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Monday, October 25, 2010
You've seen it. It's a full page ad in the local paper. Smiling couple with a Green Box emphasizing their smiling faces and the biggest type on the page asking "Who Says You Can't Get A Competitive Yield In Today's Economy?"
Your eye goes does the page and in the middle you see 9.41% as the total return and 4.88% as the "Distribution Yield/" That sure beats the yield you and I are getting on our CDs, Treasuries, bond finds etc.
But it's not a yield comparable to a yield on Treasuries or CDs etc,! It's a distribution yield based on a total return. Here's my rough guesstimate-probably less than 20% of the people reading this ad could explain the difference between total return and yield. But everyone of them feels that the yield on their investments as they now stand is pathetic. The fact is that the return reflects a sharp drop in interest rates and a consequent rise in bond prices. Experts today are warning about a bond bubble. If interest rates rise and stock prices fall, what will happen to the "competitive yield" on this fund?
We know the managers will do ok - they're charging 1.75% right off the top. It's not clear what the funds they invest in charge.
Read the fine print. If you are over 55 years old, you'll probably need a magnifying glass. In the fine print the breakdown of the portfolio is given, and it states that 64% is invested in equity funds!
Looking for yield? Need income to live on? Invest in equities!
When the housing bubble burst, people acted like they were shocked about how low prime loans were marketed and made requiring no documentation, no down payment, ridiculous teaser rates etc. that would be reset and result in payments the buyer obviously couldn't make.
How many times do we need to be shocked before we start requiring the financial sector to do the right thing.
To me, emphasizing yield on a total return fund (especially when so many are desperately seeking investments that provide a good yield)is misleading and unconscionable at worst.
What's your take?