Here's a basic four-point plan for developing an investment strategy that allows you to ride the wave of good yields today while minimizing downside risk at the back end:

1. Understand the assets. Relying solely on rating agency perspective can be risky, since different analysts use different assumptions. While it may not be feasible to thoroughly scrutinize every asset in a CMBS pool before making an investment, an investor making a big play can conduct a separate analysis and arrive at an informed decision.
2. Know the market. As with direct lending and equity investing, some CMBS investors favor pools with concentrations in institutional-grade, while others want to see greater geographic diversity, with growth markets in the mix. For investors, one question is whether the potential ups and downs of a given market align with risk-adjusted return targets.
3. Understand the deal and pool structures. It's important to understand borrowers' options for liquidation, collateral requirements, and opportunities for loan modifications, among other details that can affect yields. Moreover, investors should not forget to look at the structure of the overall trust. Has the capital stack been arranged effectively to provide the right risk-adjusted returns to investors up and down the line?
4. Adhere to your risk parameters. Investors always know their risk tolerance—they just don't always stick to it, as intensifying competition and the pressure to capture higher returns leads some investors to expose themselves to greater risk levels. An opposing argument says that investors with agility can balance good returns and minimal risk. But it's easy to get caught in the trap of gradually accepting looser and looser standards.

Invest with Confidence

The typical cycle of any investment type is that, as more and more capital chases fewer and fewer quality deals, yields get squeezed and underwriting standards get loosened. It doesn't happen all at once, so it can be difficult to pinpoint the moment when risk outweighs return.

The best way to combat this “risk creep” is to set your own standards from the outset. Developing a solid strategy and a backup plan—and summoning the discipline to follow that plan—will help ensure that you're not caught in a sudden market contraction down the road.

Jack Mullen is founder and managing principal of Summer Street Advisors LLC. The views expressed in this column are the author's own.