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Investing post Global Financial Crisis has become significantly more challenging with the yield on investments contracting. The reduction in interest rates and the falter of the global economy has meant that many investors have been forced to look at alternative investments. Traditionally property and shares have been the bread and butter of everyday investors, however the yield on both has been jeopardised by global economic fears.

Shares have performed adequately post GFC, however the level of growth in the property market in both Europe and the US has been cause for concern. Australia and a number of the emerging markets however have continued to feel the effects of mining and resource growth. Yields however have been unable to keep up with rising prices. How important is it in the post GFC world to analyse yield and investment opportunities? Industry analysts have noted that investment choice in the new economic world will be subject to heightened scrutiny. This is also result of the Bernie Madoff case and the exorbitant yield that was supplied to his investors. It is important to take some cautionary steps before investing.

Higher Yield is not always good

Many investors, who believe that yield always translates into growth, can be at risk of loss. A higher yield in most cases translates into higher risk. Junk Bonds for example are significantly higher in risk than an investment grade note. Although the coupon is attractive, the possibility of the corporate not paying back the principal is significantly higher.

It is important when researching yield, to look at the basket of investments or the underlying factor behind the reason for the yield. Some of the key questions that investors do not ask includes – why is the yield this high, and what is the chance of default or risk of loss.

Going Beyond the Name / Brand

This is a common misconception in the investment world. Investors will be blinded by the brand or name of the company and will not look at the fine print of the investment or underlying product. A good example is that of Bernie Madoff and his investment fund. Institutional investors looked at the portfolio manager and saw the significant experience and credentials of the manager without looking at the investment process of underlying assets.

Investment Stability

Another important factor to take into consideration when analysing a new investment is the stability of the underlying, and the percentage chance of return of funds. This can be achieved by detailed analysis of the make of the investment. For example, if an investor looks at purchasing a corporate bond that is paying a coupon of 6% per annum, he or she must look at the terms of the agreement. The maturity time frame, how stable financial is the company and what type of cash reserves or assets the company have. Bond holders will be the first to be paid during the liquidation of the company, hence the importance of the underlying assets. Post global financial crisis, it has become extremely important to analyse the yield on an investment.
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