Investing for Income? Safe Bets Can be Surprisingly Risky.

Recently I read that the latest Powerball winner would walk away with about $150 million after taxes! Wow!

The recent, seemingly terminal decline in interest rates has been difficult on many investors who have been planning their income needs for the future. Interestingly enough, a wise presenter at a meeting I attended in January* addressed this very point with a ‘wow’ factor of quite a different nature.

He began with a look back to July of 2005. If you were trying to derive $100,000 in income from a fairly low-risk investment – let’s say 2-year U.S. Treasuries – you would have needed to invest around $2.5 million to achieve your goal. By contrast, to achieve the same $100,000 in income in July of 2012, you would have had to invest some $45 million in 2-year U.S. Treasuries. Wow! While that kind of money may not be an issue for a $150 million Powerball winner, it certainly would be a problem for the ordinary Joe (pun intended).

A Wider Net May Make a Difference

As I’ve mentioned, perhaps ad nausea, investing is about exchanging current capital today, while accepting some level of risk in in the hope for greater returns on said capital in the future. The ideal is to build a portfolio allocated among diverse investments with the potential to both weather market volatility and generate income. While you would have needed to invest $45 million in 2-year Treasuries in July of 2012, today you may consider opting for other asset classes (see below) to pursue the same $100,000 at a more reasonable cost.

How Much Money Is Needed to Generate $100k in Yield?

Based on current yields for each asset class as of 3/31/13

Yield chart

Data represents past performance, which is no guarantee of future results. Source: Morningstar, Barclays, Bloomberg, Merrill Lynch. The 2-year Treasury is represented by the 2-year Treasury Rate. U.S Stocks are represented by the S&P 500 Index. Dividend Paying Stocks are represented by S&P 500 Dividend Aristocrat Index. Investment Grade Corporates are represented by BofA ML US Corporate Master Index. REITs are represented by MSCI US REIT Index. Emerging Market Debt (Sovereign) is represented by Barclays Emerging Market Local Currency Government Index. High Yield is represented by BofA Merrill Lynch US High Yield Master II Index. Indices are unmanaged and their returns assume reinvestment of dividends. It is not possible to invest directly in an index.

Looking Beyond “Safety” for Stronger Income Potential

The point of the above is that there are many ways to derive income. As you’ve heard me say before, the goal of investing is not only to generate income today, but for the future – to potentially grow this income and aim to sustain it over time. There are no guarantees in investing, of course – but there is hope. Either you can hope to win Powerball, or you can work intelligently, perhaps with a financial advisor, with the hope of building a diversified portfolio with the potential to weather the market’s – and life’s – little challenges (such as the disappointment of not winning Powerball in the first place).

*Thank you Burt White of LPL Financial.

Pioneer Investments is not affiliated with LPL Financial.

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