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Stock Market Investment Alternatives That Offer Value

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Bank Loan FundsWith the stock market setting new record highs every week, investors that are concerned about jumping into stocks too late in the bull market cycle should consider stock market investment alternatives that offer value.  Even after five years of economic recovery, there are still investment alternatives that trade at valuations that make them very compelling investment choices.

Examples of alternative investments that currently provide good value to investors include:  discounted bonds, Master Limited Partnerships (MLPs), bank loan funds, and non-agency mortgage backed securities.  It is important to keep in mind that these investment alternatives are suitable for different investment goals and time horizons.  Investors must take the time to learn about each of these value-oriented investment alternatives to determine which of them make sense for one’s investment goals and time constraints.

The stock market can be expected to return approximately 9 percent per year over long stretches of time, with dividends reinvested.  However, stock gains are not guaranteed over any given period of time and may require many decades of holding stock investments for gains to be realized, which may be longer than an investor’s investment time horizon.

Buying Discounted Bonds as a Stock Market Investment Alternative

Discounted BondsDiscounted bonds offer a good investment alternative for medium to long-term investors who do not mind locking up their investment money for a number of years for specific goal, such as saving for a child’s future education.  While the stock market may make gains over the next ten, fifteen, and twenty years, there are no guarantees that stocks will in fact gain over any given period of time.  By contrast, discounted bonds that are backed by bond insurance provide guaranteed gains that are realized when the bonds mature.

If an investor does not need investment money for a period of time, from five to twenty years, buying discounted bonds that mature when the money is needed offers a way to invest money and capture guaranteed returns.  The actual returns are dependent upon how discounted the bonds are when one purchases them.

For example, if bonds that mature in ten years are selling at 40 cents on the dollar at time of purchase, an investor will be paid 100 cents on the dollar when they mature in ten years, netting a 60 cent gain over the time that they are held.  This translates into a 150 percent gain over ten years; which is an excellent investment return for any asset class, especially since it is a guaranteed return backed by insurance.

Buying Master Limited Partnerships as a Stock Market Investment Alternative

Master Limited PartnershipsMaster Limited Partnerships are investment alternatives that are suitable for investors with various investment time horizons, from short-term to long-term.  What makes Master Limited Partnerships suitable for short-term investors is the fact that Master Limited Partnerships trade like stocks, which means they are very liquid and can be sold for cash at any time.  With 5 to 6 percent yields, Master Limited Partnerships provide enticing yields in the current low interest rate environment.

Master Limited Partnerships are equities that receive special tax treatment by the government.  They are required to pay out their earnings to shareholders periodically via declared dividends.  Their earnings are tax-free on the corporate level.  Taxes are paid individually by shareholders, who are considered partners.  Their high dividend payouts make Master Limited Partnerships appealing to investors looking to generate income from their investments.

One major downside to Master Limited Partnerships is that since they trade like equities on the stock market, investment principal can be lost if a Master Limited Partnership loses value over the time money is invested in it.  While Master Limited Partnerships’ prices are subject to overall stock market trends, they have lower beta than many stocks and their price swings are relatively mild when compared to higher beta stocks and the overall stock market.

Bank Loan Funds Provide Decent Returns

Bank loan funds are investment alternatives that provide investors a way of earning decent rates of investment returns.  Bank loan funds are particularly appealing in the current low interest rate environment in which interest rates are expected to rise over the next few years, as the economy strengthens and the Federal Reserve finally ends years of near-zero interest rate policy.  This because bank loan funds invest in and derive their value from adjustable interest rate loans to businesses that are five to seven years in length, with interest rates that adjust every one to six months.  This means that in a rising interest rate environment, bank loan funds will capture the higher interest rates within a matter of months, which is much faster than many other interest-sensitive investments.

Bank loan funds currently pay interest in the 3 to 4 percent range, which is a decent rate of return in the current low yield interest rate environment.  If interest rates rise over the coming years, bank loan funds will increase their payouts in response.  Bank loan funds trade as equities on stock exchanges, and are subject to overall stock market trends.  However, their valuation is ultimately derived from the loan portfolios that they are invested in, which provides them intrinsic value and relative stability compared to the overall stock market.

Non-Agency Mortgage Backed Securities Are Trading at a Discount

Non-agency mortgage backed securities are securities that derive their valuations from mortgages and are sponsored by private companies, rather than government sponsored enterprises.  In the wake of the 2008 /2009 financial crisis in which many of these securities suffered considerable loss in value, non-agency mortgage backed securities are still trading at a discount to their par value, due to investor reluctance to buy them and bid their price up to fair value.  This means they can be purchased at a discount to their face value.  However, this type of security is not insured, so there is risk to investment principal.

Non-agency Mortgage backed securities currently pay between 4 to 6 percent in interest.  Individual investors looking to earn interest from these securities can buy funds that buy non-agency mortgage backed securities to reduce the risk of loss of principal due to default.  Funds reduce the risk of losses due to default by buying numerous Non-agency mortgage backed securities, which spreads the risk of default amongst many securities.  The DoubleLine Opportunistic Credit (NYSE:  DBL), which currently pays a dividend of over 9 percent per year, is an example of a fund that invests in non-agency mortgage backed securities, as well as other interest bearing credit securities.

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