Calvert, a mutual fund company that specializes in socially responsible investments, has trademarked a new financial term – Thincome™. “Thin” and “Income” are combined to create a word which describes what is now happening to income-oriented investors. Namely, that low interest rates have made it difficult for the average retiree to live on the income that is paid by bonds, savings accounts and other fixed income investment options that they hold.
Over the past few years many retirees have had to fundamentally change their investment allocations to try to overcome Thincome. The Federal Reserve’s commitment to a very low interest rate environment has forced investors to take a couple steps up the ladder of risk in order to receive the same income they had become accustomed to with more conservative investments. Many investors have moved money into international and emerging markets bonds which pay higher rates. Some have increased exposure to higher yielding “junk” bonds which have also provided more attractive returns. They have increased the duration and maturity of the bonds in their portfolio to increase yields.
These steps can reasonably be expected to increase income and total return from bonds, but it’s important that investors understand that this Thincome environment has led to our new contribution to the investment dictionary – Riskcrease. Riskcrease is the increase in risk that Thincome investors have taken on in search of higher yields.
The problem with Riskcrease is most investors are unsure how much additional risk they have taken on by making these changes to their fixed income investments. Five years ago, their fixed income portfolios were probably fairly conservatively managed. Now, many of these fixed income portfolios are subject to a broader range of risks than before.
We suggest that investors understand the specific risks of each of their fixed income holdings to properly address both Thincome and Riskcrease.
~ Brooks, Hughes & Jones — Partners in Wealth Management — Tacoma, WA