income portfolio) but for 13% dividend plus potential capital appreciation I’m willing to take on additional risk for potential return.
As I outlined last year in my Fixed Income Alternatives strategy (including STD.PR.A & REP.PR.A) there are times when fixed income investments (or hybrids) are very attractive, underlooked or not even on the radar of most mainstream investors. My average return on the stocks I’ve purchased since has been just over 60% (average return – not total return) without any substantial losses. If I lost my entire initial investment in 1-2 of these CorTS or alternatives the income paid by the others plus their gains would continue to justify the strategy.
Thinking outside the box isn’t easy and certainly with all the anxiety in Europe on bailouts, ecomonic assistance packages and political posturing an investor has to look for opportunities because the Greek economy, while possibly in trouble, isn’t going away forever. There will be defaults, debt down grades and other issues presenting in the future months but an investor needs to find a comfort zone and 1-2 risky investments in my fixed income strategy is something I can live with when the majority of what I own continues to be held in more conservative positions