Income investors should focus on diversification and downside protection, not just yield say
Humans are predisposed to reach for the bright and shiny-the most decadent dessert, the snazziest sports car. When investing for income, the impulse-reaching for yield-often ends in disappointment.
Don’t be dazzled by the highest yields…
If an investor looked solely at year-end prevailing yields in 2014, he may have allocated more toward areas such as lower-quality high yield and master limited partnerships (MLPs) at the beginning of 2015. However, these shining yield stars, along with many of the traditional income-oriented U.S. equity sectors, were among the worst performers in 2015 as oil prices moved lower and distress spread among energy and commodity companies. Lower-quality high yield securities and MLPs have seen this trend continue and are down a further 4% and 16%, respectively as of January 27, 2016. Moderate- but still attractive-yielding asset classes and sectors provided a better experience in a challenging year (Exhibit 1).