The once clear path to retirement savings continues to become less and less clear as traditional fixed-income holdings may not provide enough for the staggering amount of Baby Boomers–an estimated 77 million Americans between 50 and 69 years old–enter retirement. Several factors brought about the evolution of retirement planning. From a longer life expectancy to rate increases, an investor now must account for a growing number of criteria when determining their retirement plan.
After a six and a half year bull market run, the market has waned in recent months. Despite a Federal Reserve rise in low interest rates, bonds are expected to rise slowly. Additionally, a recent Natixis study revealed that 69% of investors believe that a traditional stock and bond portfolio is no longer sufficient when attempting to pursue returns and preserve capital. This has investors’ minds running with new and alternative investments, if they have all the proper information. 76% of those surveyed said they would consider alternative investments if their advisor recommended them.
That’s why a BDC might be the right option to diversify your investments while increasing returns into your retirement fund.
Should You Go with a BDC?
As MarketWatch describes the prospect, “There is no magic bullet to fix things, but now is an unusually good time to consider giving your portfolio a fill up by looking at an investment in a Business Development Company (BDC).” I agree completely with this idea, though I may be a bit biased. Removing my involvement from the sector for a moment, nearly the entire industry is growing with largely strong numbers to back its potential. At the BDC where I am CEO, Saratoga Investments Corp., our last quarter exemplified our drive towards increased earnings while maintaining a top-flight portfolio.
By implementing careful and disciplined capital deployment, and maintaining an investment portfolio that places 97% of its investments in its highest credit rating criteria, Saratoga has seen immense growth over the past couple of years. Looking out across the industry landscape, investors have the ability to make similar investments to the traditional large endowments and pension funds. Now, investors can find this in a BDC with low investment minimums.
Investing in a BDC brings forth other potential benefits including better yields that tend to generate higher levels of income (dividend yields of 10%+) compared to traditional fixed-income investments. These investments also provide investors with transparency in the form of 10Q and 10K filings with complete schedules of investments so you know the portfolio you are investing in. Finally, BDC investments are subject to strict debt management regulations (currently limited to 1:1).
BDC investments are still subject to month-to-month moves as any traded investment is. But when looking to diversify, a BDC is an enticing offer for potential investors.
The Right BDC
Once you’ve decided that a BDC is indeed right for your retirement plan, the next step is to determine which BDC suits your plan.
When honing in on your BDC investment, be sure to focus on several key areas. These focus areas include a BDC’s cash flow. And the transparency of the schedule of the investments in the BDCs’ SEC filings allow you to do your own due diligence. If a BDC isn’t investing in a company that’s generating cash flow, that’s probably a red flag. Additionally, you want to see high quality margins and returns on assets. If any party involved is accepting of businesses with weaker profits, that’s another aspect you’ll need to look into further. Next, is the BDC investing in market leaders? That’s a beacon of prosperity for all parties. These three areas lead into profitability. If a BDC takes in large profits at a low price, they are showing signs of growth while multiplying its investments. Finally, use the BDCs public filings to assess the valuation history of the investments. This could assist you in identifying any issues.
Your retirement plan could increasingly look how a proper BDC portfolio should look, expansive and diverse. You have a growing number of options and financial avenues to consider. With proper planning and information gathering, your retirement plan has the chance to flourish in the coming years.
