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This is a guest article by Investor Junkie, focusing on alternative investments. This is a broad topic, so this article functions as a brief overview. There are many ideas within that deserve deeper explanation, something I’ll consider for future articles here.

Market turmoil is all around us. Last week, the 10-year US Treasury bond went below an unheard-of yield of 2%. Recently, the Federal Reserve formally announced that it will be keeping the Fed funds rate between 0% and 0.25% at least until June 2013. Savers are being punished, and traditional fixed income investments are yielding nothing. Investing for yield in this environment is very difficult. Where is one to turn to get some yield when a 5 year CD yields less than 3%?

In addition, inflation is expected to be around 3% this year, so any investment that yields less than this you are losing money in real terms. What are your options in this low yield environment? You do have no choice but to go up the yield curve. I won’t lie; some alternatives are risker than fixed income traditional fixed-income investments, though most have a low probability of default and generate much higher returns than government-secured investments. One could argue investments yielding less than the expected inflation rate is a risker investment. I would personally rather hold my money under my mattress than investing in a 10-year treasury bond.

Tokyo Stock Exchange InvestingThat being said, what are the options? Some are traditional investments, and others are alternative investments that you may have not considered previously.

  • Peer-to-peer lending
  • High-yield corporate bonds
  • Ginnie Mae bonds
  • I-Bonds
  • Municipal bonds
  • High dividend stocks
  • REITs
  • Master limited partnerships

Here is a brief summary of each of these.

Peer-to-peer lending

I’ve been investing with the peer-to-peer lending (P2P) service Lending Club for over two years. To see my process, read my Lending Club review for the details. So far I’m very happy with my 11.49% net annualized return. Peer-to-peer investing isn’t perfect though, and it is still a very new investment class. It has potential to be a viable alternative to high-yield corporate bonds, with possibly less risk. If we do see another recession, it’s possible P2P loans will default more frequently, and increased defaults will decrease investment returns.

High-yield corporate bonds

High-yield corporate bonds, otherwise known as junk bonds, offer higher yields than traditional government bonds and can be 3% to 4% higher than government fixed-income investments. Of course, the higher yields come with higher risk and have a higher chance of default. Unless you are investing six figures, you are best to diversify in this category via mutual funds or ETFs focused on these investments rather than buying individual junk bonds.

Ginnie Mae bonds

Ginnie Mae bonds are federally-backed bonds that offer higher rates than traditional government treasuries. With Ginnie Mae bonds it is often best to invest via mutual funds only because most investors will not have the capital requirements to buy directly. I discuss about Ginnie Mae investing in more detail on my blog.

I-Bonds

I’m a big fan of U.S. I-Bonds, and for the next 11 months these investments offer at least a 2.51% annualized return. That rate could be even higher depending upon the CPI calculation in October. Like government TIPS, I-Bonds follow the inflation rate. There are no state taxes to pay on interest. Federal taxes are only paid when you cash out unless the bonds are used to pay for higher education, in which case they are tax-free. Unfortunately savings bonds have an annual purchase limit, and the U.S. Treasury Department just announced an end to paper-based savings bonds. Next year, the maximum you can invest is $5,000 per Social Security number.

Municipal bonds

For higher-income individuals, muni bonds offer a decent after-tax return with a historically low chance of default. Unless you are investing six or more figures you are best to diversify via a mutual fund. Muni bonds typically offer 2% to 3% higher returns than federal government investments. The primary advantage to muni bonds is the lack of capital gain taxes, though in this low fixed-income environment, individuals in lower tax brackets might want to consider them as an investment.

Dividend stocks

Many dividend stocks have a higher return than government treasuries. You also have the added benefit of the stock possibly increasing in price over time. There are dividend ETFs that can diversify your investment. I personally like the dividend aristocrats, which have increased their dividends every year for at least the past 25 years. These might be considered boring stocks, but they typically offer decent returns for the long haul.

REITs

Real Estate Investment Trusts (otherwise known as REITs) are publicly-traded real estate companies. You can invest directly in a specific REIT or via a mutual fund or ETF. With the decline in commercial real estate prices, it might be a good time to get back into specific real estate sectors, and these investments have an almost inverse correlation to stocks. Traditionally REITs have offered a stable 6% to 7% return. REITs are typically best held in tax-deferred accounts because the investor’s profits are generally considered ordinary income rather than capital gains.

Master limited partnerships

This is one of the rarely-discussed investments that generates a consistently high yield, and low to payout in taxes. Master limited partnerships (MLPs) are similar to real estate trusts, but are usually best to invest in taxable accounts. Most MLPs are companies related to the transporting of commodities, such as natural gas and oil pipelines. Typically, their pricing is not related to price of the commodity itself, but based upon the transportation of that commodity. If you do your taxes yourself it might not be a good option to invest your taxable money. MLPs can be complex when filing your personal tax return. I discuss more about MLPs in detail on my blog.

To diversify your risk, one could invest in many of these above investments, and still yield a decent return that’s stable. This article is meant as a summary of possible investment options than can generate some yield. Please do more research before investing any of the above options. With any investment you should always determine your risk, and if unsure contact a professional. In case you didn’t know, all investments have risks. Past performance does not guarantee future returns.

How are you investing in this low yield environment?

tenaciousme

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This is a guest article by Investor Junkie, a blogger who writes about investing and being an entrepreneur.

In the past 10 years we’ve had many financial bubbles. First it was the tech bubble, and then it was the housing bubble. But do we have a higher education bubble? Having a web site named Investor Junkie I’m obviously into investments. With proper planning, I believe a higher education can be a profitable investment.

With the amount it costs for an education today, it’s important to consider the return on your investment. It’s an important investment of your time and money that if done carefully, can reap years of rewards. The CollegeBoard has some interesting statistics about the average cost of a college education for this year. According to their stats, these are the average yearly costs.

Private: $26,273 (up 4.4% from last year)
Public: $7,020 (up 6.5% from last year)

This doesn’t even include food, board, and book fees. In comparison to these increases, the average annual inflation rate was only -0.34% last year. (See later in the article how this rate might be questioned.) FinAid makes this depressing statement on their web site:

A good rule of thumb is that tuition rates will increase at about twice the general inflation rate. During any 17-year period from 1958 to 2001, the average annual tuition inflation rate was between 6% and 9%, ranging from 1.2 times general inflation to 2.1 times general inflation.

How can they justify the increases that over the past 10 years doubling inflation? If I earned the same investment returns colleges had with their tuition fee increases, I would have made out like a bandit.

Paying for college

How can someone save for college when the increase of college costs are beating most investments? Assume the average rate of the stock market is 8%. When starting with zero savings, this means you are almost ensured your goal will not be met.

I currently have two children with a third on the way. We are saving for our children’s education, but with the rate of increases it will be impossible to completely pay for our children’s education through saving alone. Just to keep up with the increase in costs, you need fund the total amount today ($105,092 for private schooling) so you are prepared in the future. This also assumes your investment matches the typical stock returns; if not, look out!

If your child isn’t first draft in college football picks, what are you other options? The CollegeBoard has an answer for this (emphasis is by me):

There is more than $168 billion in financial aid available. And, despite all of these college price increases, a college education remains an affordable choice for most families.

So if your family can’t afford it, don’t worry. There is massive amounts of money still available. What exactly is “affordable” if you have a college payment that equals a home mortgage in some parts of the country? The key part of this equation is for those who qualify for scholarships. For most, the logical conclusion is to get a college loan to pay for some or all of it. Debt is debt, no matter if it’s for consumer items, a house or an investment. Eventually it needs to be repaid. The worst part of college debt is it hangs around you forever. No bankruptcy will eliminate it. It doesn’t take a PhD degree to determine that $100,000 (at least in today’s value) will take years to recoup in salary.

If a recent graduate is able to get a job, according a BusinessWeek, they made on average $49,307 in 2009. In December 2009, the Wall Street Journal reported the rate of unemployment for recent college graduates was 10.6%, similar to the national level. Once a graduate gets a job and has other living expenses, how quickly will they be able to pay it off?

An education is an investment in your future, with the hope your salary increases because of the higher education. With any investment the goal is to achieve gains you wouldn’t have if you didn’t invest. The question is at what point does the amount of money required for a college education becomes not worth it? When does the ROI (return on investment) outweigh other investment choices? If you look at it from purely an investment standpoint and not for “enlightenment,” your choice of major and school might be different. The end goal should be getting the best bang for you buck.

What’s the cause?

Why is the cost of a college education rising as such a rapid rate? I only come to two valid conclusions. One option to consider, is the inflation rate is not an accurate representation. This could also explain increases health care and commodities. Maybe statistics like ShadowStats are discussing in fact showing the true inflation rate and better explain the reason education costs are increasing at the current pace.

The other conclusion is government intervention into the education system is causing the increases in pricing, whether through loan guarantees or loan offers direct to students. The government putting out more money to the public than what normally would be available makes more dollars chase after too few resources.

Regardless of the root cause, the cost increases are not sustainable. Students and parents can make other choices, such as attending a two-year college, attending a trade school, purchasing a business franchise, investing in a new business, or (in my opinion the worst option) not going to college at all. As many recent graduates have found out, a college education does not guarantee a job.

These recent graduates have the most amount of amount of debt compared to any previous generation. Today’s college education is equivalent to yesterday’s high school graduation, except with massive debt. That’s not a great situation to be in when just starting your career and life.

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