Alternative fixed income investments
Fixed income can bring tremendous advantages to your portfolio, from stable cash flow to a lower-risk asset. And when your fixed income investments are short-term, you get the added advantage of liquidity.
Especially for more conservative investors, fixed income assets like bonds, Treasuries, CDs and alternative investments can provide portfolio diversifiers that reduce risk. These types of investments can be a crucial stabilizing component during times of market turmoil like we’re seeing today with the significant downswings on coronavirus-related news.
Investors have several types of assets to choose from for short-term income, each with their own unique advantages and disadvantages. Of course, it’s important to identify your own financial goals and understand your personal financial situation before finding the right solution for you.
Once you fully understand your own financial needs, review the various ways you can invest in short-term, fixed income. Here are some of the more popular examples, along with the pros and cons of each:
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Bonds – U.S. Treasury and Corporate
The most common type of fixed income investment are bonds, which are essentially debt. With bonds, investors can depend on the interest rate to provide reliable income while protecting their principal, which is repaid on a schedule with a set end date.
Corporate bonds are those issued by companies in an effort to try to raise capital to fund operations or expansions. Government bonds, which can be issued by either the federal government or municipalities, are backed by a government guarantee for repayment, and are also issued to raise money for various reasons. The main advantage to buying bonds is that, with government or corporate backing, they are considered very low risk, so you are very unlikely to lose your principal funds and you can depend on the interest payments.
However, for many investors, the rate of return on bonds is low when compared to other investment choices. For example, today’s government bonds have yields of about 1% for U.S. 10-Year Treasuries and 1.5% for 30-year Treasuries, with rates fluctuating each day. Here, while not as volatile as the stock market, the bond market can still be unpredictable.
In addition, the terms of U.S. Treasury bonds are generally more than 10 years So, while you can sell bonds earlier than their maturity date for the market rate, the investing horizon for the return of the original principal and interest is longer than other short-term, fixed income choices. Investors who want to sell their bonds earlier than the maturity date will be constrained by its market value, which declines as interest rates rise and rises as interest rates fall. Right now, we are in an interest rate environment that’s at historic lows, but any interest rate fluctuation can affect the market value of your current bond.
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Treasury Bills and Notes
Treasury Bills and Notes are similar to bonds in that they can be a good way to modestly grow your money while keeping it safe in a lower-risk asset. And they’re backed by the U.S. government. Still, again the bond market can be rocky, just as we’re seeing these days with a frenzy of selling in short-term bonds.
With Treasury Bills, investors don’t exactly earn interest. Instead, they buy the bills at a discount and are then steadily repaid the full price of the bill, so they earn money in the end. For example, if you purchase a $100 Treasury bill for $99, you would be repaid the face value of $100, so the extra $1 would be like interest. On the other hand, Treasury Notes function more like bonds in that you get an actual interest payment semi-annually instead of buying the note at a discount from its face value.
The main distinction between Treasury Bills, Treasury Notes and Treasury Bonds are the terms of investment. With U.S. Treasury Bills, you can commit for a year or less, which gives investors more liquidity. U.S. Treasury Notes have terms of between 2 and 10 years, and U.S. Bonds have terms of greater than 10 years. Generally, the shorter the term of the Treasury, the lower the yield and vice versa.
One major drawback with Treasury Bills and Notes is that the yields are significantly lower than other short-term investment choices, including Treasury Bonds. Yields on a 1-Year U.S. Treasury Bill were 0.21% as of late March 2020, and yields on a 6-month Treasury Bill were 0.08%. In comparison, Wilshire Finance Partners’ two alternative investment options for fixed income are Private Debt Funds, target a 6% to 8% or 12%, depending on the fund.
CDs, or Certificates of Deposits, are another low-risk way to invest your money for income and principal protection. CDs are basically a type of savings account that has a fixed-term and an interest rate that can help you grow your money, albeit modestly.
CDs have varying terms, typically from 1 to 5 years, and different minimum deposit requirements. Some CDs require a minimum deposit of $10,000, others have no minimum deposit requirement. Like with Treasuries and bonds, the longer the term you commit to, the greater your yield. You may also find higher rates the more you deposit. The interest rates on a typical CD lately ranges from about 1% to 2%.
CDs do help you diversify your portfolio, and they’re considered good places to keep money that you intend to save for longer periods of time. Investors with CDs with FDIC insured banks get the added advantage of deposit insurance for up to $250,000. That means, even if the bank fails, you will still get your money returned for up to that amount.
One con to consider is the fact that your money will be committed for a longer period. If you want to withdraw your funds early from a CD, you will likely face an early withdrawal penalty. Also, many investors find they can earn greater returns with similar principal protections with other short-term, fixed income investment choices.
Short-Term, Fixed Income Alternative Investment Solutions
Increasingly, modern portfolio theories are recommending that investors have some exposure to alternative investments, which have little correlation to the fixed income market.
With the advantage of not being tied to market trends, short-term alternative fixed income investments can further add diversity to an overall investment strategy. Essentially, when the fixed income market is in turmoil, alternative investments like Private Debt Funds can offer a foundation of stability with predictable income and down-side risk protection. These investments give investors the defensive strategy with principal protection, and often offer a more aggressive offensive strategy with more competitive rates of return.
Alternative investments do have several major upsides, but they also have some disadvantages compared to other investment choices. Mainly, these investments typically don’t have the same government or FDIC insurance that U.S. bonds, other Treasuries or CDs offer. Therefore, investors may not feel they have the same level of risk protection. However, many alternative investments turn to other strategies for downside protection.
Wilshire Finance Partners’ Short-Term, Fixed Income Funds
Investors looking for ideal alternative investments in short-term, fixed income have two Private Debt Funds to consider with Wilshire Finance Partners – the WFP Income Fund and the WFP Opportunity Fund. With loans secured by commercial real estate, these funds offer a way to achieve predictable cash flow while providing yet another way to add diversity to your portfolio. As shorter-term investments compared to other fixed-term real estate alternative investment choices, they’re designed to provide a balance of Stable Income & Principal Protection.
Among the key advantages to Wilshire’s funds are the fact that they provide a predictable income through an asset that is not connected to the ups and downs of the stock and bond markets. Instead, these Private Debt Funds, a form of trust deed investing, are tied to commercial real estate through first deeds of trusts and mortgages. Both Private Debt Funds offer a short-term, fixed income strategy to generate income that can help you maintain your lifestyle and keep you on track toward your financial goals.
WFP investors also have the advantage of holding an easy, understandable investment – and one they don’t have follow in the daily news. The WFP Income Fund, which targets a yield of 6% to 8%, provides an annualized dividend paid monthly; terms range from 6 to 60 months. The WFP Opportunity Fund targets above-average yields of 12%, paid quarterly. The WFP Opportunity Fund, which has a two-year lock up period, can benefit investors who want principal protection but may be willing to take on a bit more risk in exchange for greater stable returns. These funds give investors all the advantages of investing in real estate, but without the responsibilities of management.
As an alternative investment, WFP Private Debt Funds may not enjoy the guarantee of government backing or FDIC insurance, but investors do have ample downside protection of having their assets secure by a hard asset – real estate. These funds are a result of pooled bridge loans originated by Wilshire Finance Partners and that are secured by multifamily and commercial real estate.
The Bottom Line
Leveraging the benefits of short-term, fixed income can benefit any portfolio. The best way for you to invest in these assets will depend on both your financial goals and how much you prioritize higher predictable returns and liquidity.
Fortunately, investors have several investment solutions, especially in alternative investments. These easy, understandable investments can offer you both greater down-side risk protection and return potential even amid chaos in the broader market.
For more information about Wilshire Finance Partners’ funds, including a copy of the Private Placement Memorandum and other information about the funds, visit the Wilshire Finance Partners website at www.WilshireFP.com, email Wilshire at Investments@WilshireFP.com, or call 1-866-575-5070.
Investments in the WFP Income Fund and WFP Opportunity Fund are only available to accredited investors.
Wilshire Finance Partners, Inc. specializes in real estate finance and investments and is the manager of the WFP Income Fund, LLC (the “Income Fund”) and the WFP Opportunity Fund, LLC (the “Opportunity Fund” and collectively with the Income Fund, the “Funds”). This communication is not an offer to sell or the solicitation of offers to purchase the securities of either of the Funds or otherwise. The purpose of this communication is to provide an overview of the respective Funds and their private placement. Persons interested in learning about either of the Funds and their private placement will be provided with a Private Placement Memorandum (inclusive of exhibits thereto and any supplements, the “Memorandum”), which provides a description of the respective Fund, the terms of its private placement, a discussion of risk factors, a copy of such Fund’s limited liability company operating agreement, a subscription agreement and other information related to the respective Fund. This communication contains certain forward-looking statements regarding each of the Funds’ investment objectives and strategies. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire Finance Partners, as the manager of the Funds. Although Wilshire Finance Partners believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire Finance Partners, any placement agent, or any other person, that the objectives and strategies of the respective Funds will be achieved. An investment in either of the Funds may be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. Each of the Funds securities are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act. Neither the Securities Exchange Commission nor any state agency has passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials. The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the securities. Past performance is not indicative of future results. Investing in the Funds involves substantial risk, including loss of investment, and is not suitable for all investors.