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The hunt for yield continues to be challenging. More than 70 percent of the bonds in developed-market government bond indexes today have yields of 1 percent or lower with nearly a third below zero. Slow global growth, negative interest rate policies and a flight to quality continue to push yields even lower, raising the following question: What’s an investor to do?
Cash remains king.
When it comes to short-term savings and emergency funds, some financial professionals say savings or money market accounts may still be the best choice. Even with historically low interest rates, the primary concern for emergency and short-term savings should be liquidity and the return of one’s money, not the return on his/her money. Credit unions or even online banks often pay higher rates than local institutions.
Reassess your asset allocation.
As an investor’s needs and goals change, it’s important to review investments and tolerance for risk to make sure investments are aligned with the investor’s stomach for volatility. Because markets can be choppy and returns muted, it’s important to be prepared.
Bonds still have a place in most portfolios.
There’s an inverse relationship between the price of bonds and interest rates. Imagine a teeter-totter. When interest rates decline, bond prices rise; when interest rates rise, the price on existing bonds declines. Interest rates have continually declined since the early 1980s. While that has been a boon to anyone borrowing money (such as for cars or a home), it has absolutely crushed savers and retirees looking to provide income off a portfolio of fixed-income investments.
However, in most instances, bonds probably still belong in most portfolios, continuing to provide ballast to ride out other, more volatile investments and income, albeit at a much lower rate than historical averages.
Be wary of chasing yield.
It can be tempting to seek out the highest-yielding investments, but high yield often equates to higher risk and volatility. Higher-yielding securities tend to be less resilient in periods of economic or market stress. Some financial professionals encourage investors to stick to higher quality corporate or government securities, offering more modest returns, to strive for a total return approach that combines price appreciation plus dividend or interest income.
Take a diversified approach.
Income can come in a number of forms and from a number of sources, including from selling a portion of a portfolio, a growing stream of dividends or interest earned on a fixed-income investment. Some investors may want to consider a broad-brush approach that strives to gain income from a variety of investment sources, industries and regions.
Should you take a hands-off approach?
To ease the pressure of making investment decisions during challenging markets, investors may want to consider working with an investment professional who can guide them to investments tailored to their risk tolerance and help them gain peace of mind. The level of service can vary, but may include professional asset allocation, investment management and ongoing tax management.
Embrace the power of planning.
Rather than focusing on what to do when market turbulence increases or dealing with challenging economic environments, it makes more sense to focus on developing (and maintaining!) an overarching financial plan. A good plan can help individuals ride out the many peaks and valleys the market delivers, and accomplish those important life goals.