Generating income in a volatile, rising rate environment for retirees.

May 9, 2024
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For the past 80+ years, investors have typically looked at bonds as a safe haven in their portfolio.  There was an ideal that bonds and stocks move in opposite directions, and that bonds will never experience the same magnitude of losses that the stock market does; but 2022 has shown us that this is not always the case.

The US Bond index is down roughly 9% year to date as of August 12th, while the S&P 500 is down almost 11% during this same time period. To put these numbers in perspective, the largest decline in the US Bond index prior to this year is -2.92%, which was recorded in 1994. This poses a unique challenge for retirees, who are likely utilizing the income generated in their portfolio to sustain their lifestyle. With stocks and bonds depreciating in value in a similar fashion, you may need to make some adjustments in your portfolio to weather the current market environment.

One way you can generate income in your portfolio is to consider replacing your core bond holdings in your portfolio with some alternative fixed income strategies. Core bonds have been hit the hardest in 2022 due to rising interest rates. Interest rates and bond prices have an inverse relationship, which means that as interest rates rise, bond prices fall and vice versa. The federal reserve has stated that they will continue to raise interest rates to combat inflation, which means there is no relief for core bonds in sight. You can utilize some alternative fixed income strategies, such as market neutral, short duration, or floating rate strategies, to protect your portfolio during the rising rate environment. These investments have additional considerations compared to core bond funds, so make sure you consult with a financial professional to make sure this strategy is right for you.

Another way you can generate income in your portfolio is by increasing your allocation to stocks that pay a strong dividend. Companies have essentially two options for their profits each quarter; reinvest the proceeds to help grow the company, or distribute these earnings to shareholders. Allocating a larger percentage of your portfolio to dividend paying stocks can generate a solid amount of income in this current market environment, but it does have some additional risks you should consider.

These are two of the many strategies at hand that you can utilize to generate income in your portfolio. When making any investment decision, it is important to consider your comfortability with risk, time horizon, investment objective, and lifestyle to ensure the decision makes sense for you. Please reach out to your Jones & Roth Financial Specialist if you have any questions on how this article may pertain to your personal situation. 

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