Lesson from Third Avenue Management closing

fotog | Getty Images

fotog | Getty Images

One of the most basic rules of investing is this: the higher the return you seek, the greater your risk becomes.

And that lesson is vividly on display today with news that a prominent New York mutual fund, Third Avenue Focused Credit, is liquidating.  That’s a fancy way of saying, going out of business.

The fund invests in high-yield, or junk, bonds. These are corporate securities that pay more interest because their issuers are less creditworthy. That means the issuers are more likely to default on their debts.

This year, the collapse of energy prices has pressured dozens of issuers in that sector. And that, in turn, has caused Focused Credit to lose 27% this year – an unusually large amount for a bond fund.

The result: mass redemptions. Not long ago the fund had $2.5 billion. Today: $789 million. The rush to the exits is why the fund has decided to block withdrawals for the time being.

Today’s lesson: know what you own, and know that higher yields mean higher risk.

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