Investors who start with a reasonable amount of capital to invest (for example, $30,000 or so) have options to think about. Allowing this capital to work solely in one asset class may be a mistake, given the known benefits that diversification can provide over the long term.
Indeed, it is difficult to find the optimal risk-adjusted return for one’s personal portfolio. Every investor has their own unique risk tolerance, cash needs in retirement, and goals. Some may need higher growth rates to be able to live the life they envision for themselves in a few decades. Others may need more stability, seeking a more peaceful and cushioned retirement.
We are all different, and that makes the investment process personal and interesting. But for me personally, this is how I look at investing in the current environment, and where I would consider putting my next $30,000 to work.
Fixed income securities are starting to look attractive
From a personal investment perspective, I have increased my allocation to bonds. Actually, I’ve been doing that in a substantial way for years.
Bonds, annuities and other fixed income securities are often viewed as assets that only investors at the older end of the age spectrum should consider. I’m not going to be thinking about annuities anytime soon (although I think they could be part of a retirement strategy for many seniors). But when it comes to bonds, especially U.S. Treasuries, I’ve been loading up a lot lately.
Why?
Well, I believe the Federal Reserve will likely follow the Bank of Canada, the European Central Bank and other major central banks in cutting interest rates. But for now, US Treasury yields remain elevated, a reality that I don’t expect to last much longer.
Like many heavily indebted governments around the world, interest rates between 4 and 5% are not sustainable from a budgetary perspective. These returns will have to be brought down somehow (recession or forced down). Either way, I think investors holding such debt can benefit from what could be a vicious cycle of austerity heading our way.
With this view I’m mostly on an island, but I’m sticking with it. Bonds could outperform stocks by a significant portion over the next decade, especially if valuations rise, as many experts think likely.
Dividend stocks are also a great place to look
If you’re of the same opinion as I am that interest rates are likely to fall, you might want to look for some prime dividend stocks like Fortis (TSX:FTS) companies that have increased their dividends every year for decades, but also have rock-solid balance sheets, can achieve a similar advantage in a falling interest rate environment.
I’ve recommended some top Canadian dividend stocks that I think investors should consider in previous pieces and I invite readers to peruse them.
To generate monthly income streams from such stocks, I would essentially say that choosing companies with different quarter end dates for their dividend payments is the way to go. In a similar way to creating a bond ladder (in the example above), investors can create their own monthly income streams without being beholden to companies that choose to pay out their dividends monthly.
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