Advice on investing in CDO

COMMENT POSTED IN MY BLOG

Here's some advice from Guide to Investment Strategy (Peter Stanyer, The Economist, 2006) page 129-130.

Who should invest in CDOs?

No one needs to invest in CDOs, and no one should invest in any instrument unless they are sure that they, or a trusted adviser, understand and can monitor the risk and potential rewards involved. This means that they need to understand the complex issues involved in pricing CDOs and, in particular, different tranches of a CDO.

... Investors who have used CDO tranches as a means of getting around a prohibition on investing in sub-investment grade assets need to assess the likelihood of such a downgrade, and all investors need to be satisfied that these disappointment risks are sufficiently reflected in the investment return that the CDO tranche offers.

Message: Make sure you or your trusted adviser know the risk, the return, and if the complicated product is priced fairly.