Tags: Benz | myths | income | investors

Morningstar's Benz: Myths for Income Investors to Ignore

By    |   Thursday, 23 October 2014 03:33 PM

For investors seeking income, now's a difficult time. Both short- and long-term interest rates remain near record lows, and some experts expect the Federal Reserve to refrain from raising short-term rates until 2016.

It's tough for investors to figure out how far out they should venture along the risk curve to earn a decent return.

Christine Benz, director of personal finance for Morningstar, cites several myths you should avoid in approaching income investments now.
  • "If rates are going to rise, you're always better off buying individual bonds than bond funds," Benz writes on Morningstar.com. You may rack up excessive trading costs in building a portfolio of diversified individual bonds.
  • "Dividend-paying stocks are safer than bonds." Depending on the stock, they can actually be much riskier, especially high-dividend stocks, as they " have much higher volatility than bonds, making them poor choices for investors who may need to pull their money out in less than 10 years," she notes. In addition, companies can cut their dividends in times of need.
  • "Cash is safer than bonds. This one is, of course, technically true." But your cash will be eaten away by inflation unless short-term interest rates rise to levels above inflation.
"Granted, not all are out-and-out falsehoods; some of them may hold up in certain situations," Benz cautions. "But at a minimum, investors shouldn't accept them without first thinking through their own situations, especially their time horizons."

Many fixed-income investors have an eye on retirement, if they aren't retired already. A total of 31 percent of middle-class Americans believe they won't have enough money to "survive" in retirement, according to a Wells Fargo/Harris Poll study.

"Saving for retirement isn't easy. It requires sacrifice, and it's not something people can push off and hope to achieve later in life," Joe Ready, director of institutional retirement and trust for Wells Fargo, said in a statement.

"If people in their 20s, 30s or 40s aren't saving today, they are losing the benefit of time compounding the value of their money. That growth can't be made up later."

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For investors seeking income, now's a difficult time. Both short- and long-term interest rates remain near record lows, and some experts expect the Federal Reserve to refrain from raising short-term rates until 2016.
Benz, myths, income, investors
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2014-33-23
Thursday, 23 October 2014 03:33 PM
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