Low risk, fixed 5% return too good to be true?

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thegreathambino
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Low risk, fixed 5% return too good to be true?

Post by thegreathambino » Sun Jan 06, 2019 4:55 am

Anyone have insights about Worthy?

https://worthybonds.com/
https://joinworthy.com/

Highlights seem to be...
  • Fixed 5% return
  • You invest, they lend it out for more than 5% - they make the difference, you make the 5%
  • Specialized in "worthy" bonds (liquid assets significantly higher than loan amount)
  • 3 year term, but can withdrawal at anytime with NO penalty
  • Not FDIC insured
  • App to invest spare change, but can invest much more than that if desired
  • No fees or penalties
Any thoughts, recommendations, or red flags here? Wondering if it's too good to be true. Seems to be VERY low risk for a fixed 5%.

Reviews and chatter about them seems to be fairly minimal, but seems like something worth investigating.

ccf
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Re: Low risk, fixed 5% return too good to be true?

Post by ccf » Sun Jan 06, 2019 5:32 am

Did your research turn up this discussion at Deposit Accounts? If not, take a look.

https://www.depositaccounts.com/communi ... 5-apy.html

My take: ugh why are financial startups like this. Worthy "bonds", RobinHood's "checking account"....

AlohaJoe
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Re: Low risk, fixed 5% return too good to be true?

Post by AlohaJoe » Sun Jan 06, 2019 5:48 am

thegreathambino wrote:
Sun Jan 06, 2019 4:55 am
Seems to be VERY low risk for a fixed 5%.
Why do you think this is low risk?

You are buying an unrated baby bond from a single tiny, unknown bank that makes money by doing inventory-based lending to small & medium businesses.

Why do you think that buying a bond from a single company -- any company -- is "safe"?

Why do you think that buying a bond from an unknown company is safe?

Why do you think 5% is a good rate for doing that?

Other than the branding, this sounds like any other "baby bond" offering. Here's a list of many similar offerings, almost all of which have yields higher than 5%: https://www.dividendinvestor.com/exchan ... ues-yield/

How is Worthy @ 5% different than Arlington Asset Investment @ 6.75%?

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JoMoney
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Re: Low risk, fixed 5% return too good to be true?

Post by JoMoney » Sun Jan 06, 2019 5:57 am

Hmmm... You said/titled the thread "low risk",
But they use the term "worthy" and say "...lower risk profile than traditional secured loans and other investment instruments..."
There are lots of other investment instruments that are rather risky, being lower risk than something else doesn't necessarily mean low risk. I am extremely skeptical.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

mrc
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Re: Low risk, fixed 5% return too good to be true?

Post by mrc » Sun Jan 06, 2019 6:40 am

At the bottom of the Worthy landing page:
Worthy is not a bank and investments in Worthy bonds are not bank deposits. They are not insured by the FDIC. Investing in Worthy bonds involves risk of loss. You should always carefully consider investments in any security and you should be comfortable with your understanding of the investment and its risks. For more information on risks related to investments in our securities, please see our filings with the Securities and Exchange Commission.
I can't decode the SEC filing language, so I wouldn't invest here, being 'uncomfortable' with my understanding. Are you?
If it’s not long term it’s small talk

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Re: Low risk, fixed 5% return too good to be true?

Post by z3r0c00l » Sun Jan 06, 2019 7:17 am

I would rate this bond at junk level and consider 5% actually quite low considering the risk.

Call_Me_Op
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Re: Low risk, fixed 5% return too good to be true?

Post by Call_Me_Op » Sun Jan 06, 2019 7:28 am

Yes, too good to be true.
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ChinchillaWhiplash
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Re: Low risk, fixed 5% return too good to be true?

Post by ChinchillaWhiplash » Sun Jan 06, 2019 10:04 am

Sounds about like a crowd sourced BDC

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whodidntante
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Re: Low risk, fixed 5% return too good to be true?

Post by whodidntante » Sun Jan 06, 2019 10:13 am

I wag my finger at this investment.

arf30
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Re: Low risk, fixed 5% return too good to be true?

Post by arf30 » Sun Jan 06, 2019 10:38 am

Unrated bonds, what could possibly go wrong?

Topic Author
thegreathambino
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Re: Low risk, fixed 5% return too good to be true?

Post by thegreathambino » Sun Jan 06, 2019 6:20 pm

As a reminder, I'm not advertising for this company or suggesting it's a good idea - I'm asking what people knew or thought about this.

From a strategic perspective, I have $75k-100k to play with here after maxing out IRA, 401k, HSA, and being as deep into a taxable account as I want to be given my personal approach regarding the stock market . So this research is coming from the perspective of what to do with that money that isn't just a high interest savings account. 5% with no penalties/fees/etc seemed - on the surface - a hell of a lot better than 2ish%. I'll keep digging but I can see some downsides given the responses above.

Seems like the consensus is that this (Worthy) and probably anything else similar just isn't worth it (no pun intended). What is then?

petulant
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Re: Low risk, fixed 5% return too good to be true?

Post by petulant » Sun Jan 06, 2019 6:44 pm

thegreathambino wrote:
Sun Jan 06, 2019 6:20 pm
As a reminder, I'm not advertising for this company or suggesting it's a good idea - I'm asking what people knew or thought about this.

From a strategic perspective, I have $75k-100k to play with here after maxing out IRA, 401k, HSA, and being as deep into a taxable account as I want to be given my personal approach regarding the stock market . So this research is coming from the perspective of what to do with that money that isn't just a high interest savings account. 5% with no penalties/fees/etc seemed - on the surface - a hell of a lot better than 2ish%. I'll keep digging but I can see some downsides given the responses above.

Seems like the consensus is that this (Worthy) and probably anything else similar just isn't worth it (no pun intended). What is then?
Why do you think there’s something with 1) higher returns than bank savings or CDs but 2) not risky like the stock market? There’s not. Anything with more interest than CDs at a bank will be riskier—probably much riskier. Anything with returns verging on stock territory will have risk.

If you’re looking for a financial hobby that’s risky and can take $75K, maybe try real estate?

drk
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Re: Low risk, fixed 5% return too good to be true?

Post by drk » Sun Jan 06, 2019 6:48 pm

ccf wrote:
Sun Jan 06, 2019 5:32 am
My take: ugh why are financial startups like this. Worthy "bonds", RobinHood's "checking account"....
Because people fall for it.

bluquark
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Re: Low risk, fixed 5% return too good to be true?

Post by bluquark » Sun Jan 06, 2019 7:03 pm

This product is not comparable to a savings account or money market (to give you a sense, money markets are rated “1” out of 5 in Vanguard’s simplified risk level system). Nor is it comparable to an investment-grade intermediate-term bond (rated “2”). It’s a high-yield bond (rated “3”).

But IMO the risk is higher than “3” because it isn’t diversified like Vanguard’s offerings are, and is unrated, so perhaps we can call it a 4 out of 5. Note that level “4” includes Vanguard’s Total Stock Market fund.

Topic Author
thegreathambino
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Re: Low risk, fixed 5% return too good to be true?

Post by thegreathambino » Sun Jan 06, 2019 7:07 pm

petulant wrote:
Sun Jan 06, 2019 6:44 pm
Why do you think there’s something with 1) higher returns than bank savings or CDs but 2) not risky like the stock market? There’s not. Anything with more interest than CDs at a bank will be riskier—probably much riskier. Anything with returns verging on stock territory will have risk.
Being someone relatively new to investing/Bogleheads/etc - maybe thats what I've missed. I assumed there would be some possible middle ground or other alternatives here. But if it really boils down to that - it sounds like options are (a) feel good about a high interest savings/CD, (b) pad the taxable account (all tax deferred accounts maxed out) and re-balance or (c) venture out and buy an asset like real estate, start a business, etc.

...with the common thread of resisting the temptation to waste time on the thousands of "alternatives" that aren't one of those 3 high level options.

Have I been over-thinking this - is it that simple?

bluquark
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Re: Low risk, fixed 5% return too good to be true?

Post by bluquark » Sun Jan 06, 2019 7:12 pm

thegreathambino wrote:
Sun Jan 06, 2019 6:20 pm
From a strategic perspective, I have $75k-100k to play with here after maxing out IRA, 401k, HSA, and being as deep into a taxable account as I want to be given my personal approach regarding the stock market . So this research is coming from the perspective of what to do with that money that isn't just a high interest savings account. 5% with no penalties/fees/etc seemed - on the surface - a hell of a lot better than 2ish%. I'll keep digging but I can see some downsides given the responses above.

Seems like the consensus is that this (Worthy) and probably anything else similar just isn't worth it (no pun intended). What is then?
Maybe you already know about this, but I would recommend an Intermediate-term investment grade bond fund like BND: https://investor.vanguard.com/etf/profile/bnd is a popular choice for people wanting to take a modest and predictable amount of risk for the fixed-income part of your retirement savings. Currently earns about 3.25%.

If you are in a high tax bracket, consider a municipal bond fund instead.

UpperNwGuy
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Re: Low risk, fixed 5% return too good to be true?

Post by UpperNwGuy » Sun Jan 06, 2019 7:14 pm

Good summary. Yes, it is that simple.

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Re: Low risk, fixed 5% return too good to be true?

Post by willthrill81 » Sun Jan 06, 2019 7:17 pm

thegreathambino wrote:
Sun Jan 06, 2019 4:55 am
You invest, they lend it out for more than 5% - they make the difference, you make the 5%
If they fail to make at least 5%, do you think that they will continue to pay you 5%? If so, how will they be able to do so?

I find peer-to-peer lending as safer than this, and yet I'm exiting my position in that as well.
thegreathambino wrote:
Sun Jan 06, 2019 6:20 pm
As a reminder, I'm not advertising for this company or suggesting it's a good idea - I'm asking what people knew or thought about this.

From a strategic perspective, I have $75k-100k to play with here after maxing out IRA, 401k, HSA, and being as deep into a taxable account as I want to be given my personal approach regarding the stock market . So this research is coming from the perspective of what to do with that money that isn't just a high interest savings account. 5% with no penalties/fees/etc seemed - on the surface - a hell of a lot better than 2ish%. I'll keep digging but I can see some downsides given the responses above.

Seems like the consensus is that this (Worthy) and probably anything else similar just isn't worth it (no pun intended). What is then?
If you're looking for a non-traditional way to invest these funds, you might try crowdfunded real estate. Jim at the White Coat Investor has done a lot in this area, and his experience might be useful to you. Here's a recent post he did about it.
Last edited by willthrill81 on Sun Jan 06, 2019 7:20 pm, edited 1 time in total.
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drk
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Re: Low risk, fixed 5% return too good to be true?

Post by drk » Sun Jan 06, 2019 7:18 pm

thegreathambino wrote:
Sun Jan 06, 2019 7:07 pm
Have I been over-thinking this - is it that simple?
Yes, it is. Rate arbitrage exists, but it is not available as a product for retail investors. Period.

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David Jay
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Re: Low risk, fixed 5% return too good to be true?

Post by David Jay » Sun Jan 06, 2019 7:23 pm

thegreathambino wrote:
Sun Jan 06, 2019 6:20 pm
...a hell of a lot better than 2ish%.
2ish% is so 2017.

Intermediate term Corporate (Investment grade) bond fund, SEC yield: 4.29% (VICSX)

Diversified, all investment grade, 7/10 of 1% lower yield and climbing.

[edit] I anticipate VICSX yield will exceed 5% before the end of 2019, the Worthy bond will be stuck at 5% for the duration.
Last edited by David Jay on Mon Jan 07, 2019 10:58 am, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

bluquark
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Re: Low risk, fixed 5% return too good to be true?

Post by bluquark » Sun Jan 06, 2019 7:27 pm

By the way, it sounds to me like you feel anything in a brokerage account is automatically riskier. Not really, literally the only thing that makes CDs safer is the FDIC insurance. If it weren't for the FDIC insurance, CDs from tiny banks would be a horrible investment.

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Re: Low risk, fixed 5% return too good to be true?

Post by ChinchillaWhiplash » Wed Jan 09, 2019 10:12 am

If higher than 24% bracket, municipal bond fund in a taxable might be worth a look. There are some low fee index funds available. Also some options for high yield. There are some income CEFs that have interesting strategies to pay high yields. Some use return of capital strategies to make them a lot more tax efficient. MGF and MIN come to mind. Not recommending these. Just throwing them out there for you. A bit more risk than CDs. Hard to say if the higher yields are worth the extra risk :confused

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Re: Low risk, fixed 5% return too good to be true?

Post by grabiner » Wed Jan 09, 2019 8:35 pm

David Jay wrote:
Sun Jan 06, 2019 7:23 pm
thegreathambino wrote:
Sun Jan 06, 2019 6:20 pm
...a hell of a lot better than 2ish%.
2ish% is so 2017.

Intermediate term Corporate (Investment grade) bond fund, SEC yield: 4.29% (VICSX)

Diversified, all investment grade, 7/10 of 1% lower yield and climbing.

[edit] I anticipate VICSX yield will exceed 5% before the end of 2019, the Worthy bond will be stuck at 5% for the duration.
The possibility of rising rates is not a benefit. If the yield on an existing bond rises, its price falls. This fund has a duration of 6.2 years, so if rates rise by 1%, the fund price will drop by 6.2%. You will make up that 1% if you hold the fund for 6.2 years, getting the 4.29% return you expecte.

I still like the fund, although I wouldn't hold it in a taxable account in a 24% or higher bracket. Vanguard High-Yield Tax-Exempt (not a junk fund despite the name; it holds mostly A-rated and BBB-rated bonds) is only a bit riskier, and has a 3.43% tax-free yield on Admiral shares. In a 24% bracket, that is as good as a 4.51% taxable yield.
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David Jay
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Re: Low risk, fixed 5% return too good to be true?

Post by David Jay » Wed Jan 09, 2019 8:48 pm

grabiner wrote:
Wed Jan 09, 2019 8:35 pm
David Jay wrote:
Sun Jan 06, 2019 7:23 pm
thegreathambino wrote:
Sun Jan 06, 2019 6:20 pm
...a hell of a lot better than 2ish%.
2ish% is so 2017.

Intermediate term Corporate (Investment grade) bond fund, SEC yield: 4.29% (VICSX)

Diversified, all investment grade, 7/10 of 1% lower yield and climbing.

[edit] I anticipate VICSX yield will exceed 5% before the end of 2019, the Worthy bond will be stuck at 5% for the duration.
The possibility of rising rates is not a benefit. If the yield on an existing bond rises, its price falls. This fund has a duration of 6.2 years, so if rates rise by 1%, the fund price will drop by 6.2%. You will make up that 1% if you hold the fund for 6.2 years, getting the 4.29% return you expecte.

I still like the fund, although I wouldn't hold it in a taxable account in a 24% or higher bracket. Vanguard High-Yield Tax-Exempt (not a junk fund despite the name; it holds mostly A-rated and BBB-rated bonds) is only a bit riskier, and has a 3.43% tax-free yield on Admiral shares. In a 24% bracket, that is as good as a 4.51% taxable yield.
All good points. I was not really recommending this specific fund, just showing that he could get investment grade bonds with a yield within spitting distance of the unrated bonds offered by Worthy.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Low risk, fixed 5% return too good to be true?

Post by AerialWombat » Wed Jan 09, 2019 8:54 pm

Junk bonds backed by inventory loans?!?!?!

I wouldn’t touch this with your 10-foot pole.

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David Jay
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Re: Low risk, fixed 5% return too good to be true?

Post by David Jay » Wed Jan 09, 2019 9:12 pm

AerialWombat wrote:
Wed Jan 09, 2019 8:54 pm
Junk bonds backed by inventory loans?!?!?!

I wouldn’t touch this with your 10-foot pole.
Not junk bonds (i.e. bonds rated BB or lower), UNRATED bonds.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

AerialWombat
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Re: Low risk, fixed 5% return too good to be true?

Post by AerialWombat » Wed Jan 09, 2019 11:32 pm

David Jay wrote:
Wed Jan 09, 2019 9:12 pm
AerialWombat wrote:
Wed Jan 09, 2019 8:54 pm
Junk bonds backed by inventory loans?!?!?!

I wouldn’t touch this with your 10-foot pole.
Not junk bonds (i.e. bonds rated BB or lower), UNRATED bonds.
OK, then 20-foot pole. :)

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David Jay
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Re: Low risk, fixed 5% return too good to be true?

Post by David Jay » Thu Jan 10, 2019 12:05 pm

AerialWombat wrote:
Wed Jan 09, 2019 11:32 pm
David Jay wrote:
Wed Jan 09, 2019 9:12 pm
AerialWombat wrote:
Wed Jan 09, 2019 8:54 pm
Junk bonds backed by inventory loans?!?!?!

I wouldn’t touch this with your 10-foot pole.
Not junk bonds (i.e. bonds rated BB or lower), UNRATED bonds.
OK, then 20-foot pole. :)
:D
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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