Five Tips to Solve the Fixed-Income Crisis

Bayard Closser, President of Vertical Capital Markets Group, shares his five tips for solving the fixed-income crisis. 5. Be Diverse "Make sure that your portfolio is well-diversified," said Closser, an industry veteran with more than 30 years working on the distribution and design of investment products. "What we're doing is, we're creating just one more unit of diversification by putting an asset class out there that people haven't had exposure to before. I always get quite concerned when people put too much money into one particular asset class. So make sure that you're well-diversified." 4. Look For Growth "Does [your investment] offer any type of growth potential that goes along with it or total return capabilities?" Closser asked. "You look at fixed incomes today, you know, we started doing some research and you go back to 2010 and you have a lot of experts warning about the bond bubble. "Do you have an investment vehicle that has -- or [offers] a combination -- that gives you the diversification that helps protect against a rising interest rate environment?" 3. Pessimism Never Hurt Anyone "Make sure that you're not betting too much on good things to happen," Closser warned. "Understand what the economic outlook is. "Real estate is a great example. A lot of times when people buy real estate they're buying commercial properties. They're looking for compression of cap rates. They're looking at improving economies. They're making a lot of assumptions. I want things where nothing good has to happen to make it work -- which, frankly, mortgages can do." 2. Reasonable Expectations Required "You gotta make sure that your expectations are reasonable in the yield and the total return," Closser insisted. "We're getting too far out and overweighting areas in the investment spectrum to generate yield in traditional investments that are taking on considerably more risk than I think most investors would normally be willing to accept. Make sure that your investment is well-collateralized. Don't just go out there and buy something because it's an income stream." 1. Traditionalists Need Not Apply "You gotta look outside traditional fixed income instruments," said Closser. "When you think about where interest rates are…we have a very volatile interest rate environment, but it is relatively low compared to [historical data]. People who need income can't look to traditional options like certificates of deposit, treasuries or even corporate bonds. "Even high-yield bonds cannot deliver the type of income that they need. They've got to look at alternative assets. Not necessarily alternative strategies but assets that generate different types of income streams, like real estate and mortgages." Bonus: How to Avoid Another Mortgage Crisis "I'm not sure I have five tips [for this]," said Closser. "It's real simple. Avoiding another mortgage crisis…borrowers and lenders have to stay within their means. Don't borrow more than you can actually afford. Don't expect more appreciation than you're going to receive." When it comes to buying a home, individuals need to remember that it is a lifestyle choice, one that comes with an emotional attachment. "[It's] not an investment," said Closser. "You've gotta look at it, in my mind, from that perspective. "Lenders have to be on that side, too. You have to make loans that make sense. [Lenders] overleveraged properties. And [lenders] didn't do all the credit valuations that [they] should [have done]. Even as an originator prior to the crisis, Vertical paid very close attention to those types of guidelines." In the end, it all comes back to the basics. "It's really back to the basics from the things going in," Closser added. "Figure out what's important to the people. Do they have the types of -- not only the financial capabilities but are they going to continue to want to live in those properties if things get difficult? "Lenders have to get to a point to where they start lending again. It's so difficult to borrow money today because of the regulatory environment. We gotta come to a happy medium to stimulate the real estate environment again." Louis Bedigian is the Senior Tech Analyst and Features Writer of Benzinga. You can reach him at 248-636-1322 or louis(at)benzingapro(dot)com. Follow him @LouisBedigianBZ