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If you rely on interest you earn on your savings to buy groceries, get gas and pay the electric bill, money's probably tight.
Blame it on the puny yields on fixed-income investments like bonds and money market accounts. But despite the low-yield world we live in, you can earn more on your money to help make ends meet — if you're willing to take more risk.
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Since the 2008 financial crisis, the Federal Reserve has kept interest rates low to spur growth, making it more challenging to generate income. The Fed's three rate cuts in 2019 haven't helped.
The average annual return on money market accounts is less than 1 percent, and the yield on a 10-year U.S. government bond is about 2 percent. Those returns don't add up to a lot of monthly income, nor do they keep pace with the increase in prices for everyday consumer goods, which rose 2.1 percent in the 12 months that ended in November.
So what's a retiree who counts on income from savings to do?
What you shouldn't do is throw up your hands and assume it's impossible to earn a higher return.
“Look, it's a challenging environment, but it can still be done,” says Mark Freeman, founder and chief investment officer at Socorro Asset Management LP in Dallas. But “it's going to take a different approach."
That different approach means employing a prudent diversification strategy in which you invest in higher-yielding yet more volatile types of bonds, as well as assets not traditionally viewed as income generators, such as dividend-paying stocks.
Here are some fresh approaches to generating income:
Take some risks
The mistake many investors make is thinking the bond portion of their portfolio must be devoid of risk, says Dave King, senior portfolio manager of Columbia Flexible Capital Income Fund (CFIAX) and head of income and growth strategies for Columbia Threadneedle Investments in Boston.
"That's wrong,” King says.
A 10-year Treasury note yields 2 percent. But if you're willing to take more risk, you can earn a higher yield on different types of bonds, he says.
He's not recommending that you invest only in the riskiest bonds with the highest yields.
He's advising you to spread your fixed-income dollars around to a broader menu of bonds, such as investment-grade corporate debt, “higher-quality” junk bonds with lower risk of default, and “convertible” bonds that can be turned into common stock.
You'll have to stomach some short-term market volatility, of course. But those periodic bouts should smooth out over time, and you'll end up with a diversified basket of higher-yielding investments, King says.