Without a doubt last year’s stock market melt-down delivered a devastating blow to the retirement savings of Americans, wiping out an estimated one trillion dollars in IRA and 401(k) accounts alone. American families lost nearly 18% of their wealth as their net worth fell by an estimated eleven trillion dollars. The average 401(k) participant saw their account values tumble by an average of 30%. We have seen some rather frightening economic times recently that understandably have left many, especially those who have already retired and who have watched in horror as their retirement assets shrank, feeling uneasy about continuing to look to the stock market as a safe haven for their retirement savings. While the market has improved some in recent months, authorities like Kiplinger’s magazine predict that while U.S. stocks could end 2009 in the black, the market could fall another ten to twenty percent before improvements in the economy take hold and that the recent market volatility is likely to remain a constant. With the uncertainties inherent in forecasting markets, even among Wall Street professionals, the average investor, especially those at or near retirement should be eying new strategies that include easing up on equities and bulking up on lower risk investments.
Along with the worst bear market anyone has seen since the Great Depression, traditional safe havens like Treasury Bills and Certificates of Deposit are yielding next to nothing, actually providing negative returns after inflation. You might as well tuck your money under the proverbial mattress. Gone it seems are the days when investors could earn five percent interest, risk-free. Still there are investments that are earning a significant rate of return reliably, consistently and with acceptable risk. Fixed-income securities like bonds, real estate investment trusts, preferred stock, emerging market debt instruments and annuities are just a few examples of investments that can provide the kind of returns needed for a secure retirement, yet few people seem to know about them. In the current treacherous investment environment, if you happen to be an investor not familiar with these investment alternatives, you would do well to learn about them. For years people assumed that the stock market would solve all their retirement needs since it historically compounded at a rate near 10 percent annually. This idea has been served up by Wall Street for years aided by the proliferation of popular finance bestsellers but recent events have served notice that putting all of your investment dollars into the equity basket can have devastating results.
While I don’t advocate the wholesale abandonment of the stock market by selling off the devalued equity portions of your investment and retirement accounts as doing so would serve only to lock in your losses, now is a good time to further diversify by building a solid fixed-income component within your portfolio using current cash available for investment and saving. Having been an observer and participant in the markets for more than the last two decades and gaining some understanding that a bear market was on the horizon, shortly before the stock market bubble burst I did exactly that. I sold a portion of my appreciated equity holdings and established a fixed income portfolio consisting of four investments that were suited to my personal temperance and the degree of risk I find tolerable. I then began funneling all my new investment dollars to that portfolio. As a result, during the darkest days of the current bear market I managed to avoid the worst of the carnage. Even though I saw similar declines in the values of my IRA and 401(k) accounts that most have experienced, the fixed-income investment component of my portfolio helped to offset those paper losses putting me in the position to hold out until the economy improves and until hopefully to a substantial degree, those accounts recover their value. At the worst point, my total losses in all portfolios, taxable and retirement were under 6 percent and currently the values of my combined portfolios are down less than 1 percent.
For the purposes of illustration, I initially invested equal dollar amounts in four securities: DNP Select Income Fund: Symbol DNP (closed-end preferred stock dividend fund), PIMCO Corporate Income Fund: Symbol PCN (closed-end corporate bond fund), Cohen & Steers Quality Income: Symbol RQI (closed-end leveraged REIT fund) and T. Rowe Price Emerging Markets Bond: Symbol PREMX (open-end mutual fund investing in foreign emerging market government and corporate bonds). Currently, the average yield for these four investments stands at better than 18%. The average per share price of all have declined along with the broader market but the monthly or quarterly dividend payments have been reliable and consistent and have made a major contribution to mitigating the declines in the equity investments portion of my combined portfolio.
A suitable fixed-income investment portfolio can be designed for every investor and accommodate any tolerance for risk. Investments can be purchased to produce portfolios that range from conservative to moderate to aggressive. As with all investments, the individual must balance return with their own personal tolerance for risk. Still even the most conservative mix will reward you with a much better return than socking away your money in Treasury Bills and CDs and will allow you to out pace inflation so that you don’t suffer a real decline in future purchasing power.
I have provided you here with only the barest basics of constructing a prosperous fixed-income investment basket and please understand this article does not represent specific investment advice. You should obtain and read the prospectus for any investment you are considering to make certain it is right for you and your situation and/or seek the advice of a competent financial advisor. Investment instruments suitable for my particular situation may not be suitable for everyone. For more detailed information on fixed-income investment, I highly recommend the book, Yes, You Can Be a Successful Income Investor: Reaching for Yield in Today’s Market by Ben Stein and Phil DeMuth. You too can become a successful income investor.