HighYield Interest Rates

High yield interest rates on offshore investments abound but are they safe? Find out more here.

Can High-Yield Interest Rates From Overseas Be Trusted?

It happens time and time again: Whenever the economy goes bad, people start looking around for conservative investments that come with lower risk in exchange for lower reward. When the belts are being tightened, suddenly those high-risk stocks and junk bonds don’t seem so smart, and the order of the day becomes investments whose gains are more dependable even if slower in coming. And whenever things like savings accounts and corporate bonds become in vogue, everyone starts scrambling for safe investments with high-yield interest rates.

Finance veterans usually have mixed feelings about the whole concept of high-yield interest rates. Practically everyone who has been in this business for a long time has been burned at least once by a so-called “sure bet” that turned out to be nothing but a junk investment that was doomed to fail. Such investments usually bury their volatility and risk deep in the documentation—if they reveal these things at all—and they put their high-yield interest rates in big, bold letters for all the world to see. These are not investor-friendly tactics.

International savings accounts?  

In recent years, with the rise of internet banking, a new type of so-called “high-yield” investment has come to the forefront—namely, overseas savings accounts. For example, banks in Iceland have recently been offering online savings accounts with interest rates as high as 10% or even higher. When confronted with such numbers, if your first instinct is not to have a laugh and dismiss it immediately, then you might be in the wrong business.

But there are people who swear these accounts are legitimate, so it’s worth at least taking a look at them. The first and most obvious point against these high-yield interest rates is that overseas banks obviously are not insured by the FDIC, which should raise red flags the size of Texas. There’s no way of knowing for sure that a bank in a country like Iceland is not going to go under in the near future. If this happens, your losses will be 100%.

Other risk factors

In addition to that little FDIC issue, there are other things that count against these overseas savings accounts with high-yield interest rates. For one thing, you’re also exposed to risks associated with fluctuating currency exchange rates. For example, investing money in European banks may have seemed like a good idea a few years ago when the Euro was perpetually on the rise against the dollar, but the story has since been reversed.

In the end, while it may seem that the difference between a 10% interest rate and a 2% one is huge, is it really worth the risk? That 2% interest rate in an FDIC-insured bank is nothing to sneeze at. Your gains will be real, and there’s practically no chance that you’ll ever lose your money. With those overseas banks, on the other hand, who knows what the chances are that you’ll lose your money? For all we know, it could be a 50/50 proposition. In short, enter at your own risk.