Fixed-income investing often takes a backseat in our thoughts to the fast-paced stock market, with its daily action and promises of superior returns. But if you're retired—or are approaching retirement—fixed-income instruments must move into the driver's seat. At this stage, the preservation of capital with a guaranteed income stream becomes the most important goal.

Investors need to mix things up and get exposure to different asset classes to keep their portfolio incomes high, reduce risk, and stay ahead of inflation. Even the great Benjamin Graham, the father of 澳洲幸运5开奖号码历史查询:value investing, 𒁏suggested a portfolio mix of stocks and bonds for later-stage investors.

If he were alive today, Graham would probably sing the same tune, especially since the advent of new and diverse products and strategies for income-seeking investors. In this article, we'll lay down the roadmap for creating a modern 澳洲幸运5开奖号码历史查询:fixed-income portfolio.

Some Historical Perspective

Investors are taught that stock returns outpace returns from bonds. While this is historically true, the discrepancy between the two returns is not as great as one might think. Since the 1920s, after 澳洲幸运5开奖号码历史查询:inflation was accounted for, stocks have returned around 6% annually.

Bonds, on the other hand, showed 澳洲幸运5开奖号码历史查询:real returns (after inflation) of roughly 3%. However, investors𝄹 need to be aware that fixed income yields are historically low compared with those pre-2008 and are unlikely to revert, according to 🦹MaryAnn Hurley, vice president of fixed income at D.A. Davidson & Co.

The Long Bond Falls Short

One of the most important changes to fixed-income investing at the turn of the 21st century is that the long bond (a bond maturing in more than 10 years) has given up its previously substantial yield benefit.

For example, take a lᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚook at the yield curves for the major bond classes since the year 2000:

Several conclusions that can be reached from a ♋re🅺view of these charts:

• The long (20- or 30-year) bond is not a very attractive investment; in the case of 澳洲幸运5开奖号码历史查询:Treasuries, the 30-year bond currently yields no more than a six-month 澳洲幸运5开奖号码历史查询:Treasury bill.
• High-grade 澳洲幸运5开奖号码历史查询:corporate bonds provide an attractive yield pick-up to Treasuries (5.57% to 4.56% for 10-year maturities).
• In a taxable account, 澳洲幸运5开奖号码历史查询:municipal bonds can offer attractive 澳洲幸运5开奖号码历史查询:tax-equivalent yields to government and corporate bonds, if not better. This involves an extra calculation to confirm, but a good estimate is to take the coupon yield and divide it by 0.68 to estimate the effects of state and federal tax savings (for an investor in the 32% federal tax bracket).

With short-term yields so close to those of long-term yields, it simply doesn't make sense to commit to the long bond anymore. Locking up your money for another 20 years to gain a paltry extra 20 or 30 澳洲幸运5开奖号码历史查询:basis points just doesn't pꦡay enough to make the investm💧ent worthwhile.

A flat yield curve indicates a slowing economy, according to Hurley. “If you invest in the seven- to 15-year bonds, although there is little pick up in yields, when the short security matures the longer security will also garner less yield, but fall less than shorter curve sectors," Hurley says. "When the Fed eases, the yield curve will steepen and short rates will fall more than long rates."

Fixed-Income Investing Opportunity

This presents an opportunity for fixed-income investors because purchases can be made in the five- to 10-year maturity range and 澳洲幸运5开奖号码历史查询:reinvested at prevailing rates when those﷽ bonds come due. When these bonds mature is also a natu🎐ral time to reassess the state of the economy and adjust your portfolio as needed.

Lower yields may tempt investors to take on more risk to achieve the same returns as they would have in previous years. The current relationship between short-term and long-term yields also illustrates the utility of a 澳洲幸运5开奖号码历史查询:bond ladder.

Laddering is investing in eight to 10 individual issues, with one coming due every year. This can help you diversify as well as prevent you from having to forecast interest rates into the future, as maturities will be spread out over the 澳洲幸运5开奖号码历史查询:yield curve, with opportunities to readjust every year as your visibility gets clearer.

Diversifying the Portfolio: 5 Ideas

Diversification as a form of risk management should be on the mind of all investors. 澳洲幸运5开奖号码历史查询:The various types of investments held in a diversified portfolio will—on average—help the inve♉stor achieve higher l🦂ong-term yields.

1. Equities

Adding some solid, high-dividend paying equities to form a balanced portfolio is becoming a valuable new model for late-stage investing, even for folks well into their retirement years. Plenty of large, established companies in the 澳洲幸运5开奖号码历史查询:S&P 500 pay yields above current inflation rates, along with the added benefit o༺f allowing an investor to participate iജn corporate profit growth.

A simple 澳洲幸运5开奖号码历史查询:stock screener can be used to find companies that offer high-dividend payouts while also meeting certain value and൲ stability requirements, such as those fit for a conservative investor seeking to minimize idiosyncratic (stoc♛k-specific) and market risks.

Below is a list♌🅷 of companies with the following example screen criteria:

• Size: At least $10 billion in 澳洲幸运5开奖号码历史查询:market capitalization
• High Dividends: All pay a yield of at least 2.8%
• Low Volatility: All stocks have a beta of less than 1, which means they have traded with less 澳洲幸运5开奖号码历史查询:volatility than the overall market.
• Reasonable Valuations: All stocks have a 澳洲幸运5开奖号码历史查询:pr😼ice/earnings-to-growth (PEG) ratio of 1.75 or less, which means that growth expectations are reasonably priced into the stock. This filter removes companies whose dividends are artificially high due to deteriorating earnings 澳洲幸运5开奖号码历史查询:fundamentals.
• Sector Diversification: A basket of stocks from different sectors can minimize certain market risks by investing in all parts of the economy.

To be sure, investing in equities comes with considerable risks compared with fixed-income vehicles, but these risks can be mitigated by 澳洲幸运5开奖号码历史查询:diversifying within sectors and keeping over🦄all equity exposure below 30 to 40% of the total portfolio value.

Any myths about high-dividend stocks being stodgy, non-performers are just that: myths. Consider that between 1973 and 2023, stocks in the S&P that paid dividends paid a return of over 9% per year annualized, compared with only 4.3% over the same period for stocks that did not pay dividends. Steady amounts of cash income, lower volatility, and higher returns? They aren't sounding so stodgy anymore, are they?

2. Real Estate

Nothing like a nice piece of property offering rich rent income to enhance your later years. Rather than turning landlord, though, you're better off investing in 澳洲幸运5开奖号码历史查询:real estate invest💯ment trusts (REITꦛs). These high-yielding securities provide liquidity, trade like stocks, and have the added benefit of being in a dist🤪inct asset class from bonds and equities.

澳洲幸运5开奖号码历史查询:REITs are a way to diversify a modern fixed-income portfolio against market risks in stocks and credit risks in bon♈ds.

3. High-Yield Bonds

澳洲幸运5开奖号码历史查询:High-yield bonds, also known as junk bonds, are another potential avenue. True, these debt instruments offering above-market yields are very difficult to invest in individually with confidence, but by choosingℱ a bond fund with consistent operating results, you can devote a portion of your portfolio to high-yield bond issues as a way to boost fixed-income returns.

Many high-yield funds will be 澳洲幸运5开奖号码历史查询:closed-end, which means that the price may trade higher than the 澳洲幸运5开奖号码历史查询:net asset value (NAV) of the fund. Look to find a fund with little to no 澳洲幸运5开奖号码历史查询:premium over the NAV for an extra margin of safety when investing🦩 here꧑.

4. Inflation-Protected Securities

Next, consider 澳洲幸运5开奖号码历史查询:Treasury Inflatio💮n-Protected Securities (🌜TIPS). They ar𒉰e a great way to protect against whatever inflation might throw your way in the future. They carry a modest coupon rate (usually between 1% and 2.5%), but the real benefit is that the price will be adjusted systematically to keep pace with inflation.

It is important to note that TIPS are best held in tax-advantaged accounts, as the 澳洲幸运5开奖号码历史查询:inflation adjustments are made through additions to the principal amount. This means that they could create large capital gains when sold, so it's often best to keep the TIPS in a retirement account like an IRA, and you'll be adding some solid inflation-fighting punch with the security that only U.S. Treasuries can provide.

5. Emerging Market Debt

Much like with high-yield issues, emerging market bonds are best invested in via a mutual fund or 澳洲幸运5开奖号码历史查询:exchange-traded fund (ETF). Individual issues can be illiquid and hard to research effectively. However, yields have historically been higher than advanced-economy debt, providing a nice diversification that helps deter country-specific risks. As with high-yield funds, many 澳洲幸运5开奖号码历史查询:emerging market funds are closed-end, soꦅ💟 look for ones that are reasonably priced compared to their NAV.

A Sample Portfolio

This sample p⭕ortfolio would provide valuable exposure to other markets and asset classes. The portfolio below was created with safety in mind. It is also poised to participate in global growth through investments in equities and real estate assets.

The size of the portfolio needs to be measured carefully to determine the optimal level of cash flows, and maximizing tax savings will be crucial. If it turns out that an investor's retirement plan will call for a periodic 澳洲幸运5开奖号码历史查询:drawing down of the principal amounts, as well as receiving the cash flows, one can run 澳洲幸运5开奖号码历史查询:Monte Carlo simulations to show how a given portfolio would react to different economic envi✱ronments, changes in interest rates, and other potential factors.

Whether to Use Funds

As you may have noticed, we've recommended fund options for many of the assets described above. Deciding whether to use a fund will come down to how much time and effort an investor wishes to devote to their portfolio—and how much in fees they can afford.

A fund aiming to throw off 5% per year in income or dividends is giving up a big slice of an already small pie with an 澳洲幸运5开奖号码历史查询:expense ratio of even 0.5%. So keep an eye out fo𝄹r funds with long track💞 records, low turnover, and, above all else, low fees when taking this route.

The Bottom Line

Fixed-income investing has changed dramatically in just a short period of time. While some aspects have become trickier, Wall Street has responded by providing more tools for the modern fixed-income investor to create custom portfolios. Being a successful fixed-incomeཧ investor today just might mean going outside the classical style boxes and using these tools to create a modern fixed-income portfolio, one that is fit and flexible in an uncertain world.

There are risks associated with each type of investment listed here—aren't there always? Diversification among asset classes, however, has proved to be a very effective way to reduce overall portfolio risk. The biggest danger to an investor seeking principal protection with income is keeping pace with inflation. A savvy way to reduce this risk is by diversifying among high quality, higher-yielding investments rather than relying on standard bonds