It's not called financial repression for nothing. The Federal Reserve's ultra-low interest-rate policy since the financial crisis may have lent support to a listless economy and made the government's massive debt a lot easier to finance, but it's been more than hard on retirees and conservative savers.
For risk-averse investors relying on income from their portfolios, it's been a yield drought, as certified financial planner Barry Glassman puts it. And it's going to continue.
Andy Ryan | Getty Images
"Yields are likely to stay lower for longer than people expect," said Glassman, founder and president of Glassman Wealth Services. "It's happening on the backs of retirees and conservative investors."
The real yield on a 10-year Treasury bond was 0.72 percent on Nov. 17, and a 30-year bond yields a little more than 1 percent after inflation. While the Fed has indicated it plans to raise short-term interest rates, the uncertain domestic and global economies and the still-loosening monetary policy of central bankers in other countries suggests that rates could remain very low for a long time still.
The CNBC editorial team presents our inaugural list of the Top 50 Money Management Firms.
Investors who need more income from their portfolios have no option other than taking on more risk.
"There is no free lunch," said Russ Koesterich, chief investment strategist for BlackRock. "If you want more return, you have to take on more risk."
"The problem is, everyone has been stretching for yield, so you don't find a lot of bargains. But people can't rely on the same instruments [for income] that they did 10 years ago."-Russ Koesterich, chief investment strategist for BlackRock
He suggests that conservative investors figure out a combination of different income-producing strategies to manage the extra risk. It could include investing in preferred stocks, global securities with higher dividends or yields, high-yield bonds, real estate investment trusts or energy-related master limited partnerships that pay a high yield.
"The problem is, everyone has been stretching for yield, so you don't find a lot of bargains. But people can't rely on the same instruments [for income] that they did 10 years ago," Koesterich said. "They have to cast a wider net."
Here are three options that investors can consider if they need to boost the income they're getting from their investment portfolio.
High-yield bonds
While credit risk might seem like a bad idea with the U.S. economy still weak and the rest of the world looking equally uncertain, high-yield bonds do offer bigger returns than government and investment-grade bonds.
The yield on the BofA Merrill Lynch High Yield Bond index rose from just over 6 percent at the end of May to 7.9 percent as of Nov. 17. If you were holding junk before the volatility picked up this summer, you've taken it on the chin.
However, rates have retreated from over 8 percent in the last several weeks, and the credit risk of high-yield bonds can offer some diversification from the interest-rate risk of a portfolio of Treasury bonds.
The Vanguard High Yield Corporate Bond fund has underperformed Treasuries in the recent downturn, but it still has a positive return of 0.5 percent in the year-to-date through Oct. 27. It invests in relatively high-quality junk and has a current yield of 5.61 percent. If the stock market gets wild again, junk bonds will also get hit, but if you can wait out turmoil, the higher yield will pay you more income.
"You have to be able to withstand volatility," said Glassman, who noted that junk bonds lost 21 percent in 2008. "They recovered almost all their losses in that year within 18 months."
Patrick Abboud
No comments:
Post a Comment