For purposes of this article, we have defined the following:
Gov’t TBills – 1 yr obligations guaranteed by the US Government
Gov’t TNotes – 510 yr obligations guaranteed by the US Government
Gov’t TBonds – 1530 yr obligations guaranteed by the US Government
CD’s – 1 yr FDIC insured
Money Mkt Funds – liquid mutual funds maintaining a $1 share price
Corporate Bonds – 1530 yr obligations guaranteed by a US corporation rated BBB or better
Mortgage Investments – 1 st deeds of trust on real estate with 65% loan to value maturing in two years.
Risks involved in mortgages thus, the principal is fixed generally are only backed by
vary from the other and does not fluctuate unlike the mutual fund’s integrity to
investments that financial GNMA’s, which return a honor the $1 share price
advisors might be more portion of principal with each because all they are holding
familiar with and more due interest payment and trade are shortterm obligations,
diligence is required. First of in the open market and are both government and
all, unlike CD’s or US thus subjected to market corporate. However, in the
government obligations, volatility. The mortgage early 1990’s, when many
mortgage investments are not investment’s backing is corporate bonds went sour,
FDICinsured and primarily going to be the investors suddenly learned
have no government underlying real estate on that their $1 share price was
guarantee. Do not confuse which the mortgage is not guaranteed; they could
these types of mortgage recorded (specific versus actually lose principal. The
investments with past blind pool) and almost all mutual fund families that
GNMAs, the pooled shortterm mortgages will sponsored the money market
investments created by the pay interest only, thus funds paid out of pocket to
quasigovernmental mortgage keeping the principal intact. subsidize the share prices,
company Ginnie Mae and
thereby preserving the sacred
sold to the public. GNMA’s However, all income
are mortgagetype producing investments carry
investments and have a some risk – and it’s often
quasigovernment backing. misunderstood, even by
By contrast, the mortgages sophisticated financial
used in the above examples advisors. For example,
are individual mortgages; money market funds
cow.
RISK VS REWARD
FOR MORTGAGE INVESTMENTS
Should You Add Mortgage
Investments to Your Portfolio?