With money yields at historic lows, where can yield-needy investors turn? This is indeed a major concern for numerous retirees. The dilemma in finding yields can do much to alter an investor’s well-being, both short- and long-term. These concerns include:
Playing It Too Safe: Investing in short-term, guaranteed securities is a long-term safe bet, with one exception: Will the small amount of interest earned be enough to support a specific lifestyle? Furthermore, what if rates stay low for one year, or two years or even longer? Life is short, and living in the current time period is important, too.
Stretching Too Much for Higher Yield: With the two-year Treasury note yielding less than .5 percent, many may invest in longer maturity securities to increase yield. This move, however, may not necessarily work out for the investor. If interest rates rise, principle values will fall. Even if CDs are used, penalties will apply if they are prematurely liquidated for reinvestment.
Over-Allocating to Higher-Yielding (Risky) Security Types: Many investors are electing to invest more of their assets in high-yield or lower investment-grade securities. While a position in higher-yielding securities may be appropriate, these are very vulnerable to shocks in the economy and should be used in good measure.
Besides the challenge of low yields, and the problems associated with commonly-used securities, investors face numerous obstacles in addressing their concerns. One obstacle, obviously, is the multitude of investment vehicles that are available. Which of these options are suitable and warranted? Yet another obstacle: how does an investor find a trustworthy advisor to help select the securities and security types that will help achieve their goals? Moreover, of the solutions that are being offered, are they suitable for each particular investor?
Investors must ask themselves four basic questions when addressing these circumstances.
1) What is the basic income amount needed to fulfill my living requirements?
2) Given this amount, can this basic income be generated by my current investment portfolio? Alternatively, as maturities continue to occur, will I be capable of funding my current living standards?
3) Do I have the knowledge to follow capital market activity, to construct a portfolio that can help to match today’s demands, while also keeping abreast of tomorrow’s needs in a changing environment?
4) If I need assistance, do I know an institution that can help provide guidance and does this firm have a documented process and proven history of providing this type of service?
Your financial adviser is focused on answering these questions and tailoring solutions. For instance, many investors are currently overlooking asset classes and securities that can help fulfill their income needs, such as inflation-protected bonds, dividend-growing equities, bank loans and international debt, which can help boost yields and buffer risks.
Our strategies, which pool the best of different asset classes, are often appropriate for investors who strive to improve yield while reducing risk. As an example, a High Income Balanced portfolio can generate an attractive cash yield of roughly 3.8 percent.
Portfolios such as this can be very beneficial in a low interest rate environment.
Jeffry Trad, CIMBA, MBA, is chief investment officer for Midland Financial Strategies, a division of Midland States Bank. Trad has spent more than 20 years in financial management and leadership.