Every day in the financial markets, there are winners and there are those who, well, donít win.
Over the past few weeks ó oh, to be a stock investor. With the Dow Jones Industrial Average having climbed just under 1,000 points in the past month, a 7 percent return in 19 market days, and most major market indices within spitting distance of all-time highs, stock investors indeed have reason to rejoice.
Granted, thereís no telling for sure if this trend will continue, but low interest rates and overall improved corporate earnings indicate that this recent advance could have additional legs.
Not so for investors looking for income. Stocks love low interest rates and greater certainty in earnings outlook. While bond and other fixed-income investments are not supposed to offer double-digit returns, many who purchase in these investments do so for income, particularly as one nears retirement or is in retirement.
After a career of work, responsibility to an employer, a family and building a nest egg so one can step back and take it easy a bit, the meager yields in income-oriented investments are rather depressing.
The downside to this interest-rate environment is that some people nearing retirement, unhappy with yields on safe investments, are abandoning their investment plan and venturing out into investments in search of higher yields ó and higher risk.
Unless you know the risk, itís best to stay with what you know. If you are looking for yield as you near retirement, itís important to look at income investments in a ďtotalĒ return way and not just in the narrow definition of yield.
And re-invest everything until you absolutely need to take the money out for living expenses. The magic of compounding is really magic; the longer itís working for you, the better.
Retirement funds with target dates are very popular. These are mutual funds that have a target date that you match with your own retirement date.
The idea here is that these funds become more conservative as you get closer to your retirement years. Right now the average yield in these funds is in the 2 percent range.
But if you look at the ďtotal returnĒ figures for these funds, the picture is a bit more encouraging. Actually not just a bit. Total returns in these funds for the past five years are in the 20 to 25 percent range.
For example, assume an investor put $10,000 in Vanguard Target Retirement Income on Jan. 1, 2008 ó the year of the financial market collapse. As of last week, that investor would have $12,317, according to Morningstar. Thatís a 23.1 percent return.
Total returns on income funds have been respectable over the past few years. The total return on these funds has been healthy, especially when you compare it against the stock marketís five-year performance of around 13 percent.
Itís easy to lament the days of certificates of deposit that paid 8 percent returns and a time, not that long ago, of achieving a return that would provide a monthly dividend check one could live on.
We may not see those days for a long time. In the meantime, if you are nearing retirement and still have time to let compounding work on your nest egg, look for the overall return.
In the end, thatís the number that really matters.
Karen Paul is a financial consultant based in Burlington.MORE IN World/National BusinessWASHINGTON ó The Federal Reserve is edging closer to raising interest rates from record lows... Full StoryNEW YORK ó The blow that the hacking attack has dealt Sony is spreading beyond the entertainment... Full Story
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