If you depend on interest earnings for your income, chances are you weren't cheering the six Federal Reserve short-term interest rate cuts this year.
"We're certainly starting to see the person who is over invested in cash instruments (bank or money market accounts) and CDs (certificates of deposit) feel the pain," said Hal Lewis, financial adviser with Salomon Smith Barney in Memphis.
If you are one of those investors, you have options to add to your bankroll, but all involve added risk.
Some people like CDs because the principal is guaranteed (up to $100,000 in most cases) by the Federal Deposit Insurance Corp. Today, CDs return in the 4 to 5 percent annual range.
"There's nothing out there like it with FDIC insurance," said Madeline Simonetti, Certified Financial Planner with American Express Financial Advisors.
It's an accepted principle of investing that to gain more return or potential return, you have to add to your level of risk. So before you make a move, look at your tolerance for risk, said Ronald Lazarov, partner in Kelman-Lazarov Inc., a Memphis planning and investment advisory firm.
In searching out higher-return alternatives to CDs or bank accounts, look at total return, not just the interest rate or yield, Lazarov said.
For example, you may find a mutual fund that pays an 8 percent annual dividend. But if the fund shares lose 6 percent of their value, your total return is only 2 percent, less than what you may have earned on a CD.
With the risks in mind, you may want to try to increase your income.
A first step: Increase the maturity length of the investments you own, Lewis said.
Normally, the longer you agree to tie up your money, the higher rate of interest you can earn. And the Fed's interest rate action mostly affect short-term rates.
"Long-term rates have not fallen much, and some have gone up," Lewis said.
Annuities are another possibility, Simonetti said.
The insurance company that issues the annuity policy guarantees your principal, but that backing is only as strong as the company. You can pick the length of time you want to invest for - five to seven years is typical. Annuities are available that will allow you to get immediate income, Simonetti said.
"While interest rates are higher than you could get in a normal CD, they're not so attractive you want to tie your money up for that period of time," she said.
Remember, you are also paying for mortality charges and other expenses, which may eat into returns.
Real estate investment trusts represent another option. The shares of those companies, which invest in apartment complexes, hotels, shopping centers, office buildings and other projects, are yielding 6.5 to 8 percent, Simonetti said. But like any stock, the value of shares may drop, reducing your total return.
You may want to consider government or high-quality corporate bonds or mutual funds that own such investments, Lewis said. Those investments throw off higher rates of interest than CDs, but there is the danger they may decline in value.
With company securities, you take on credit risk - the risk the firm may not repay interest or the debt.
If you're not comfortable with the alternatives, you may have to look at your budget, advisers said.
"You may have to cut back spending somehow and wait for different times," Lazarov said. Or if your investment income normally covers your rent or house payment, you may have to dig into some of your principal.
(Write David Flaum at The Commercial Appeal, 495 Union Ave., Memphis, TN 38103 or e-mail email@example.com.)
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