In other words, we don't want to keep running to the bank with cash in hand, only to be taken to the cleaners in the process.
But that's the possibility with some investments, and especially some fixed-income products that are tied to mortgage funds.
The mortgage security industry has taken a huge hit in the last year with the emergence of the sub-prime mortgage debacle. A combination of unduly inflated property values to qualify loans, and the extension of mortgage credit to individuals who really couldn't afford to carry the debt, has resulted in a huge implosion of the nation's housing industry that has not been seen for some time.
Will it recover? Probably, over time. Investors waiting for the skid to bottom out will swoop in and buy up the bargains, fix up the neighborhoods and slowly restore stability and value.The key word here is time...and the key concern for seniors, who don't have that time on their side.
For young investors with mortgage securities in their portfolios, time is their best friend. Akin to long-term stock performance there will be lows and highs, but over the long term, in general, you do okay. For those investors who like to dive in on a daily basis and play with their portfolio, buying this and selling that and constantly tinkering with the mix, tweaking is a passion born out of competitiveness, rather than panic.
For the rest of us, we are advised to abide by our risk tolerance and, having done due diligence in that department, resist the temptation to panic when the market takes a nosedive and just wait it out.
However, when you're 65, waiting it out does not seem all that attractive. And higher-risk investments that require time for positive performance averaging makes little sense for you. At this time in your life, you're looking for lower risk and a safer bet. While the returns will be less-than-stellar, a lower return in exchange for minimal risk is the only way to go. Unless you have a completely expendable cash kitty that you can throw to the wind and come what may, conservative investing is the thing to do for retirees, or those nearing retirement.
Given the nation's sub-prime mortgage crisis and the assault on mortgage money in general, mortgage funds can be hardly viewed as a low-risk, conservative investment.
And yet, it is alleged that several banks, brokers and vendors are selling structured investment products to anyone who'll buy them, including seniors—the demographic least able to absorb a failure in the investment. And given the mix of mortgage funds in some products, that risk of failure can be substantial.
For example, here is a quick snapshot of some structured fixed-income products, and the percentage of the assets held in mortgage securities...
Bank of America's Columbia Total Return Bond Fund (NSFAX) has 41.8 per cent in mortgage-back securities.
JP Morgan's Ultra Short Duration Bond Fund (ONUAX) reveals 55.1 per cent is held in collateralized mortgage obligations, and a whopping 86.9 per cent of the portfolio is tied to the listing sub-prime mortgage ship.
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And that's just part of the picture. There are many other funds and products that carry substantial risk—risk which may go unnoticed by all but the most wary investors.
It is alleged that so-called structured products are being marketed as a great way for seniors to supplement their fixed incomes. However, many of these come with a basket of fees, and it is alleged that their popularity amongst brokers and vendors is to generate fee revenue for the sponsoring institution, and to transfer the risk of under-performing or failing assets to those who can least afford it.
Which could mean, in the end, you'll have to get to the cleaners on your own—as you may not be able to afford the luxury of being taken there.