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>>Robert K. Dellenbach: Investors living on bond income are getting
squeezed badly. Yields today on government bonds are so low that these
investors, many of them retirees, simply cannot maintain their standard
of living by relying on their current portfolios, especially when stock
dividends are also falling. The temptation, with no improvement in sight
for at least next year or two, is to seek higher yielding investments;
however, this is often a big mistake, exposing retirees to unreasonable
amounts of risk with potentially catastrophic consequences. Instead, try
other approaches. The first and most conservative strategy is simply to
accept that, for a period of perhaps two years, investors will need to
withdraw principal to compensate for missing interest. This should not
be seen as a taboo. Principal might be depleted by 5-10% during this time,
but that is much less than the losses that could be easily incurred by
seeking higher returns at the cost of much greater risk.
The second approach is to take advantage of the incredibly depressed
values of even high-quality assets that have been created by the panic
selling waves of the last 18 months. It is too early to gamble on high
yield bonds, even though they are yielding more than 20% today, because we
expect the economy to continue to deteriorate and corporate defaults to keep
rising. However, investment grade bonds are yielding considerably more than
Treasury securities. Investors can reasonably take a small part of a
conservative bond portfolio and invest in a well-diversified pool of AA-rated
corporate bonds. Although the income would be taxable, the gain in yield
would more than compensate for that. Expect, however, ongoing ripples of
volatility in this approach. Either of these strategies is far superior to
gambling on 12% promise in a 3% world.