Reweighing your income strategy will be required if investors want to meet their retirement goals, according to a recent piece in the New York Life Investments.
Indeed, as Darren Winters points out, the unstoppable surge in negative yields reached $17 trillion in August, courtesy of the central banks unprecedented monetary easing experiment. Put simply, reweighing your income strategy now could save you from an austere retirement sometime in the future.
So part of reweighing your income strategy entails reassessing long-term bonds (fixed income) as an asset class in your portfolio. Negative yielding bonds means investors are guaranteed to lose money. The 10 year German and Swiss bonds already have negative yields. That also means that traditional long term bonds may not be as effective as they were in the past.
Investors have been conditioned for years to view long term bonds as the place to go to for steady yields and limited downside risk to their capital.
Reweighing your income strategy means that traditional longer-term bonds are no longer a centerpiece in an income portfolio
Longer-term bonds are debt instruments with a maturity period of more than 15 years.
As Darren Winters explains, long bonds should typically pay investors a higher interest rate because they have greater credit and inflation risk. Historically, long term bonds provided a steady income stream and have been subject to less volatility than equities.
But if the best of the bonds in terms of low risk is so overbought, hence the negative yields, then where else can income-seeking investors with low tolerance to risk put their savings to work?
Reweighing your income strategy could mean reassessing municipal Bonds ranking in your portfolio
This is according to a piece in New York Life Investments.
But risks have been rising in Municipal Bonds. “There has been a surge in sales from the riskiest parts of the $3.9 trillion market for state and local debt” reported the Wall Street Journal in January. Many retirement communities, charter schools, and hospitals can use the market to sell tax-exempt debt because they play important community roles, but they aren’t government entities—and analysts said a downturn could cause financial difficulties for some.
Nevertheless, investors can get downside protection with insured municipal bonds, which are guaranteed to pay interest and principal back by private insurers. Insured municipal bonds have historically performed similarly to munis while capturing less of the “downside”, according to New York Life Investments.
Reweighing your income strategy towards short-duration, high-yield bonds could also ease the yield drought and contain risk in your portfolio
Bonds with a shorter duration and higher yield can be a lower volatility approach to achieving the same income investing goals.
In theory, the shorter the duration of the bond the lower the risk, because a default is less likely. So risk is reduced with a bond that has short maturity.
Reweighing your income strategy towards high dividend-paying stocks will also help to pamper your income yielding portfolios
Search for stocks which have stable or growing dividends and have good cash flows.