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Help With Suggestions for Income Side Investments
Old 10-22-2014, 10:48 AM   #1
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Help With Suggestions for Income Side Investments

I am feeling it is time to change my allocations from being essentially 100% equities to something a little more conservative and diversified. Being 100% equities has not bothered me, and I have done well with good diversification within the equities

However, being approx 1 year from retirement it is probably good to become more diversified portfolio. I am nearly 51, and think a 70% equities, 30% income allocation would be good range for me. Allow some risk reduction and bit of moderating effect. Have high risk tolerance and generally a buy and hold type investor.

I have never been a big fan of bonds, I kind of think they are just a way to barely keep ahead of inflation. Not thrilled with options that are mainly gov't treasury based or similar like CD with their current miserable return rates. I am trying to educate myself on other options like high yield, corporate, REITs, bank loans, international, and other "income type" investments.

So I appreciate help with suggestions how to invest for the (new to me) income side of my portfolio. If it matters I use Fidelity as my brokerage provider. Thanks for any advice and suggestions
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Old 10-22-2014, 11:20 AM   #2
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Why not add some Wellesly to your mix? You will get bonds, income producing stocks, and a fund that seems to preserve capital even in bad times.

Or, how about an ETF that invests in dividend paying stocks?

Just a few thoughts. Take what you wish and leave the rest.
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Old 10-22-2014, 11:48 AM   #3
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I've invested in a business development company called Main Street Capital (MAIN) the yields about 6.8% currently and has proven to be pretty stable. It only invests in established businesses and not new businesses. Check it out.


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Old 10-22-2014, 12:04 PM   #4
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A big potential risk of new ER's is sequence of returns. Although being 100% equities may give best LT performance (ave annual returns), a big downturn early in retirement can mean running out of $$ later on. One approach I've heard to help minimize that risk is the bucket list. Not THE 'Bucket List', but viewing your retirement assets as 'buckets' with a specific goal for each. This might be as simple as short/mid/long term buckets. Short term bucket (ultra-safe like cash equiv or very ST inv-grade bond fund) for 1-2 years of expenses (daily living, planned expenses, allowance for unplanned expenses). Long term bucket for 5-10+year investments like ETF or mutual fund of solid dividend paying stocks. Mid term bucket ($$ to draw on in 2-5yrs) could be a spot for quality int-term bonds or bond fund. In essence, this approach is a refinement of the old advice to not have $$ in the stock market that you may NEED in next 2 years.

As always- Any free advice is worth what ya paid fer it
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Old 10-22-2014, 12:15 PM   #5
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Fixed income is a real tough place right now. One thing to be cautious of is interest rate risk.

FWIW, I target 80% domestic fixed income and 20% international. Within domestic, I target 80% investment grade and 20% high yield. Within international, I target 15% emerging market.

Keep an eye out for Penfed and if they will do a promotion on CDs this December. Last December, they offered 3% 5 year CDs which were pretty good.
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Old 10-22-2014, 12:29 PM   #6
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Vanguard Wellington fits the criteria and spirit of your thinking. Would also be good benchmark if you try other alternatives.


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Old 10-22-2014, 12:50 PM   #7
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I'm certainly not an expert in this area. But I'll share what I do, FWIW. You can see my overall AA in my signature, which includes a healthy dose of real estate. This includes 2 rental houses and a REIT ETF. I bought the RE after significantly reducing my bond allocation over the last couple years. I like it as a bond alternative because it produces steady income, which is higher than most bonds or dividend stocks, the rental houses get preferential tax treatment, and the price volatility is somewhere between stocks and bonds, but should at least keep up with inflation in the long term, and be less sensitive to interest rate increases in the short term.

Within my 35% bond allocation, I hold 40% total US bond index, 25% investment-grade corporate, and 20% high-yield corporate. The other 15% is split between international and municipal. I'm not particularly happy with this mix; it yields 3.4% with a duration of 5.9. So, a lot of interest rate risk, with high probability of rate increases going forward. I've been increasing high-yield corp, as it should be less sensitive to rising rates.

I also have access to a stable-value fund, which seems to be a popular option on this forum. But I've always avoided it because the ER is 0.83%, it has harsh trading restrictions, and the current yield is only 1.83%. Nevertheless, when/if interest rates actually start moving up, I'll probably sell some of the US bond index and buy into the SV fund.

Bottom line, I keep the overall bond allocation low, I like real estate as an alternative, I'm increasing high-yield corporate, and I'm warming up to stable value.
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Old 10-22-2014, 02:22 PM   #8
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Thanks to all for the suggestions. Couple specific replies below:

Quote:
Originally Posted by Dash man View Post
I've invested in a business development company called Main Street Capital (MAIN) the yields about 6.8% currently and has proven to be pretty stable. It only invests in established businesses and not new businesses. Check it out.
Thanks for that, will look into it.

Quote:
Originally Posted by pb4uski View Post
Fixed income is a real tough place right now. One thing to be cautious of is interest rate risk....snip...
Exactly my primary concern with the income side. The FED itself has said rates are likely to rise in 2015. That points to having investments that are less interest rate sensitive. Also ones that are not locked in for a period of time where you could effectively be losing money.


Quote:
Originally Posted by Cobra9777 View Post
I'm certainly not an expert in this area. But I'll share what I do, FWIW. You can see my overall AA in my signature, which includes a healthy dose of real estate. This includes 2 rental houses and a REIT ETF. I bought the RE after significantly reducing my bond allocation over the last couple years. I like it as a bond alternative because it produces steady income, which is higher than most bonds or dividend stocks, the rental houses get preferential tax treatment, and the price volatility is somewhere between stocks and bonds, but should at least keep up with inflation in the long term, and be less sensitive to interest rate increases in the short term...snip...
I have had a couple rental properties in past, not really wanting to get back into those hassles. Both were good financially, but I currently do enough work around my house and helping friends and neighbors some. Don't want what effectively becomes a part-time job and associated stress of rentals. At this point I prefer to be more hands-off type investments. REITs certainly a good choice for a portion of new income allocation, but the concern over interest rates may affect these detrimentally.
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Old 10-22-2014, 03:08 PM   #9
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Glad you brought up this topic as I was in the same boat and have slowly been reallocating from 95% equities to something a bit more balanced and would like some alternatives to bonds.

I am currently living on my 401K and a taxable account for the next 4 years until the IRA can be accessed. I recently moved the taxable equities to FFVFX 2015 fund and IMBE 2016 Muni Bond fund. So that account is now 30% equities, 65% Bonds (including a high yield fund FAGIX - so it still might not be as conservative as it should be.) and 5% cash.

In the 401K fund I moved some equities to a REIT (about 5%) and a conservative bond fund. I think I will be moving more to a 2015 dated fund that's available in that account.

The IRA is at 80 / 20 if I include a small SPA that will start paying out in 6 years. For bonds there I use AGG, FAGIX and a small REIT position in SCHH.

I think I need to get a bit more conservative now that I'm living on this money, but the run up was good over the last year and a half.

Anyone have comments on date specific bond funds like IMBE? Am I just fooling myself on the preserving capital ability of these compared to a 'regular' bond fund? I'm thinking of using them as a ladder in the IRA (corporate, not munis).
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Old 10-22-2014, 03:41 PM   #10
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Personally I think that using a mix of short-medium bond funds (primarily indexes) mitigates a lot of the risk over the long term. It's also nice now that Vanguard has international bond index funds (I'm a big believer in global diversification.)

I do have a small amount in an REIT index (probably not enough to really make a difference).

All that said, I'm going to put my pension lump sum into Wellesley, which to me mimics the risk profile of a pension fund pretty well.
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