Welcome to today's live chat about income investing!
Hello, and welcome to all
Manny and Jeff, what's the biggest challenge facing income investors today? It's not easy out there, is it?
No, it never is. Yields are still low and there's economic weakness to think about. Sometimes, that's good for bonds and income. Other times, it's a problem.
Obviously, you can't get anything from money-market funds or CDs, so you basically have to take risk to get any sort of decent income
I'm sure many of our readers are interested in just how much risk you have to take. What would you say are some of the least risky income investments?
This depends on what kind of risk you're thinking about. If you are concerned that interest rates will go up and hurt you that way, then you want short-term stuff. If you are more fearful of economic troubles and defaults, then go with government debt but keep it short-term, also. I'f I had to pick one investment that appears safe on both counts, it would be a GNMA fund.
Jeff, you like BBB corporate bonds, too, don' t you? Not totally safe but a decent risk/reward tradeoff
Yes, those are a good place to go for more yield, in the 3% to 4% range.
Alright, let's get started with our first reader question from Jim.
And what about funds that invest in floating-rate debt? I realize that if we have another credit crisis like the one we had in 08, these funds will sink, but barring that they offer decent yield and their prices tend to stay in a pretty narrow range most of the time
As Jeff said earlier, it sounds like you pretty much have to take some risk no matter what.
Alright, here's Jim's question.
Where is the money currently invested?
That annuity question is right up Jeff's alley. But just getting back to risk and reward for a sec while Jeff ponders annuities, even if you earn 2% today, you're at best breaking even with inflation. So you need to go beyond short-term bond funds to get a positive after-inflation return. We can talk about more ideas later
Jim, you mean EuroPacific? That's American's main developed-market int'l stock fund
Then you should move about two-thirds of it into some kind of income fund but not annuitize yet if you don't need to start drawing out the income. I'd be highly uncomfortable being 67 and having 100%, or closer to, exposure to stocks.
Jim, is the bulk of your money in tiaa-cref? Do you have retirement money elsewhere?
I can hear Jeff breathing a sigh of relief :)
Well, then you're probably OK but I'd make sure that stock allocation has some dividends to protect against the worst. All in all, from this limited info, you don't seem to be off the tracks. Definitely, though, don't lock in this low of a lifetime annuity rate.... not if you don't need the money now.
Good, that gives us a better sense of your situation, Jim. For practical purposes, you should lump all of your money together in arriving at asset-allocation decisions. Jeff's comments sound right to me
One more follow-up from Jim
Thanks for the great questions, Jim. Did that link to Investing for Income work okay for you this time?
While we're on the topic of asset allocation, let's take our next question from JJ
What kind of a return do you need? Do you have a lot of cash saved now, or are you well short of your goal?
While we wait to hear back from JJ, let's go back to something you said earlier Manny. You mentioned that in order to get a positive after-inflation return, you need to go beyond short-term bond funds. Can you talk a little bit more about this? What are some possible ideas?
FWIW, the 2020 target-retirement funds from Fidelity, Price and Vanguard have from 26% to 42% in bonds.
Vanguard Wellesley and Wellington are pretty reliable for beating inflation and without too much drama.
Jeff and I both attended the recent Morningstar conference (please post links to the pieces we did), and the suggestions that kept coming up most frequently with regards to income were junk bonds, emerging-markets bonds and, sigh, dividend-paying stocks. I put a sigh in there cause I know a lot of investors have pretty much written them off or are approaching them with extreme care. But there are so many great blue-chip companies out there that are yielding 3, 4, even 5% and have an opportunity to grow their dividends year in and year out. In fact, we love the dividend-growth strategy. Jeff wrote about it from a stock perspective in the Feb issue, our next issue (Sept) will contain a piece on the best dividend-growth funds.
Wellesley and Wellington are kind of mirror images of each other. Wellington is 2/3 high-quality stocks and 1/3 high-quality bonds; Wellesley is 2/3 bonds, 1/3 stocks.