Here we are, back at our favorite Italian restaurant for the millionth time, and the perennial age-old question has reared its ugly head again: do we order the same thing we always get (chicken parmigiana, obvi) or do we try something new? There’s a pumpkin rosemary pesto gnocchi dish on special tonight that looks pretty yummy. Do we take the plunge, or stay in our Sicilian safe space?
There are pros and cons to branching out and trying something new, and this is where this convo is going to take a hard right turn from Italian cuisine to securities investing. Older, more mature securities are like the chicken parmigiana of the investing world: they’ve been around for a while, their behavior is somewhat predictable, and we have a fairly decent idea of their overall value. These securities might cost a bit more, but we’re paying for that stability and predictability. We know what we’re getting and we know we like it.
Generic securities, which are born from recently-issued mortgages and loans, are more like the pumpkin rosemary pesto gnocchi. They’re new on the investment scene; they’ve usually been around for less than a year. This youthfulness is great, because since they’re kind of an unknown, investors can usually pick them up for a lot less than their seasoned counterparts.
But just as we don’t know how the gnocchi is going to taste, we also don’t know how generic securities are going to perform. Is the price going to be all volatile and jump all over the place, like newly-issued securities sometimes do? Are people going to default on the loans and mortgages on which the securities are based, causing their value to dive right into the toilet?
We just don’t know; that’s why these securities are riskier—and often cheaper—than their elders. But, just like ordering a new and exciting dinner entree, there’s always the chance we’ll end up very pleasantly surprised.