Wealth Management Insights
      Are you looking for increased yield from your investment portfolio?
       July 2011
Investment income or “yield” has always been an important component of total return. However, in today’s low-interest-rate and largely risk-averse environment, more people are looking for the yield they need outside of traditional income-generating investments. If you are among those seeking yield in your portfolio, there are important considerations to keep in mind.
What you should know:
1.
Today’s market environment is different.*
In most cases, the yield rates investors have counted on are no longer attainable through the same investment vehicles.
  • Federal monetary policy, weak economic growth and low inflation have compressed yields on different asset classes across the board.
  • The 10-Year U.S. Treasury Bond, which has averaged a 5.2% yield over the past 20 years, was under 3.2% at the time of this writing.**
  • Riskier high-yield bonds, which have historically averaged yields over 10%, today offer less than 7%.
  • The conditions that led to this compression of yields are expected to persist into the foreseeable future.
2.
 Higher yields often mean more risk.

While most investors are aware that the market environment has changed, many have not adjusted their expectations for yield. As these investors look to less traditional income-generating investments, they are often also looking at investments that entail greater risk.
  • Traditional bonds (government, corporate and high-yield) have historically provided average to above-average yields, lower volatility and moderate total return.
  • Less traditional yield options (real estate investment trusts, master limited partnerships, preferreds) generally have above-average yields and total return potential, but also have higher volatility and are susceptible to periods of pronounced negative performance.
  • The chart on the next page generally illustrates the historical relationship between expected yields and volatility among the various vehicles available in normalized market environments.
3.
 Understand your goals and comfort level..

When making any investment decision, you should look past potential returns to determine the appropriateness of a particular vehicle for your portfolio and risk tolerance. You can do this by answering three important questions:
  • What is the yield or income required on a regular basis? If investment income is a part of your monthly budget, look at your balance sheet to see how large a role it plays.
  • What is the total return necessary to achieve my objectives? This is where an understanding of the way yield works with the price change in an investment asset over time comes in, so knowing your time horizon for meeting your investment goal will be important.
  • What risks and volatility am I willing to tolerate to meet the yield and return objectives? If your time horizon is short and your goals are still out of reach, it may be tempting to step outside your comfort zone for greater yield. But consider that riskier investments can result in periods of low or even negative return.
What you should do now:
Adding different instruments to access yield opportunities may enhance your portfolio. But potentially greater investment yields are often tied to the risks associated with those investments. With an understanding of your goals, needs and personal preferences, your Financial Advisor can help you evaluate your options for potentially improving the overall yield on your portfolio while ensuring that you find the appropriate balance of risk and return trade-offs for your specific situation.

* In a rising interest rate environment, the value of fixed-income securities generally declines and conversely, in a falling interest rate environment, the value of fixed-income securities generally increases. High-yield or high-dividend securities may be subject to market, interest rate or credit risk and should not be purchased solely because of the stated yield or dividend rate.

**Data as of 6/30/2011.

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