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Schulfer column: The search for yield in your portfolio

10:19 PM, Mar. 26, 2013  |  Comments
LouAnn Schulfer
LouAnn Schulfer
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This question is often asked: How will my portfolio generate enough income? In an ideal world, the investments held in a portfolio would generate enough income to meet an investor's needs without ever having to touch the principal. Unfortunately, that's not always possible, and it's certainly a tall order today.

As a result, there might be times when income is generated by taking interest and dividends, and liquidating some portfolio holdings. In this low interest rate environment, the better question to ask is: How much can I withdraw from my portfolio each year without outliving my savings?

Interest rates, portfolio stability and time frames

Several factors have to be considered to determine how much an investor can withdraw over a sustained period. These include the current interest rate environment, portfolio volatility and the period of time over which withdrawals may be taken.

Bonds

Today, the potential returns and risks of income-producing assets run the gamut. Historically low yields on U.S. treasuries and low yields on high-quality corporate bonds make it difficult to generate enough income to keep pace with inflation. High-yield bonds offer more attractive levels of income, but require investors to take on much greater credit risk. Over the long term, that could translate into greater portfolio volatility and potentially less liquidity. Municipal bonds (munis) also have the potential to create greater portfolio risk than many investors realize. Not only are munis selling at premiums of 10 percent to 15 percent above their value at maturity, but they also have liquidity, call and default risk and might be subject to AMT (alternative minimum tax).

Dividend paying stocks

On the equity side of the market, preferred or dividend-paying stocks that pay higher yields relative to bonds might be attractive; however, the yields are not guaranteed. A stock dividend might be cut or eliminated. In addition, a stock price decline, due to quarterly earnings disappointment or other bad news, could result in increased portfolio volatility. And, with any equity, your principal is subject to fluctuation and potential loss.

The investment world is full of risk and return trade-offs. A two percent return in a bond investment might not seem all that attractive, but it might offer less risk than some other investment opportunity offering higher return potential. The only way to build a portfolio with a sustainable long-term withdrawal rate that meets your needs over time is by putting together a comprehensive wealth plan, implementing it and sticking to it.

If you're ready to get started on a personalized wealth plan where the goal is to help you continue to enjoy the lifestyle to which you have grown accustomed, please contact Schulfer & Associates, LLC Financial Professionals.

The above material was prepared by Peak Advisor Alliance. Securities and advisory services offered through LPL Financial, a registered investment adviser, member FINRA/SIPC. LouAnn Schulfer is an LPL investment adviser representative and the co-owner of Schulfer & Associates LLC Financial Professionals, 1417 Main St., Stevens Point. She can be called at 715-343-9600 or emailed at LSchulfer@LPL.com.

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