Bonds are often an integral part of a diversified investment portfolio. In our roundup of decent bonds, we introduce you to a unique type of bond investment available to all investors. If you are attracted to the 5% interest rate, you will want to know about Worthy Bonds.…
How can bond investments generate 5% return at zero interest rate? Here are some reasons.
Having no middlemen is a great way to benefit both consumers and sellers. This is a business strategy that has been around for a long time. Netflix does this with filmmaking by being both a producer and distributor of films. Warby Parker is a eyewear business – sourcing eyewear directly from manufacturers and making them available to consumers online at reasonable prices.
And this is what Worthy Financial is doing with its Worthy Bonds platform.
Through Worthy, ordinary people like you and me can buy bonds to finance small businesses and entrepreneurs that pay 5% per annum. Instead of putting our money in a bank and earning a measly 0.01-2.00% interest rate while they lend our money for so much more, we can get involved.
Of course, “getting involved” comes with additional risk, but this is a proposition that we will discuss below.
Bonds 101
First, I wanted to give an overview of bond investing. Fortunately, this will be quick because bonds have a pretty simple definition:
A bond is a loan
When you invest in a bond, you lend money to the government or business and you receive interest payments in return. This is similar to when you finance a car and have to pay the bank interest on the loan you take, but vice versa. You are now the “bank” collecting interest on the loan you make, which is why they usually call it fixed income.
Many types of bonds are available to investors, including:
- Government treasury bonds
- Municipal bonds
- Corporate bonds
- A worthy bond
Today we take a look at Worthy Bonds, which are similar to corporate bonds but focused on small business loans.
Decent review
Worthy Bonds is a product offered by Worthy Financial, Inc. The company was founded in 2016 by Sally Outlaw and uses the A + (Reg A +) provision of the Jobs Act, which was approved in June 2015, to help small business owners raise money from both middle and wealthy Americans.
As described on their website:
“Worthy Peer Capital is a 100% subsidiary of Worthy Financial, Inc. – a financial services company committed to community capital. We believe that everyone deserves economic security and that we all will be better off if we invest in each other. ”
As mentioned, Sally Outlaw is the CEO and founder of Worthy Financial and it seems she has a personal mission to give everyone the same opportunity to grow their nest, which she reflected in the Worthy Bonds proposal. it a mission that I think we can all accomplish.
Worthy bonds are SEC-qualified bonds made up of asset-backed loans to small businesses. There’s a lot of jargon in there, but they’re primarily loans to entrepreneurs…
At a high level, Worthy Bonds are unique because:
- You can start investing with as little as $ 10.
- Offer 5% per annum
- There are no commissions
- Anyone can invest in them
It should be made clear that these bonds No The FDIC is insured. As with any investment, there is a certain risk involved.
How It Works: A Dignified Tie
As mentioned at the beginning, Worth Bonds kicks out the middleman.
The company borrows money from Worthy with the funds you invest. In return, you get a direct portion of the interest the company pays you on the money you loaned them, which is 5%.
Of course, Worthy takes a piece of the pie too. They charge the business some interest rate above 5%. For example, they can take 10%, give you 5%, and keep 5% for themselves.
The difference is that instead of having the bank take money from your checking or savings account and lend it out at 10%, while you get almost nothing in return (except for security), you get a portion of that reward.
Who can invest?
Worthy Bonds are open to both accredited and non-accredited investors. However, there are some restrictions for non-accredited investors.
Being accredited investor has nothing to do with your loan; is someone who meets at least one of the following two qualifications:
- Has a net worth of US $ 1,000,000 (excluding the cost of the primary residence).
- Has an annual income of $ 200,000 or more ($ 300,000 for married couples) with a reasonable expectation of the same or higher income in the current year.
Accredited investors have no restrictions on what they can invest, although they may have to call or visit a physical branch to invest unusually large amounts of money.
Non-accredited investors can invest 10% of their annual income. Although I don’t think non-accredited investors should be willing to invest more than that anyway.
Decent bond risk
Worthy Bonds invests in asset-backed companies, which partially mitigates lending risks.
They seek to provide loans to companies that have liquid assets that exceed the value of the investment itself. If the loan diminishes and the small business fails to meet its obligations, Worthy could, in theory, recover its funds.
However, since they are not FDIC insured, there are still risks of losing your money, as with any investment. Nothing is guaranteed.
Starting out
Like many new fintech companies, getting started with Worthy Bonds is easy.
You can start the registration process here, and after providing the required personal information, you connect a bank account to fund your investment. Worthy has also started offering IRA investment options if you’re interested.
Once you get started, you can reinvest the current interest payments or withdraw them as you receive them. If Worthy is a long term investment for you, interest reinvestment is usually the right decision.
One of the great things about Worthy Bonds is that they No fees… You get the full 5% they provide in interest (net of any taxes) and you can withdraw your money anytime you want without any early withdrawal penalties.
Finally, Worthy also offers a review feature. Like Acorns, if you need a little help saving, Worthy will round your purchases to the nearest dollar and invest the difference in Worthy Bonds on your behalf (once your rounding amount hits the $ 10 minimum). For example, if you buy something for $ 9.45, they round up the purchase amount to $ 10 and invest $ 0.55 on your behalf.
Pros and Cons of Decent Bonds
The pros of a decent
Small minimum investment
The ability to start with as little as $ 10 is a huge advantage of Worthy Bonds.
This allows new and regular investors start todayinstead of saving money to start investing. As they state in their mission, they help people grow their nest egg even if they don’t think they can.
No fees or fines
Worthy does not charge any early withdrawal fees.… This is what sets them apart from certificates of deposit (CDs) and other bond offerings and makes them look more like a savings account or money market account. You can access your money at any time.
Also, there are no commissions with Worthy Bonds.which distinguishes them from bond funds and exchange-traded funds (ETFs), which usually charge a small rate of expenditure.
To be honest, they take the spread and some of the interest on the loan. So investors have an opportunity cost because they only get 5% instead of 7%, or 10%, or whatever Worthy collects as interest.
Open to non-accredited investors
A worthy bond is open to everyone! Again, this is just another way they live up to their values and allow investors to diversify their investment portfolio in a way that is usually only available to Wall Street.
As mentioned, there are restrictions for non-accredited investors – you can only invest up to 10% of your income. Although most people, most likely, in any case, do not seek to invest more than this amount.
High yield (on bonds)
A 5% yield is an excellent yield for a bond.
Most high yield savings accounts today (as of April 2020) only offer 1.5-2% per annum, and most bond funds today only pay around 2%.
Sure, you can probably find some corporate bonds offering around 5%, but the risk on these options can be relatively high.
The ability to get 5% profit from Worthy makes them very competitive in this regard.
Cons worthy
Risk
Decent bonds are not FDIC-insured like a bank account, which makes them much more risky than high-yield savings accounts.
We know that assets are paying off their loans, but that is not always enough when companies default. The overall risk of worthy bonds is supposed to be lower than that of stocks, but it is not well known since it has been tested.
In all fairness, next year could be a good test of how Worthy can react and whether they can continue to pay 5% while the economy is struggling.
Brief history of the company
Worthy was founded just a couple of years ago in 2016.
Unlike Treasuries and the S&P 500, which have a history of decades, worthy bonds have only a couple of years of history. Again, in my opinion, this increases the risk associated with investing in Worthy.
Lack of visibility
When you invest in Worthy Bonds, you cannot choose which individual companies you want to invest in. You must rely on Worthy to invest for you.
It’s not necessarily a bad thing, though. Just as people prefer to let fund and index managers choose stock investments on their behalf, having Worthy select loans takes some of the work off your back. You just have to believe that they know what they are doing
High taxation of interest
Interest earned on decent bonds is taxed as ordinary income. Typically, this is a higher rate than capital gains tax.
In essence, this is no different from other corporate bonds, but it deserves attention.
FURTHER READING: How to invest $ 1000 (and double it!)
Summary: Decent Bonds Review
Decent bonds can be an attractive investment option for ordinary people.
For people with a higher risk tolerance, Worthy bonds can act as a reserve fund. For those simply looking to build a diversified investment portfolio, Worthy Bonds can be an opportunity to invest in high yield bonds.
I love the overall mission of the company, which is to enable everyone to accumulate sustainable wealth over time.
However, this is a new platform and each new investment platform should be approached with caution. Possibly highlighting just a small portion of your portfolio if you think it fits with your investment strategy and are interested in giving Worthy Bonds a try.
This article originally appeared on The Money Mix and has been republished with permission.