Written by Asi de Silva, CFA | October 23, 2024
Interest rates have been declining and we expect this trend to continue over the next several months. In today’s newsletter, we will update you on the investment options and yields available today. But first of all, why does this matter to you? There are multiple potential reasons.
If you’ve been keeping a significant portion of your funds in a high-yield savings or money market funds, now is a good time to reassess if this approach is still appropriate for you. Perhaps you maintain a large percentage of your portfolio in bonds and are concerned about what will happen to your income once interest rates decline.
Or, perhaps you have accumulated significant funds, let's say $1,000,000, and expect to draw a relatively small amount, for example $20,000 to $30,000 each year, in retirement (or for your cash needs). At the very least, it would be beneficial for you to consider whether adjusting your portfolio for more income is advantageous. If properly structured, you wouldn’t even need to touch the principal value of your funds.
Regardless of the reason, it helps to stay up to date with the markets. Here is where we stand today.
Low(er) risk, typically lower yield
- Money market funds (4.5%)
- Treasury bills (4.75%)
- Short-term high-quality bonds (4.5%-5.00%)
Most portfolios should have at least some of these investments.
They are ideal for supporting your ongoing cash needs, improving your portfolio income, and can be used to buy stocks at lower prices when the market is down.
At Capital Squared, we use U.S. government treasury bonds to secure near-term income (usually for 5-7 years) by investing in a series of bonds that mature to match clients’ income needs. This is called a “bond ladder.”
Medium risk, higher yield or yield + growth
- Municipal bonds (4%-7%)
- Corporate bonds (4.5%-6%)
- High-yield bonds (6%-9%)
- Large-cap stock dividends (3%-5%)
Depending on your tax situation, most of these are appropriate to use as part of a diversified bond and income allocation.
High risk, highest yield
- Real estate investment trusts (4%-6%)
- Business development companies (9%-10%)
- Closed-end funds (8%-12%)
For those seeking income beyond what’s available in public markets, there are private assets that generate a high 8%-15% annual yield. This is an option for clients with larger portfolios who can absorb the illiquidity risk. The principal is typically locked up for 5-10 years and can only be withdrawn once the lockup ends.
There is a place and time for each of these investments. However, investing in any of the options in this category requires specific investment experience and should be left to professional investors.
Why else should you consider increasing your portfolio income today?
No one has a crystal ball to predict the markets. However, it would be fair to conclude that markets are at a high point given their performance over the past two years. Many investors, specifically retirees, take on too much risk by focusing extensively on maintaining a "balanced" portfolio.
They keep too much in unpredictable international and volatile small-cap stocks just to conform to a cookie-cutter investment process (or because their advisor needs to place them in a certain “model”).
As we mentioned earlier, depending on your portfolio size, it may be possible for you to cover most or even all of your cash needs through investment income.
Just imagine the peace of mind that comes with knowing your investment income covers most, if not all, of your expenses.
This is a powerful concept.