Trust deed investing has been around for many generations, yet today it seems few people are familiar with how it works or how it compares to other investment options. The economic signals today are mixed and confusing, and investors are understandably unsure about what to do. Invest or sit on cash? Invest in what? Trust deed investments offer one of the best opportunities, and risk-adjusted yields, available today when compared to the other major alternatives: stocks and private equities.

First let’s understand the inherent value of risk-adjusted yield. Simply put it is the return potential of a given investment relative to its risk, where the risk is generally measured by volatility. Commercial trust deed funds historically yield consistent returns in the 9%-12% range annually, with very little volatility. Other assets, say small cap stocks or funds for example, have the potential for much higher returns but with much greater chance of loss as well. So the commercial trust deed fund would have a higher risk-adjusted yield.

Stock Market

Commercial trust deeds funds show much less volatility than stocks.

If we now look at the major stock market indexes and compare them to commercial mortgage funds we see how this pattern plays out. The chart shows three major stock market indexes versus the lower end average of commercial trust deed funds. While there are slight variations among the indexes they all follow a similar path, and all show a lot of volatility. It’s interesting to note that this particular chart shows the stock market during the best part of the recent economic bubble, and stops before the market imploded in August of 2008. While there are periods where the market outperforms trust deeds it is impossible to time the market perfectly, and as we’ve all painfully learned recently those profits can disappear quite literally overnight.

Another important distinction is the collateral behind the investment. Theoretically an equity holder’s investment is backed by the company’s assets, but in reality your capital can disappear into the wind. (Just ask shareholders of Lehman Brothers or the Madoff funds.) Trust deeds are backed by valuable, and tangible hard assets: real estate. While real property can and does drop in value it is not subject to the minute-by-minute trading of wall street, and most real estate will always have some economic value. If the private money lenders do their job right there is ample collateral backing every trust deed investment. And don’t forget, when things go bad the lender (trust deed holder) is first to get paid, but the equity holder stands at the back of the line.

Private Equity
Private equity is exactly what it sounds like: investing money directly into a private company in exchange for an ownership stake. The attraction, of course, is that these mostly smaller, early stage companies offer the chance for eye-popping profits if and when they become successful.

Trust deed funds provide a better, more accessible option for most investors.

Of course, that’s a big IF. Truth is most of these companies fail, or at least fail to achieve any sort of real value. On top of which investing in private companies is a tremendous amount of work and generally requires significant expertise. This is why it is mostly done through private equity or venture capital funds. (We’ll ignore Angel investing for the time being.)

So what about those eye-popping returns? Well, private equity and venture funds operate on basic portfolio theory. That is, out of every 10 investment about 6 will go completely bust, 4 or 5 will do ok and 1 or 2 will knock it so far out of the park that the fund overall provides a decent return. Nothing wrong with that if you have the stomach for that level of risk. Think of it as the extreme sports of the investing world. In fact, the amount of money required is so high and the risk so great that this is generally an investment class relegated to institutions and the extremely rich.

Stocks, bonds, mutual funds, and even private equity can be valuable tools in your investment toolbox. But the familiar, understandable, reliable and secure commercial trust deed fund should hold a prominent role in most investor’s portfolios.