By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, August 31, 2003

Notable changes have emerged in the world of interest bearing investments during the past three years.

All categories of interest rates have been reduced, especially the short-term ones. This presents great challenges for investors who depend on their portfolios for income.

The interest rate declines have affected all income portfolios. Investors in retirement are affected the most.

Income portfolios will have to adjust investment strategies to make the best of the current times. Just examine the rates below to get a sense of the painful decline.

Examples of the interest rate damage since mid-2000:

NOTE: All rates above are from the same institution for non-redeemable Guaranteed Investment Certificates, paying annual compound interest, minimum investment of $1,000.

A significant impact has been inflicted on income oriented portfolios in a short time. Fixed income yields have slipped by about half in three years.

Say someone had started a fresh 5-year fixed income ladder in mid-2000. Their average yield would have been approximately 5.3%.

Now compare that to someone starting the same ladder today. The average yield would be a paltry 2.4%, about 55% less.

This decline has affected, and continues to affect, all retirement plans. Investors now contemplating retirement are concerned about the path they are about to embrace.

Some comments to improve income portfolios:

• Review the investment expectations. Re-assess all investment policies and strategies to reach the chosen destination.
• The fixed income component is the stable part of the portfolio return. Therefore, make sure that the income generating portion is prudent for the situation.
• Studies show that asset mix decisions have the greatest impact on portfolio returns. They explain, on average, 94% of the contribution to total return.
• If asset mix is not the focus in the investment portfolio, it ought to be.
• A ladder of interest rate maturities offers protection against the ravages of gyrating interest rates.
• Review the investment horizon when structuring a ladder of interest rate maturities to match portfolio needs.
• Investors who hold large cash resources in short-term instruments often wait too long before they initiate suitable investments. Examining the appropriate steps to achieve a variety of suitable maturities assists the plan.
• Investors contemplating retirement, or in the midst of it, ought to be careful about choosing instruments that offer low quality. While the increase in yield is tempting, it may not be sufficient compensation for the added risk.
• Inquire about which guarantees, if any, apply to interest bearing vehicles being considered.

The fixed income strategy, especially during lean interest rate periods, is vitally important for a portfolio’s financial health. Especially, for a retiree who relies on the portfolio to provide ongoing income needs.

Saving more for retirement is becoming a higher priority for many. While the dismal fixed income yields are not expected to last forever, time is required before improvements occur.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.