(Bloomberg Business) — If you want a consistent stream of income when you retire, you’ve probably heard about a few familiar investment strategies. A dividend-paying stock gets you a regular cash payout from a company while letting you participate in the stock market’s upside. Municipal bonds are safely backed by governments, and their income usually isn’t taxable.
But after years of low interest rates and rising stock markets, these once-conservative strategies might actually be putting investors in risky situations. Here’s where these income investors are going wrong: They invest too narrowly.
When online investment firm SigFig analyzed 300,000 investors’ portfolios, it found that people who are focused on income — rather than growth — are getting most of that income from just a few sources. Of income investors over the age of 40, 52 percent are getting their income entirely from three or fewer dividend-paying stocks. Thirty-one percent are relying on only one dividend-paying stock.
“Being so concentrated in a few income-generating stocks is dangerous,” says Jason Hsu, co-founder and vice chairman of Research Affiliates. With only a few stocks, investors are violating an important rule of investing: Spread money around to lower the risk of big losses and make one’s portfolio less volatile. Advisers typically put clients in funds owning hundreds of stocks and bonds in a variety of categories.
SigFig in October created a “diversified income” portfolio that produces income from eight different exchange-traded funds, or ETFs, with exposure to U.S. and international stocks, U.S. preferred stocks, and five types of bonds.They’re falling for sales pitches.
With interest rates so low, many older investors are desperate for income. Some brokers are taking advantage of that desperation to sell investors products that are expensive, overly complicated, and wrong for their particular situations. That’s the conclusion of a new report from the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority.