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Health & Fitness

The Search for Investment Income

Ideas for retirees and conservative investors to generate more income from their investments.

One of the challenges for today’s retiree is finding suitable fixed income instruments that pay a decent yield and avoid the rollercoaster ride of today’s financial markets. Gone are the days where a money market paid 2 or 3 percent and a CD* could be found paying a very satisfactory 4 or 5 percent. Although that still paled in comparison to the seventies when CD* rates were well into the double digits, it was very acceptable relative to what you needed to stay ahead of inflation and maintain your restful sleep pattern.

Today’s relative lower risk options unfortunately do not offer much in the way of inflation protection. In fact most money markets and CD’s* in recent years have and continue to slowly erode your purchasing power. What may feel comfortable and safe in reality is taking money out of your pocket each and every year. Treasuries which have always been considered a safe haven for very conservative retirees or nervous investors offer nothing more than record low yields and very high valuations which present risks to complacent investors in the form of potential plunging bond^ prices.

What does a retiree do that can’t and shouldn’t put all their eggs in equities but still needs a reasonable performance from their investments? What fixed income classes are there that are still attractive? First it should be noted that although you can construct a lower volatility investment portfolio, it will still require you to increase risk over money market accounts and CD’s*. There is always going to be a trade-off. To keep pace with inflation, instead of dipping your toes into the water, we may have to go knee deep. As long as you stay very well diversified and don’t make any big bets, you can put together a portfolio with a reasonable risk quotient. Also very important to note is that needed money for expenses and emergencies should still remain in very liquid instruments such as bank checking and money markets. It is not paramount that you beat inflation with every dollar you have, just the majority of them.

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So where am I putting my clients money on the fixed income side right now? Here are just a few of my favorite places in no particular order. High Yield Bonds+^ (Taxable and Tax-Free): Although the easy money has already been made from a total return perspective, yields still remain attractive at over 5 percent. As the economy continues to stabilize, defaults are expected to be low. Investment-Grade Corporate Debt^: Among high quality issues, this may be your best bet. With yields currently around 2-3%, it’s certainly not much but it keeps pace with current inflation. Emerging Market Debt^: In terms of quality, this option puts you somewhere between domestic corporates and high yield bonds. Valuations in these bonds remain attractive and yields are currently in the 4-5% range. Bank Loans^ (Floating Rate): Although the rates haven’t been floating anywhere to the upside, the yield alone makes bank loans an attractive option. With yields around 5 percent and less volatility than high yield bonds, bank loans may be a piece of the yield puzzle for you.

There are many other great choices as this is not an exhaustive list of options but you would be off to a great start! Including these options plus other asset classes will go a long way to keeping pace with inflation, increasing income and doing so in a smart, well-diversified way.

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    *CD’s are FDIC insured and offer a fixed rate of return if held to maturity.

    ^ Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

   + High Yield/Junk Bonds (Grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

The opinions voiced in this material are for general information purposes only and are not intended to provide specific advice or recommendations for any individual(s). To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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