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Recent reports show that yields for California high-yield bonds may increase to as much as 6 percent by the middle of 2010. Despite this yield increase (which represents higher potential returns), those making investments are not convinced that they should buy in because of California's poor economic state.

What Are High-Yield Bonds?

If you're not familiar with high-yield bonds, they are also known as high-yield debts, and are bonds that are rated below investment grade at their time of purchase. Inherently, they bring with them a higher risk of default - or other adverse credit events - because you are investing in debt that is to be paid back in a predetermined period of time.

Because they pose so much risk, investors usually get paid higher yields than better quality bonds.

The Deal with California's High-Yield Bonds

Kenneth Naehu, is a major investor who invests $2.5 billion for Bel Air Investment Advisors in Los Angeles. Late last year, he sold his California high-yield bonds late last year because he saw the state's deficits mounting.

He, like others making investments, is very skeptical of California's economy, which right now is $20 billion in the whole and possibly looking to pass out IOUs for the second year in a row, not to mention it having $73 billion in general obligation debt outstanding.

However, Gov. Arnold Schwarzenegger and two-thirds of the Legislature are trying to agree on way to fix the economy and if they can, they hope to sell billions of dollars in bonds.

Should Investors Take Advantage of the Higher Yields?

Some wonder if they should take advantage of these bonds that are bringing in higher yields in comparison to municipal bonds - currently there is a gap between the two yields in the ballpark of 3.15 percent. However, there is an inherent risk involved in buying into high-yield bonds as opposed to other bonds that have a great likelihood of promising a return.

Right now, there is no guarantee that the state will be able to pay back the debts owed as promised with the possibility that it will have to pass out IOUs for the second year in a row. So if you're concerned at all that making investments in the state's bonds could pose a risk to your assets, you may want to follow Naehu and just wait before making a decision.

The investment market was plummeted in 2008 and toward the end of the year the Congressional Budget Office (CBO) estimated that U.S. retirement plans alone had lost as much as $2 trillion. This doesn't include the many other ways to invest where losses scaled upward toward $6.9 trillion by early 2009.

With so much money lost, many people decided to cut back on investing to avoid losing more money.

According to an Oct. 2009 survey conducted by AlixPartners, LLP, 49 percent of investors surveyed said that they either stopped or reduced investing in stocks or mutual funds. Twenty-six percent said they have no intention of investing in these financial vehicles for at least three years.

Of course, you don't have to stop investing altogether because times have been rough. It's good to know that there are places to invest, even during a difficult economic time like our nation's current recession. It's just a matter of knowing when, where and how to invest, as well as how to make good choices for the long run.

The Safe Route

Probably the first consideration you'll make when thinking of investing your money is taking the safe route, which could include putting your money into money market accounts and similar instruments, like CDs and T-Bills, which allow you to grow your money based using an interest rate you agree to:

• Money Market Accounts - Similar to high-yield savings accounts, money market accounts are offered through banking institutions and allow for investors to grow their money in a liquid or semi-liquid account at a specified interest rate.
• Treasury Bills (T-Bills) - T-Bills are government-issued bonds that allow investors to pay a particular sum over a specific period of time. They are issued at less than face value so that after they've matured, you will be paid at face value.
• Certificate of Deposit (CD) - The CD is also a short-term borrowing tool (however, some can stretch out to five-year terms). They are offered through banks like savings and money market accounts. During the term, you won't have access to your funds (unless you accept an early withdrawal penalty) but you will be able to retrieve your funds at a matured rate.

When going for these safer investment options, keep in mind that unless you secure a fixed interest rate, it could fluctuate at a moment's notice. If your rate is variable, you might find that your 2.50% APY has dropped to 1.36% within a day.

Stock Investments and Counter-Cyclical Stocks

Typically, when you think about true investing in the financial market, you think of stocks and bonds. While bonds are relatively safe, the stock market can be a bit riskier. However, if you're smart about the way you manage your stocks, you could still benefit rather nicely from these investments.

There has always been talk about diversifying your portfolio to ensure that your funds are safe if the market plummets. However, many investors found that when the entire market drops - versus just a few companies - diversification doesn't mean as much, except with counter-cyclical stocks.

Counter-cyclical stocks move in the opposite direction of the S&P 500 and business trends in general (i.e. the health care industry adds more jobs during a recession), which means if you line up with companies that function well during difficult economic times like those in food or medicine, you have a chance of greater stability within your portfolio. And depending on the company you invest in (i.e. Wal-Mart), you might actually see gains as the company lowers costs and sells more to accommodate the difficult times.

What's great about counter-cyclical stocks is even if they do drop some to reflect temporary consumer abandonment, they usually bounce back pretty quickly because consumers have basic needs that only certain companies can fulfill.

If you're thinking of making your first investments during the recession, it's always better to be safe than sorry. You want to make decisions that will sustain you financially in the long run, which is why it's a good idea to spend as much time possible researching how to invest safely after a recession so that if another one strikes you won't lose all of your money.

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