It’s a harsh environment for retirees and income investors. Many not only are still trying to recover from the recent housing and stock market crashes, they’re also having to deal with interest rates that are next to nothing. Earning a safe yield from your portfolio has just gotten a little harder for everyone. Experts say those looking for income now have to walk a little further out onto the limb and take on a little more risk. From high-yield corporate bonds to real estate investment trusts, there are many opportunities. But advisers say you should carefully weigh your risk tolerance and alternatives.
U.S. Treasuries were once a foundation of retirement income, but their historically low yields make them all but worthless nowadays. At 1.8 percent (10-year), 2.5 percent (20-year) and 2.95 percent (30-year) as of press time, Treasury yields don’t even come close to generating the 4 percent to 5 percent retirees typically need to sustain their income. Continued monetary easing by the Fed and indications that rates may not start to rise until 2014 means it could be quite a while before traditionally save yields return to their historical levels.
While CDs haven’t always been hot performers, they have often served many retirees and income investors safe yields as part of a diversified portfolio. Yet CD rates still remain low, with top paying 5-year yields averaging less than 1.5 percent. Todd Douds, senior vice president at Fort Pitt Capital Group in Pittsburgh, says that regardless of their investing philosophy, income inventors have to take on more risk nowadays to find yield.
“We’re in a low yielding environment now mostly due to the Fed actions, and that’s designed with the intent that investors will reach out further on the risk spectrum and get capital moving in the markets,” says Douds.
They’re taking more risk not in the types of asset classes they use but how they’re investing within those classes. Mutual funds still remain the most common investment vehicle and according to data from Morningstar, one of the most popular asset classes in 2012 was corporate bonds. The next two largest net asset allocations were in high-yield and emerging-market bonds.
Although inflows to Treasuries were virtually nonexistent, high-yield bonds ($28 billion), emerging-market bonds ($19 billion) and high-yield municipal bonds ($11 billion) saw significant inflows. Larry Rosenthal, president of Rosenthal Wealth Management Group in northern Virginia, says income investors are looking for yield wherever they can find it, and it’s driving them into riskier areas than they would usually be in.
“Right now in the bond world, the fixed-income world, people are utilizing lots of different asset classes in order to minimize the principal fluctuation and keep in check the interest rate risk,” says Rosenthal.