Income Investors at a Crossroads

Income Investors at a Crossroads

Investment income is often related to having enough to live on in retirement. But it can also help you reach other goals, too, such as paying for a student’s education or putting a down payment on a new house. Regardless of the goal, today’s markets may put your portfolio at a crossroads, requiring a new approach to meet your income needs.

Navigating a New Market Environment

Historically low interest rates have led some investors to seek income from traditionally riskier investments, such as high-yield bonds. Yet those investors may not have fully felt the risks they have taken on because years of global central bank policies have helped subdue market risk. Volatility may return to higher levels as these policies are phased out. More volatility means more risk, and a greater tendency for certain types of bonds to perform more like stocks in stressful market conditions.

As interest rates increase to more normal rates, and some stocks become overvalued—it may be important to revisit your income strategy. You should seek to build an income-generating portfolio with the right mix of yield, risk and return potential for you. Below are some strategies to consider.

Determine Your Objective. Discover Your Strategy.

Your Income Objective Potential Strategy
PRESERVE:
Looking for yield, but prefer less risk and have a lower tolerance for large losses. 
High-quality core and/or *short duration bonds

  • Tend to react differently than stocks during volatile times—which may help offset stock declines.
  • May provide appealing returns compared to more conservative Treasury bonds in a way that’s less risky than using stocks only.

Know before you invest:
While less risky than stocks, core bonds are subject to fixed-income risks such as those associated with debt securities—including credit, price and interest rates.

PRESERVE & GENERATE: Worried about rising interest rates and heightened volatility, but also want to keep income potential.

 

Alternative income strategies

  • Can complement the fixed-income portion of a portfolio by addressing important risks to bonds.
  • Offer different return and income sources, which tend to react independently from stocks and bonds during certain market and economic events.

Know before you invest:
Alternatives encompass a variety of non-traditional assets and often employ complex trading strategies. You’ll want to be aware of each investment’s unique risks.

GENERATE:
Need income today but are also looking to maintain enough growth to potentially make the money last as long as needed.
 Multi-asset class income strategies

  • Can include a variety of income sources, like U.S. and non-U.S. stocks and bonds, as well as non-traditional income sources such as debt from emerging markets or global real estate investments.
  • Some may seek to offset inflation to help with purchasing power in the future.

Know before you invest:
Multi-asset class investments that include non-traditional strategies may have additional risks, including short-term fluctuations, causing your shares to be worth less than the price you paid for them.

Market Signals and Your Income Strategy

Today’s markets are evolving. This may require you to rethink your income strategy and take a different path before rising interest rates or volatility become significant issues. If you need help evaluating your approach to income, please contact us.

The opinions expressed are those of Steve King and are no guarantee of the future performance of any American Century Investments fund.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Generally, as interest rates rise, the value of the securities held in the investment will decline. The opposite is true when interest rates decline.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance risk.

* A short-duration bond generally has a duration of three years or less. Duration is an indication of the relative sensitivity of a security’s market value to changes in interest rates. The longer the duration, the more sensitive its market value is to interest rate fluctuations. Duration is different from maturity in that it attempts to measure the interest rate sensitivity of a security, as opposed to its expected final maturity.