The Fed doesn't care about fixed income investors. Stark as that
may seem, it's true.
Since 2008, the Fed has manipulated interest rates to near zero
percent, thereby depressing the yields on fixed income investments
like bonds (NYSEArca: AGG) and savings accounts. And the Fed's
extension of Operation Twist through the end of this year is more
of the same.
Here's the translation: Savers are being penalized, speculators
are being rewarded.
On June 1, the yield on 10-Year Treasury (NYSEArca: IEF) notes
fell to a record low of 1.43%.
The best 7-day yield on a retail money market fund (Nasdaq: FSLXX),
according to Crane Data, is a paltry 0.10%. Tax exempt money funds
(Nasdaq: MOFXX) yield slightly more, but mounting muni credit risk
has everybody but Paul Krugman rightly on edge.
A top yielding 5-year certificate of depression (CD) will snag
you around 1.69%. At that interest rate, it'll take you
approximately 42 years to double your money.
As a result, conservative income investors, at a record rate,
are piling into volatile but high yielding asset classes like junk
bonds (NYSEArca: HYG), preferred stock (NYSEArca: PFF), exotic
emerging market debt (NYSEArca: PCY) and other high risk areas they
wouldn't have dreamed of touching in past years. The net cash flow
into HYG, which tracks low rated corporate bonds, has more than
doubled over the past year!
History doesn't always repeat itself, but it often
rhymes.
People who chased yields in highly leveraged mortgage REITs
(NYSEArca: REM) got crushed when the group collapsed by 42% in
value in 2008, not to mention the wave of dividend cuts they
suffered. Before that time, mortgage REITs were sold as a reliable
source of income.
Here's the message: Investors better come up with a better game
plan for generating adequate income. You don't necessarily need to
take more risk, but rather, you need to look in the right
places.
Our $100,000 all
ETF Income Mix Portfolio
has generated $5,900 in monthly income over the past six months,
not including dividends. The expense ratio average for this
portfolio is a rock bottom 0.18%, which is five times less compared
to acomparable mutual fund portfolio.
By using the right combination of
ETFs
, options, and dividend income, getting better monthly cash flow is
possible, despite the Federal Reserve's monetary nonsense.
