Searching For Income in Your Investments
In today's market environment, positioning your portfolio to generate income can be one of the most challenging tasks you'll find in managing your assets. With interest rates and inflation remaining relatively low, by historical standards, the real return, actual return minus inflation, on fixed-income investments such as bonds has been significantly less than what investors have enjoyed during the last 20 years.
To help your income keep pace with inflation, and at the same time take advantage of rising interest rates, there are several strategies you can make use of as you work toward your investment income objectives - both now and over time. Following are some examples to consider.
Keeping up with inflation. In very basic terms, inflation erodes the purchasing power of your dollar so that it buys less and less over time. Just think of the price of gas today, for example, and think about how much gas you could have bought 20 years ago for what it takes to buy just one gallon now. But for a more eye-opening example, let's look at the impact inflation can have on your portfolio.
Even a relatively modest inflation rate of just three percent could have a drastic effect over time. If you have a portfolio that generates $50,000 in annual income, that unassuming 3 percent inflation rate would shrink your income to less than $30,000 in 20 years, if you don't do anything to counteract its effects.
To help combat the effects of inflation on your portfolio, one investment idea to consider would be adding dividend-paying stocks to your portfolio. While stocks move up and down in value, and may be worth more or less than what you paid for them originally, long-term investors benefit from dividend payments received from these stocks. There is no guarantee that a company will continue to pay dividends, but there are many well-known companies out there that have paid dividends consistently for years.
Treasury Inflation Protection Securities (TIPS) are another type of investment that could help your portfolio. Like other treasuries, TIPS are backed by the full faith and credit of the U.S. government. And you can see from their name that they were designed specifically with inflation in mind. Unlike traditional bonds, the value of the principal and interest income paid changes over time to reflect changes in the rate of inflation.
Preparing for higher interest rates. Current interest rates and bond yields are relatively low by historical standards. But now that the economy is improving, the Fed is raising rates to help control inflation. This presents opportunities and problems for fixed-income investors.
To help position your own portfolio appropriately, you may want to consider a laddered-maturities strategy. This involves purchasing equal quantities of a group of bonds with maturities positioned like the rungs of a ladder. By spreading your investments over several maturities, you can better capture the benefit of rising interest rates while minimizing the valuation changes in the bonds you own.
Short-term bonds may also provide a healthy addition to your portfolio. Short-term interest rates have begun to rise, which often leads to a rise in long-term bond yields. Since short-term bond prices can react less to changes in rates, they may provide stability to the income in your portfolio.
These are just some of the strategies you can use to find income in your portfolio. Now is the time to take steps to address your investment income needs.
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