With the stock market near an all-time high and interest rates at historic lows, is there any hope to find consistent returns without incurring too much risk? Traditionally, investors have been able to reduce the risk in their portfolios by dividing their assets between stocks and bonds, since their prices generally tend to move in opposite directions. Unfortunately for investors nearing retirement, stock prices are currently high, and bond yields are near zero.

In the last year, stock prices have become increasingly volatile and relatively expensive. A common indicator of how expensive stocks are is the price-to-earnings ratio, which divides an individual stock's price by the company's annual earnings per share. On Oct. 7, the S&P 500 price-to-earnings ratio was near 20, compared with its historical average of 14 to 16. As a result of the current high prices, investors who want to reduce risk are looking for ways to avoid putting too much of their portfolio into the stock market at this time.

Meanwhile, bond yields are at an all-time low, and the Federal Reserve decided last month to keep interest rates near zero for the short-term. Bond investors fear that with yields so low, their investments aren’t keeping up with inflation and the rising costs of healthcare. They also worry that in the future, when rates do increase, the value of their bond investments will fall.

Baby boomers approaching or living in retirement depend on earning a return on their investments to make sure they do not outlive their assets and can afford increasing living costs. Conservative investors are seeking new investments to earn reasonable returns without incurring too much risk.
One type of investment that may address this need is a business development company, or a BDC. A BDC is an investment company that offers loans to small and mid-sized businesses that are not publicly traded on a stock exchange. In the United States, about 97 percent of companies are not publicly traded, yet many offer strong investment opportunities.

BDCs were authorized by an act of Congress in 1980 to promote funding for small and mid-size businesses. Similar to mutual funds, BDCs allow many individual investors to pool their funds to invest through loans to private companies.

An important difference between BDCs and the stock market is that BDC loans are typically secured by equipment or property of the borrowing company. This means that even if a company goes bankrupt, investors can expect to get some portion of their investment returned to them.

While investors in an individual company's stock will generally lose 100% of their investment if the company goes bankrupt, BDC investors can expect to retain 50-70% of a loan’s face value. Because of the secured status of the loans, and a diversified portfolio with dozens or hundreds of loans in the fund, adding BDC investments to a portfolio increase yield without taking too much risk.

Another advantage is that BDCs may offer higher returns than investors expect to get elsewhere. Today's yields on BDCs range from 6 to 9 percent and are based largely on floating rate loans, which will pay more if and when interest rates rise in the future.

While BDCs may offer benefits and opportunities for investors, buyers should proceed with caution. To be sure, BDCs do carry risk, but may be an attractive option to consider for a portion of your portfolio.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. www.breitercapital.com can expect to get some portion of their investment returned to them.

While investors in an individual company's stock will generally lose 100 percent of their investment if the company goes bankrupt, BDC investors can expect to retain 50 to 70 percent of a loan’s face value. Because of the secured status of the loans and a diversified portfolio with dozens or hundreds of loans in the fund, adding BDC investments to a portfolio increase yield without taking too much risk.

Another advantage is that BDCs may offer higher returns than investors expect to get elsewhere. Today's yields on BDCs range from 6 to 9 percent and are based largely on floating rate loans, which will pay more if and when interest rates rise in the future.

While BDCs may offer benefits and opportunities for investors, buyers should proceed with caution. To be sure, BDCs do carry risk, but may be an attractive option to consider for a portion of your portfolio.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.