Your goal should be two guarantees: high yield to maturity and full recovery of principal. Neither is assured using index-based exchange-traded funds. An actively managed, go-anywhere fund from an ace manager such as Baird, Fidelity or Pimco will out-return the indexes over the years, but there is near-term price risk if managers mistime bets or if hostile reports on jobs or inflation or another trading signal rips into bond values. 

If your choices are limited within a 401(k) or other retirement plan, choose a short or ultra-short bond fund option, if possible. If not, stay with cash for now. The inverted yield curve, with short-term yields the highest, remains your friend and makes cash profitable and safe.

Looking ahead at bonds

But if you suspect cash yields will drift down and want to lock in the current rates without near-term price risk, my preference would be to infuse some dollars into individual bonds or into target-maturity funds or ETFs, such as Invesco BulletShares or iShares iBonds ETFs. If you have an account with Schwab, Fidelity or E*Trade, it is neither difficult nor costly to research, compare and buy single bonds. Then you, and not a fund manager or the Federal Reserve, control how much and when you get paid and the timing of repayment of the principal.

Normally the best method is to ladder maturities, arranging for parts (rungs) to mature in succeeding quarters or years so you both cement the best yields along the curve and know you will have money to roll over at specific times. You can use Treasuries, high-quality corporate, bank or utility bonds, municipals, high-yield bonds, or a mix of all of them. You can even request a brokerage’s bond platform to set it up for you.

I went to Schwab’s tool to ladder either Treasuries or certificates of deposit. Given the rate-curve inversion, one-year ladders have higher average yields than longer ones. A step stool of T-bills of three, six, nine and 12 months pays an average 5.25% to maturity; use CDs and you get 5.45% (as of May 31). A five-year ladder works out to 4.76% for Treasuries or 4.98% for CDs.

To beat that, of course, you can buy corporate bonds at a spread of one to two percentage points above Treasuries. If you navigate the bond listings, you can ladder one- through five-year BBB-rated bonds for an average 6% yield to maturity; I could recently order a five-step triple-B assembly from Synchrony Bank, Boeing, Ares Capital, Blue Owl and Boston Properties with an average yield to maturity of 5.98%, with none below 5.82%. It’s possible those bonds might flop around in value, but if your plan is to keep them to the end, that doesn’t matter — even if, say, Boeing were to be downgraded to junk status.

Or, you could use a mélange of BulletShares investment-grade, target-maturity corporate ETFs dated 2025 through 2029 for an average 5.3% — less than a BBB ladder due to its A and AA holdings. BulletShares charge just 0.1% and pay monthly, as oppsed to the semiannual interest payments from individual bonds. What matters either way is that you can roll over the principal on your own terms.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here. 

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But the array of bond fund yields can be confusing for investors trying to add a fund to their portfolio. In late March, for instance, the Schwab 1-5 Year Corporate Bond ETF (symbol SCHJ) boasted a 30-day SEC yield of 5.11%, a trailing 12- month or distribution yield of 3.16%, and a 5.28% yield to maturity. “If you look at all three, they can help create an overall picture of a bond fund,” says D.J. Tierney, a senior investment portfolio strategist at Charles Schwab Asset Management. 

Note that a bond fund’s yield is just one piece of the puzzle when you’re considering an investment in the fund. Investors should also understand the fund’s investment objective, fees and expenses, overall credit quality, potential risk of default on debt, and sensitivity to interest rates.

And be careful about confusing yield with income, says Tierney. Income is the coupon rate a bond pays — it’s the annual interest paid on a bond, and it is generally fixed throughout a bond’s life span. A bond’s yield, on the other hand, can be an indicator of the return an investor may receive each year over the life of a bond held to maturity, relative to the price of the bond. (Bond prices and yields move in opposite directions.) 

For example, a five-year Treasury note that matures in January 2029 pays a coupon rate of 1.75%. That’s the income, expressed as a percentage of the face value of the bond, you can expect to receive per year. But in late April, the bond yielded 4.74%, reflecting the expected return on your investment over the life of the bond, says Tierney, including interest payments and principal you may expect to receive when it matures, relative to the market price of the bond. 

That said, investors should think of a fund’s yield as “a starting point” when it comes to forecasting a total return, says Warren Pierson, co-chief investment strategist at Baird Asset Management. It’s no guarantee. “A lot can go wrong before a yield turns into total return,” says Pierson. Use this guide to help you demystify bond yields and choose the right fund for your needs. 

30-day SEC yield

The Securities and Exchange Commission created the standardized calculation for the SEC yield, sometimes called the 30-day yield or current yield, to allow investors to compare one bond fund to another. Some even refer to it as the standardized yield. 

“If you’re comparing two different funds, this is the yield to look at first,” says Pierson (and it’s the yield cited most often in Kiplinger). Be wary if one fund sports a yield that’s measurably higher than that of a similar fund. “Rest assured there’s some additional risk,” he says. “You might not be able to determine what the risk is, but it’s there.” 

The calculation shows investors what they would earn, after expenses, over a 12-month period if the fund continued earning the same yield for the rest of the year. It annualizes the income distributed over the past 30 days and divides it by the fund’s net asset value at the end of the 30-day period. All SEC yields are net of expenses. A subsidized 30-day yield reflects fee waivers and/or expense reimbursements during the period; an unsubsidized figure does not adjust for waivers or reimbursements. (Some funds don’t have waivers. In those cases, unsubsidized and subsidized 30-day yields will be the same.) 

But there are caveats. The SEC yield is backward-looking — by 30 days, to be exact. What’s more, fund companies are not even required to disclose yield, but when they do, they must use the SEC-yield calculation. As a result, some bond funds disclose their 30-day yields only quarterly or monthly; others update them daily. It pays to be mindful of the “as of” date when you compare the SEC yields of funds.

Trailing 12-month yield (TTM yield)

Also called the distribution yield, a trailing 12-month yield is the ratio of the sum of all fund distributions over the past 12 months to the fund’s net asset value at the end of the period. 

The one-year look-back makes the distribution yield even more backward-looking than the 30-day SEC yield. As a result, during periods of dramatic interest rate shifts, the trailing 12-month yield can be misleading, says Tierney. “The first question investors should ask is, are we in a stable rate environment, or is it changing?” 

Moreover, the actual distribution-yield calculation is not standardized and thus may vary depending on the fund issuer.

Yield to maturity (YTM)

The yield to maturity of a single bond is the overall annual interest rate you will earn if you buy the IOU and hold it to maturity. 

But bond funds hold dozens if not hundreds or thousands of bonds, all with different maturity dates. So it’s not a calculation that all fund firms provide. Vanguard does, however. In late April, Vanguard Short-Term Investment-Grade had a yield to maturity of 5.4%. And Charles Schwab Asset Management (not to be confused with the online broker) provides it for its mutual funds and ETFs. 

Fidelity and Pimco, on the other hand, do not. Instead, you might see an “average maturity” or “effective maturity” for the fund, listed in years. That’s the average length of time until securities held by a fund reach maturity and are repaid. 

That stat might reveal more about interest rate sensitivity than it does about the fund’s yield, however. The longer a fund’s average maturity, the more the fund’s share price will move up or down in response to changes in interest rates.

Yield to worst (YTW)

Some bonds, such as municipal, mortgage and certain corporate bonds, are callable, meaning they can be “called in” and paid off early by the issuer before their maturity date. “You might have a bond with 10 years to maturity, but it’s callable in five years,” says Duane McAllister, an investment committee member at Baird Investment Management. 

Calling in a bond early can be a good tactical move for issuers; it cleans up a firm’s balance sheet, for starters. A yield to worst, then, is the lowest yield an investor can expect on a callable bond — call it a worst-case-scenario yield. 

Unfortunately, not all bond fund websites cite a yield to worst. But some do, including Baird. In late April, for instance, the Baird Aggregate Bond fund sported a portfolio average yield to worst of 5.08%. Says Baird’s McAllister, “That’s the worst- case scenario, but sometimes it works out to be better than that.”

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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It’s little wonder that the market hit a springtime speed bump, pulling back 5.5% in April before bouncing mostly back. Now, investors have to ask first whether the pullback has run its course before they consider whether the second half will deliver further gains. 

We would not be surprised to see the market fall (and pick itself back up) multiple times over the next several months, within a modestly upward trajectory that delivers gains by year-end. An S&P 500 level of 5300 at year-end seems a reasonable-to-conservative target, with 5500 at the high end of strategists’ estimates. Judging by index levels alone, wrapping up at 5300 would not represent much progress beyond the first-quarter high of 5254 for the S&P 500, although it would be an 11% price gain for the year — a 12.5% return including dividends. (Prices, returns and other data in this story are through April 30, unless otherwise noted.) 

But that doesn’t mean you should have closed the books in March, pocketed your gains and put the proceeds under your mattress. The market is not a monolith, and a rotation of leadership in a number of investing styles and categories will present pockets of opportunity (and some risk) that will demand careful attention to your portfolio. 

In contrast to the record-setting euphoria that characterized the start of the year, however, your patience is likely to be tested in a market contending with several crosscurrents, rising uncertainty and a pick-up in volatility, especially as we approach the U.S. election. Investors who soldier on will be rewarded, says Yung-Yu Ma, chief investment officer of BMO Wealth Management, U.S. “We continue to expect more flow than ebb, more push than pull and more forth than back.” 

It might help to remind yourself that corrections are a fact of investing life, and the market’s recent stumble didn’t even come close to one. Corrections are declines of 10% or more, but less than 20% (which is when a bear market kicks in). There have been 10 corrections since 1990, according to investment research firm CFRA, with an average market decline of 14.7%. 

“One thing to remember about a correction is the speed of recovery,” says CFRA’s chief investment strategist, Sam Stovall. Since 1990, the S&P 500 has returned to breakeven in an average of just three months. 

One pillar gone

Still, there’s no arguing that an important support for the stock market is gone — or at least missing for now. Early in the year, the market was buoyed by the expectation of six or seven interest rate cuts this year from the Federal Reserve, which would have significantly reversed the monetary tightening put into effect by the 11 rate hikes in 2022 and 2023 that brought the Fed’s benchmark rate from near zero to a range of 5.25% to 5.50%. 

Inflation appeared to be waning, with the Fed’s target rate of 2% seemingly within reach, and it looked as if the central bank was going to pull off an economic miracle — a so-called soft landing, taming debilitating price hikes with just enough tightening to cool an overheating economy without breaking its back. 

Not so fast. “The market was overly optimistic about immaculate disinflation,” says Phil Orlando, chief stock strategist at financial firm Federated Hermes. Inflation proved tough to vanquish, and a spate of recent economic reports show prices have headed north instead of south. The government’s recent release of the consumer price index marked the third straight month of no improvement. For the 12 months ending in March, the inflation rate was 3.5%, up from a 12-month rate of 3.2% in February and, for now, about where Kiplinger sees it ending the year. 

Inflation pain points include gas prices, housing and auto insurance costs. Overall, inflation should continue to moderate, although recent months have shown that the “last mile” to the Fed’s target rate can take a twist here or a turn there. 

The Fed’s preferred inflation barometer runs lower than the CPI but confirms the recent uptick. 

Traders are now expecting just one or two cuts from the Fed this year. But no cuts are a distinct possibility and, although unlikely, the possibility of rate hikes has entered the conversation. A “slower to lower” Fed and “higher for longer” economic growth, inflation and interest rates are now the expected order of the day. 

Bond yields have risen in anticipation, with the yield on 10-year Treasuries touching 4.7% in late April, before receding a bit. Inflation beneficiaries have rallied, including commodities as well as energy and materials stocks. Says Jason Draho, a U.S. investment strategist at UBS Global Wealth Management: “The overarching macro theme for the past few months is reflation.” 

It’s also worth noting that despite the market’s hiccup in reaction to diminishing prospects of near-term rate cuts from the Fed, rising interest rates historically haven’t been as bad for bull markets as investors might think. 

Research from market strategist Brian Belski at BMO Capital Markets found that, going back to 1990, the S&P 500 has gained 13.9%, on average, during periods when 10-year Treasury yields were on the rise, compared with 6.5% during falling-rate periods. “This makes sense, since lower rates can be reflective of sluggish economic growth and vice versa,” Belski says. 

A sturdy second support

Without an accommodative Fed to cut rates, at least until closer to year-end, the market is left with a second, arguably more important pillar of support — namely, a surprisingly resilient economy and its corollary, healthy corporate earnings. 

Although a lukewarm report on first-quarter economic growth showed a slowdown, economists concluded that it wasn’t as bad as it looked and that the report understated strong domestic demand. That was followed by an employment report showing moderating gains in job and wage growth. And a manufacturing index that had finally pulled into expansion territory in March contracted again in April. 

Nonetheless, many economists have been adjusting their forecasts higher for gross domestic product growth in 2024 and see little sign of anything resembling a recession or even stagflation, which occurs when the economy stalls but inflation remains high. In April, for one example, Wells Fargo Investment Institute boosted its outlook for GDP growth this year from 1.3% to 2.5% (which is also the growth rate that Kiplinger forecasts). 

“We wouldn’t be surprised to see close to 3% GDP growth this year,” says Ryan Detrick, chief market strategist at money management firm Carson Group. Labor markets and consumer spending are still strong, he says, and the industrial side of the economy is picking up. “It’s positive, especially if the consumer slows down a bit, for that baton to be passed to manufacturing as the economic cycle ages,” Detrick says. 

Meanwhile, corporate profits are robust. Analysts expect earnings for S&P 500 companies to rise an average 10% in 2024, according to earnings tracker LSEG I/B/E/S, and another 14% in 2025. That’s after hardly any growth at all in 2023. 

Better yet, the rest of the market is starting to share in the wealth that heretofore has been concentrated in the so-called Magnificent Seven, the tech-focused behemoths that have dominated lately. “Earnings growth is broadening out, allowing the rest of the market to catch up,” says Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. 

The chart on the facing page, from FactSet Research, another earnings research firm, shows that by the fourth quarter, analysts expect earnings growth of 15% from the same quarter a year ago for the Mag Seven, but they expect 18% for the 493 companies that make up the rest of the S&P 500. Contrast that with year-over-year earnings growth expected for the first quarter of nearly 39% for the Mag Seven and negative 4% for everyone else. 

“The year-on-year revenue and earnings growth that we’ve seen out of tech growth names has been eye-popping,” says Federated Hermes’s Orlando. “I’m not telling you they’re going to lose money, but the pace of growth is going to slow.” 

Crosscurrents to watch

One thing that investors can unfortunately count on in an election year is an increase in market volatility. But these choppy markets tend to resolve to the upside. “Once you’re through the election and uncertainty is alleviated, most of the time you see a rally. We don’t think this time will be different,” says Detrick. History shows average stock market gains of more than 7% in presidential election years (see the chart on page 24). 

Perhaps more important than who lives in the White House is the makeup of Congress: Stocks have gained the past 13 times we’ve had a divided Congress, Detrick’s research shows. Since 1951, the S&P 500 has logged annual gains of 15.7%, on average, when Congress is split but 8% when one party controls both the House and the Senate. 

Drilling down to the sector level, a survey of industry analysts at RBC Capital Markets shows that a Trump sweep or a Trump presidency with a split Congress would be favorable for energy, healthcare and materials stocks. The analysts’ views on sector returns were more neutral in a Biden sweep or split. 

Overall, says RBC’s Calvasina, “the conclusion is that the outcome of the election matters to some sectors and industries more than others, but it’s not the main thing that’s going to drive the markets over the rest of the year.” 

Geopolitical tensions are another worry for investors, with an ongoing war between Russia and Ukraine and escalating conflict in the Middle East. “We all sound crass talking about human-life stories in terms of dollars and cents, but that’s part of our job,” says Mark Hackett, chief of investment research at insurer Nationwide Financial. 

Other than initial reactions, the market typically is not affected much by geopolitical events, he notes. “There’s usually a momentary reaction as people are scared, uncertain or sad—but these events tend not to be disruptive long-term.” It would have been a mistake, he adds, to have sold stocks when Russia invaded Ukraine, or last October, when Hamas attacked Israel. 

But Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, worries that the current Middle East conflict “has entered a new realm. There’s a real potential there for sudden surprises,” he says. Threats to oil supplies in a worst-case scenario could send crude prices surging, he says, “in which case economic slowing in the U.S. would accelerate quite a bit.” Oil prices have been well behaved so far. 

But potential oil shocks are one reason strategist Ed Yardeni, of Yardeni Research, has been recommending that investors overweight energy and precious metals stocks in their portfolios. “They’re shock absorbers against any shocks from these two wars,” he says. 

Buy the new guard

Even down from record highs, stocks aren’t cheap, with the S&P 500 recently trading at 20 times expected earnings. But there’s a wide variation among sectors: Tech stocks sport a P/E of 27, on average, while energy, the cheapest sector, trades at a P/E of less than 13. 

A pivot away from the large, growth-focused stocks in the technology and communications services sectors — or at least some profit-taking — makes sense in order to rebalance into more value-oriented fare. “If you’re going to fish in a pond, fish in one with stocks trading at 14 times earnings with accelerated earnings growth,” says Hackett. “That’s preferable to 30 times earnings with decelerating growth.” 

So-called cyclical stocks, those that do best when the economy is strong, generally fall into the value camp. Sectors you should have on your radar now, according to several strategists, include energy, materials and, depending on who you ask, industrials or financials. Cyclicals also tend to do well in the second half of election years as optimism begins to emerge, notes strategist Calvasina, who recommends overweighting energy, financials and materials stocks. 

Of course, it’s possible that the economy isn’t as strong as some make it out to be, says Wells Fargo Investment Institute’s Christopher. “We think the economy will have a saucer-shaped trajectory this year,” he says, with midyear weakening that is not entirely apparent yet. But that will help cool inflation, spur Fed rate cuts and set up accelerating growth for the economy in 2025, so his advice is the same: Stock up on cyclicals, including energy, industrials and materials. 

Investors looking for a top-notch value fund can consider Dodge & Cox Stock, a member of the Kiplinger 25, the list of our favorite actively managed no-load funds. Or consider Oakmark, a fund whose long-term returns have rewarded patient investors. (To see what stocks Oakmark comanager Bill Nygren likes now, see “5 Cheap Stocks to Consider,” on page 19.) To add broad sector exposure to your portfolio, consider exchange-traded funds, including Energy Select Sector SPDR, Vanguard Financials and Fidelity MSCI Materials. 

Profit from strength in industrial stocks by zeroing in on infrastructure plays, says BMO strategist Ma. Three separate government spending bills are pouring billions of dollars into green energy, roads and bridges, semiconductor manufacturing facilities, and improvements to the electricity grid, among many other initiatives. “These projects take a long time to get going and have a long runway — only a fraction of the buildout has taken place,” says Ma. 

Industrials are also getting support from the longer-term trends of onshoring, reindustrialization of the U.S. and building up supply-chain resilience. There’s even a link to the artificial intelligence megatrend, he says, as a huge need for data centers and the electricity to run them comes into play for industrial firms. 

Ma likes the diversified approach of Global X U.S. Infrastructure Development, an ETF with 73% of assets in industrial firms and 20% in materials companies (which produce and process the raw materials that go into infrastructure production — think concrete, metals, plastics and so on). Among the ETF’s top 10 holdings are Emerson Electric, a member of the Kiplinger Dividend 15 with a 1.9% yield; industrial machinery and supplies company Parker Hannifin; and Vulcan Materials, one of our January Investing Outlook picks for 2024, up 32% since our recommendation but with more room for gains. All are rated “buy” by Wall Street analysts. 

It’s prudent to balance cyclical bets with a stake in defensive sectors. For Calvasina, that’s utilities. Consider Invesco S&P 500 Equal Weight Utilities. For Christopher, healthcare is an undervalued defensive choice. Fidelity Select Health Care is a Kip 25 fund. 

Small-company stocks are on some strategists’ buy lists, but others remain wary, as previous rallies have fizzled. “There’s a long list of why they’re interesting,” says Calvasina. Valuations are at a deep discount compared with large-company stocks; analysts are increasingly revising earnings estimates upward; and forecasts for economic growth are moving higher. “In an above-average or hot economy, small caps outperform, and it looks like that’s where we’re headed,” she says. 

The problem? With typically higher debt levels, small caps feel the pinch of higher interest rates more acutely. They’re unlikely to rally convincingly until the Fed is certain that inflation is under control and cuts rates accordingly. 

“You’ve got to kick off the cutting cycle, or be certain it’s around the corner,” says Calvasina. “I covered small caps for a long time — they’re like my first professional child. But I think Fed rate-cut expectations are all over the place at the moment.” 

Still, small caps deserve a spot in a diversified portfolio. Index investors can improve their chances with a fund that tracks the S&P SmallCap 600 instead of the Russell 2000; the former has a profitability requirement for constituents that raises the quality bar. Consider ETF 20 member iShares Core S&P Small-Cap. Or employ the services of a skilled manager in a fund such as Needham Aggressive Growth. 

Views on international markets are mixed. Among developed countries, Europe is “not quite warming up, but getting less cold,” says BMO’s Ma. Positives include modest valuations and anticipated rate cuts from the central bank, but for now he remains neutral. Japan, by contrast, is a bright spot.

 A number of structural corporate governance changes are increasing shareholder value, says Ma, such as aligning CEO incentives with stock performance, returning cash to shareholders via more dividends and buybacks, and using cash wisely for acquisitions. (Historically, Japanese companies have hoarded cash and been resistant to corporate takeovers.) 

“Structural change like this is rare,” says Ma. “It tends to have a multiyear runway, and the market tends to underestimate it.” He recommends iShares MSCI Japan, an ETF that provides exposure to a broad array of companies. 

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, likes emerging markets. They’ve languished for years, and a stronger dollar weighs on nations with high dollar-denominated debt loads. But Suzuki sees the green shoots of recovery as global economic growth picks up and a re-flation wave benefits commodity-producing nations. Actively managed Baron Emerging Markets, a Kip 25 fund, is our choice. (For more insights from Suzuki, read his thoughts for the rest of 2024.)

Finally, fixed-income investors should consider a “barbell” approach to a mercurial bond market. With the yield curve still inverted, short-term bonds and bond funds deliver superior yields for now and are a good place to keep cash you’re waiting to deploy. T. Rowe Price Ultra-Short Term Bond, yielding 4.9%, is an option. 

But consider locking in some long-term bond exposure if and when opportunities arise, says Federated’s Orlando. In a volatile interest rate market, 10-year Treasury yields could retest higher levels in the second half, he says. But with the Fed having completed its rate-hiking cycle, the next move is more likely down; Orlando sees the 10-year yield at 3.8% or lower over the next year or so. (Kiplinger expects the 10-year note to end 2024 with a 4.3% yield.) In that case, recent yields of 4.6% or 4.7% look pretty good. 

“Where’s the top? I can’t pick the exact spot. But investors who have lengthened out their bond duration will be happy they did — much like people who locked in 3% mortgage rates a few years ago,” he says. 

Buy Treasuries directly from Uncle Sam at TreasuryDirect.gov or from your broker. Fund investors can’t “lock in” yields because bonds flow in and out of fund portfolios, but they might consider Vanguard Long-Term Treasury Fund, with a 4.5% yield. Stick with high-quality fixed-income holdings. There’s little in-centive to reach for yield, with the spread between yields on Treasuries and those on lower-rated bonds “incredibly tight,” says Hackett. “You’re not rewarded for being aggressive.”

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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While we wait, some enticing yields are on offer across a wide range of asset classes for income-hungry investors — and, for a change, that includes bonds, a core income-producing asset. “One overarching theme is that fixed income is kind of back to normal, which means back to a world we haven’t seen in 15 years,” says Simeon Hyman, global investment strategist at ProShares. 

A case in point: You can now earn a real yield (that is, the yield after inflation) of about 2% on ostensibly risk-free Treasuries and other high-quality bonds — and much more in riskier high-yield bonds. Stocks and energy-infrastructure securities provide both income and a growing stream of dividends, a quality that is especially important in providing protection against consumer prices mercilessly on the rise. Even-higher yields are available from closed-end funds and business development companies. 

This guide will help you identify attractive income-producing investments in nine different categories, ranging from low-risk, plain-vanilla securities to more-complex, higher-risk and potentially higher-return investments. (Although yields and risk usually move higher in lockstep, that’s not the case this year, and we’ve listed investments roughly in the order of ascending risk.) 

Before you embark on your quest for income, keep a few considerations in mind. You should have a financial plan in place that specifies long-term portfolio allocations. Everyone’s financial situation is different, but generally you should ensure that you keep sufficient cash and equivalents on hand to cover six months of living expenses before investing in high-risk/high-return assets. Prices, yields and other data are as of the end of the first quarter of 2024.

5%: Short-Term Accounts

Yields on short-term, fixed-income accounts and securities follow movements in the Fed’s short-term interest rates. That means relatively attractive yields are available on cash and other short-term, liquid assets in today’s higher-interest regime.

The risks: The game will change when the Fed starts cutting rates later this year, which is widely expected. “Money market rates could go down tomorrow if rates decline,” says Lew Altfest, chief investment officer of Altfest Personal Wealth Management. Andy Kapyrin, a partner at Corient, says, “Investors are overeager to stay in cash and thus risk missing an opportunity if the Fed cuts rates.”

How to invest: Kapyrin recommends deploying some of the cash into one- to five-year bonds, which would lock in today’s yields for a longer period than, say, the overnight rates on money market funds. Of course, because this category is mostly cash equivalents likely earmarked for emergency reserves or to meet short-term liabilities, you want to play it safe.

One exchange-traded fund Kapyrin cites is Vanguard Short-Term Treasury (VGSH, $58, yield 4.7%), which invests in one- to three-year government paper and has a duration — a measure of interest-rate sensitivity — of 1.9. That means if rates were to rise (or fall) one percentage point, the fund would lose (or gain) roughly 1.9%. (Prices and interest rates move in opposite directions.) 

If you seek less interest rate sensitivity, Vanguard Ultra-Short Bond (VUSB, $50, 5.1%), which invests in a variety of government and corporate investment-grade bonds, has a duration of just under 1. Investors who want to stick with ostensibly risk-free government debt can consider Goldman Sachs Access Treasury 0-1 Year (GBIL, $100, 5.2%), which tracks an index of Treasury obligations with a maximum remaining maturity of one year. 

Many investors will still want to stash some of their cash in a money market mutual fund, which is a popular parking place for money you’re waiting to deploy. Vanguard Federal Money Market (VMFXX, 5.2%) consistently outperforms its counterparts, largely due to a rock-bottom expense ratio of 0.11%.

5%–7%: Investment-Grade Bonds

The core of a typical fixed-income portfolio is made up of investment-grade bonds issued by the U.S. Treasury, government agencies (mortgage-backed securities, for example) and corporations. These assets provide income without dramatic price fluctuations and, generally speaking, provide portfolio diversification because they tend to move out of sync with stocks.

The risks: Interest rate spreads between corporate bonds and Treasuries are remarkably narrow by historical standards. “There is little spread for taking credit risk,” says Kapyrin. That said, there’s also a risk of inertia in keeping too much cash. 

“People could certainly have money in cash at 5%,” says Abhijeet Patwardhan, manager of FPA New Income (FPNIX, 4.7%). “But the cost of doing that is if the market rallies and rates come down a lot, I think those people will regret not having locked in higher yields that were available.” 

How to invest: Investment-grade fixed income is a vast and diverse universe with many different strategies. FPA New Income, for example, is a fund with superb risk management that focuses on preservation of capital as well as generating income. Patwardhan says the fund’s duration of 2.7 is its highest in 20 years and that the current portfolio is dominated by securitized debt, because that’s where he sees the best risk-adjusted investment opportunities. In the fourth quarter of 2023, he snapped up agency residential mortgage–backed securities.

Altfest also spots value in non-agency mortgage-backed securities because he thinks that homeowners who have lived in their houses for years and have built up home equity are a solid credit risk. He likes Jeffrey Gundlach’s DoubleLine Total Return Bond (DLTNX, 5.4%), which invests in both agency- and non-agency mortgage-backed securities and has a duration of 5.9.

You can find a higher yield in VanEck CLO (CLOI, $53, 6.8%), an actively managed ETF subadvised by PineBridge Investments. Collateralized loan obligations are loans — broadly syndicated bank loans, for instance — that are pooled together and securitized. Fran Rodilosso, head of fixed income ETF portfolio management at VanEck, observes that with investment-grade CLOs (about three-fourths of the fund’s holdings are rated A or above), you can pick up one to two percentage points in yield compared with what’s available in corporate bonds with the same credit rating.

4%–7%*: Municipal Bonds

Issued by state and local governments, muni bonds pay interest that is free from federal taxes — and for bonds issued in your state of residence, free from state and local taxes, too. High-quality, investment-grade munis tend to follow movements in the Treasury market and, like Treasuries, tend to perform well in a recession.

The risks: The main risks aren’t about creditworthiness. “The liquidity of most state and local issuers is at historical highs, due to robust revenues and all the money the federal government gave them,” says Jeff Timlin, a tax-exempt bond manager at Sage Advisory. 

Instead, the main issue may be high valuations, in part reflecting the constrained supply of munis and the very strong demand for them in the market. John Miller, head of First Eagle’s high-yield team, notes that the $4 trillion muni market has scarcely grown in decades. “One reason munis are outperforming is pure scarcity value,” he says.

How to invest: To calculate your tax-equivalent yield and compare it to the yield of a Treasury or other taxable bond, subtract your federal income tax bracket rate from one, then divide a muni bond’s yield by the result. Thus, the tax-equivalent yield for a muni yielding 3% would be 3.95% for someone in the 24% tax bracket, or 4.76% for a taxpayer in the top, 37% federal bracket. Timlin says that in today’s interest rate environment, investment-grade munis generally don’t make sense for investors unless they’re in the 35% or 37% tax bracket.

There are some pockets of value, however. Because investors are crowding into shorter-term muni bonds, their prices are least attractive relative to taxable bonds. But venturing further out on the maturity spectrum can be rewarding. Jim Colby, a muni bond manager at VanEck, says that munis become attractive relative to Treasuries at maturities of about 10 years, and the yields become increasingly alluring the further out you go on the yield curve. 

Consider: For muni bonds rated AA and AAA with maturities of one to 10 years, the current yield ratio to Treasuries is 55% to 60%, compared with a norm of 75% to 80%, according to Miller. But for 30-year maturities, the ratio is above 80%. 

Another area with value, says Colby, are high-yield muni bonds, often backed by revenue from a sports stadium, public hospital or the like. Their yields are an attractive two to three percentage points above investment-grade munis. Historically, the default rate for high-yield munis is a small fraction of that of high-yield corporates, and the recovery rate is much higher. 

You can gain exposure to a well-diversified basket of high-quality munis by investing in a national muni fund. Vanguard Tax-Exempt Bond (VTEB, $51, 3.4%) holds more than 10,000 bonds from across the land, nearly all rated A or higher. It’s an intermediate bond fund with a duration of 6 and a rock-bottom expense ratio of 0.05%. The tax-equivalent yield is 4.5% for someone in the 24% federal bracket, or 5.4% for a 37%-bracket taxpayer.

The high-yield muni market is about 15% of the muni universe, and most of the bonds aren’t even rated because they tend to be smaller issues to support local infrastructure. Active management in such a fragmented market calls out for a seasoned muni bond veteran like Miller, manager of First Eagle High Yield Municipal (FEHAX, 5.1%). Miller was previously head of the muni bond department at Nuveen, a muni powerhouse, before he decamped to First Eagle. Converted from a taxable bond fund, the high-yield tax-exempt fund has soared 4.2% since Miller took the helm at the start of 2024. The tax-equivalent yield for a taxpayer in the 24% bracket is 6.7%. 

If you prefer a shorter-duration, passively managed fund, consider VanEck Short High Yield Muni (SHYD, $22, 3.8%); Colby is a comanager. 

6%–9%: High-Yield Taxable Bonds

Also known as junk bonds, high-yield corporates are issued by firms with sub-investment-grade ratings. As compensation for lending to these higher-risk businesses, investors receive higher yields than investment-grade bonds offer. Junk bonds move more in sync with stocks than with Treasuries and are less sensitive to interest rate swings than high-quality bonds with the same maturity.

High-yield bonds have really come into their own in recent years. “High yield has become a very established, accepted asset class that investors are no longer fearful of,” says Ray Kennedy, co-manager of Hotchkis & Wiley High Yield Fund. “It’s not your parents’ high-yield asset class.” Liquidity and transparency have substantially improved, default rates have remained tame, and risk-adjusted returns have been better than those of investment-grade bonds and several other asset classes.

The risks: The risk of default is the main concern. For now, default rates are a relatively modest 2% to 4%, according to Kennedy, but would rise if the economy were to tip into a recession. 

How to invest: High-yield bonds quite likely merit some allocation in your fixed-income portfolio. “The role in high yield is to achieve higher long-term returns than the rest of your income portfolio but with a lower correlation with interest rate movements,” says VanEck’s Rodilosso. 

Because you also want to sleep soundly at night when investing in these riskier credits, it pays to employ a defensive manager who minimizes downside risk. “You make more by losing less,” says Carl Kaufman, who has run Osterweis Strategic Income (OSTIX, 6.1%) since 2002. 

He likes the current set-up for shorter-term bonds, given the inversion of the yield curve (with shorter-term securities yielding more than longer-term ones). “You can get some nice yields at the short end without taking the risk of the long end of the curve,” Kaufman says. The longer the maturity, the higher the chance of default and the greater the interest rate sensitivity. The fund’s duration is 1.7. 

David Sherman, founder of and portfolio manager for CrossingBridge Advisors, has compiled an outstanding risk/return profile over many years with his short-duration high-yield funds. “We’re 100% bottom-up, disciplined value investors,” Sherman says. “The first investment decision is ‘do no harm.’ ” His CrossingBridge Low Duration High Yield (CBLDX, 8.2%) is one of only a handful of bond funds to make money in 2022, a disastrous year for fixed income. The fund’s duration is generally around 1. 

Riverpark Strategic Income (RSIIX, 9.1%), which Sherman also manages, has a slightly higher duration of about 1.5 to 2 and an equally stellar risk-management record. The fund has only one-third of the average volatility and maximum drawdown of the high-yield bond category. The portfolios are mainly U.S. credits, but Sherman scours the globe and has a particular affection for Nordic bonds.

3%–5%: Dividend Stocks

Dividend-paying stocks play an important income role in a diversified portfolio. Unlike fixed-income investments such as Treasuries and corporate bonds, dividend distributions paid by healthy corporations can increase each year, making the payouts a potent way to maintain the purchasing power of a long-term portfolio. They’re particularly valuable in an inflationary environment such as we have today.

The risks: Stocks tend to be much more volatile than high-quality bonds and suffer more in a recession. Some investors make the mistake of reaching for the highest yields, which can be an indication a company is in distress or lacks promising growth prospects. 

How to invest: The oil patch is generally a good place to hunt for yield. John Buckingham, editor of The Prudent Speculator, likes Devon Energy (DVN, $50, 4.9%), an independent exploration and production firm, for its high-quality domestic assets, improving balance sheet, and focus on profitability and dividend distributions. 

Another of his picks is Air Products & Chemicals (APD, $242, 2.9%), a member of the Kiplinger Dividend 15, the list of our favorite dividend payers. Founded in 1940, Air Products is one of a handful of players in the highly consolidated and growing industrial gas industry. The company has increased its dividend for 42 consecutive years.

Core investment banking activities such as mergers and acquisitions and initial public offerings are coming alive again, and that should benefit generous dividend payer Morgan Stanley (MS, $94, 3.6%), says Jay Hatfield, founder and CEO of Infrastructure Capital Advisors. 

If you prefer to invest in a diversified basket of dividend stocks, consider Schwab US Dividend Equity (SCHD, $81, 3.5%). The fund, a member of the Kiplinger ETF 20 list of our favorite ETFs, offers both a relatively high yield and a solid track record of boosting dividends each year. 

Save some room for foreign stocks, which offer significantly higher yields than do their counterparts at home. Jay Hill of Tweedy, Browne notes that European companies prefer to return money to shareholders through dividends, whereas many U.S. firms prefer share repurchases. Tweedy’s Thomas Shrager points to Swiss-based pharmaceutical giant Roche Holding (RHHBY, $32, 4.4%), which trades as an American depositary receipt, as an example. Roche has boosted dividends 37 straight years, and Shrager sees a solid drug-development pipeline that should underpin growth in sales and earnings for years to come.

For a diversified overseas portfolio, consider Vanguard International High Dividend Yield (VYMI, $69, 4.9%), whose top holdings are Toyota (TM), Novartis (NVS), another Swiss pharma giant, and Shell (SHEL).

4%–6%: Real Estate Investment Trusts

Because REITs are required to distribute at least 90% of their taxable income each year, they offer relatively high yields. REITs can raise rents when leases expire, which makes these real-asset businesses a strong inflation hedge in today’s environment of rising prices. 

The risks: REITs tend to underperform in periods of rising interest rates because they typically carry high debt loads and face increasing competition from the higher yields available on fixed-income investments. 

How to invest: The REIT industry has expanded and diversified dramatically to include tech-oriented subsectors such as data centers and cell towers, along with e-commerce warehouses, self-storage facilities and health care properties. In recent months, the financial media have been filled with doom-and-gloom articles about the growing number of bankruptcies of city-center office buildings emptied out by the increasing popularity of remote and hybrid employment. That narrative is somewhat distorted in that office space represents only about 5% of the REIT universe, and some of the urban developers are doing fine.

“I think people are making a big mistake about offices by not distinguishing between A+ properties and B and C” properties, says Hatfield. He notes that REITs, as public companies with mostly fixed-rate debt, are much better capitalized than privately owned office towers, which may have floating-rate debt. He likes the largest office owner, Boston Properties (BXP, $62, 6.2%). 

Another controversial sector is brick-and-mortar retail. Michael Elliott, a REIT analyst at CFRA Research, favors Simon Property Group (SPG, $152, 5.2%), the largest shopping mall owner, for its focus on class-A malls with the industry’s highest sales per square foot. Another of his picks is VICI Properties (VICI, $29, 5.8%), a gaming REIT that owns casinos and resorts in Las Vegas, including Caesars Palace, MGM Grand and The Venetian. 

If you prefer to hold a diversified REIT sector fund, here are two very different choices: Vanguard Real Estate (VNQ, $84, 4.1%) is a low-cost, passively run index fund with a basket of 159 securities. Actively managed Fidelity Real Estate Income Fund (FRIFX, 5.9%) holds an unusual combination of REITs, REIT corporate debt and commercial mortgage-backed securities. 

“I have found that allocating to different real estate security types has helped deliver less volatility, higher income and a similar return profile compared to funds that focus on real estate stock investing,” says Bill Maclay, the Fidelity fund’s manager. Today, Maclay says he finds better value in real estate debt, which is “attractively priced, with the highest yields in more than a decade.” One of his current areas of focus is high-yield mortgage-backed securities secured by warehouse properties.

5%–8%: Midstream Energy Infrastructure

Midstream companies process, store and transport oil and natural gas around the nation through pipelines. Their place is in between upstream companies (energy producers) and downstream firms, which make finished products such as liquefied natural gas.

The industry has performed well the past few years and remains in a sweet spot. Because capital investment needs are modest, the firms are gushing cash flow, which they use to reduce debt levels and increase dividend distributions and share buybacks. 

“The beauty of this story now is that it’s [about] cash flow ... and the return of money to shareholders,” says Greg Reid, a comanager of Westwood Salient MLP & Energy Infrastructure, who says the average pipeline company yields about 6% and is increasing cash flow by 5% to 6% a year. 

The risks: The largest risk is an economic slump, which would cut energy consumption and reduce volumes moved through the energy infrastructure. Inflation is less of a challenge because, unlike in many other industries, pipeline operators can generally pass on higher costs to customers each year through inflation escalators built into long-term contracts.

How to invest: Midstream energy is composed of both master limited partnerships and corporations (also known as C corps). Yields tend to be higher for MLPs, which distribute most of their income each year but issue K-1 forms, which can be somewhat cumbersome at tax time, to limited partners (that is, investors). 

Your first decision is whether you are willing and able to handle the K-1s annually. If you are, then there’s an attractive yield available in Energy Transfer LP (ET, $15, 8.1%), whose operating cash flow is quickly expanding, notes Stewart Glickman, an energy analyst at CFRA. Many fund managers, such as Hatfield, at Infrastructure Capital Advisors, are particularly drawn to natural gas. “The U.S. is the Saudi Arabia of natural gas, which is good for pipelines,” says Hatfield, who recommends Enterprise Products Partners LP (EPD, $29, 6.9%).

Simon Lack, comanager of Catalyst Energy Infrastructure Fund, likes Williams (WMB, $38, 4.9%), which operates, among other assets, the Transco pipeline, a 10,000-mile pipeline system that extends from south Texas to New York City and transports about 15% of the country’s natural gas. If you seek a higher yield, then Lack recommends Enbridge (ENB, $36, 7.5%), a conservatively managed Canadian company and the sector’s largest player by market value. 

Or, for a diversified sector holding, consider Lack’s fund itself. Catalyst Energy Infrastructure Fund (MLXIX, 6.0%) pays monthly dividends and avoids the need to issue K-1s by keeping its MLP weighting in the fund to less than 25%.

9%–10%: Business Development Companies

Business development companies invest in small and growing firms that are typically too small to access bank lending. Congress devised the BDC structure in 1980, and the effect has been to “democratize access to the private-credit asset class,” says Steve Boehm, a partner at the law firm of Eversheds-Sutherland who has advised many of the largest BDCs over the past 25 years. As with similar investments aimed at high-net-worth individuals and institutional investors, BDCs are currently a hot asset class, says Boehm.

Most BDC loans to small, private firms are secured, first- or second-lien variable-rate loans with interest rates that adjust when lending rates change. A BDC can trade at a premium or discount to the net asset value of its investment portfolio, which is reappraised quarterly. 

Like REITs, BDCs are required to distribute at least 90% of their taxable income each year. Because this is ordinary income (that is, not qualified dividend income eligible for lower tax rates), a tax-deferred retirement account is a natural home for these high-yielding investments.

The risks: BDCs often use borrowed money to make loans to their portfolio companies. That leverage can goose returns as long as portfolio loans are solid and BDCs can lend at higher rates than at which they borrow. But it can magnify losses in net asset value if the reverse comes to pass. Another challenge is that lending rates may have peaked this cycle, which would constrain earnings growth for BDCs.   

How to invest: There’s very wide variation among BDCs’ sizes, quality of management and portfolios. Because these are private, high-yield loans with a risk of default, Alex Seleznev, founder of Capital Squared Financial, suggests a low-single-digit allocation to the asset class. “This is an aggressive component of someone’s income-oriented portfolio,” he says.

Seleznev is attracted to Ares Capital (ARCC, $21, 9.2%), by far the largest company in the industry by market value. “Size matters in BDCs,” he says. This is true particularly because BDCs, which must distribute nearly all their earnings, need ready access to capital markets that may be unavailable to small players. Robert Dodd, a BDC analyst at investment firm Raymond James who has covered the industry since 2006, notes that Ares has steadily increased its book value (a critical metric for him because it measures the quality of a BDC’s loan portfolio) and has never cut its dividend in the 20 years since it went public. “There’s a level of consistency over a long period of time,” he says.

Dodd also recommends Sixth Street Specialty Lending (TSLX, $21, 8.6%), whose portfolio consists nearly entirely of first-lien loans. Ares, which almost never trades at a discount to net asset value, is currently at an 8% premium, and Sixth Street at a 26% premium; both have total leverage ratios (borrowed money as a percentage of assets) of about 50%, which is typical.

If you’d rather diversify your BDC portfolio, you can choose between a market-weighted index-tracking fund, VanEck BDC Income (BIZD, $17, 10.3%), and an actively managed one, Putnam BDC Income (PBDC, $34, 9.2%). Putnam’s BDC fund, launched in 2022, is managed by Michael Petro, who has invested in BDCs for more than 15 years. 

4%–12%: Closed-End Funds

Closed-end funds raise money through an initial public offering, then invest the money in stocks, bonds, MLPs and other financial assets. Trading on an exchange, shares of closed-end funds will fluctuate in price according to investor demand and can trade at a discount or premium to the per-share value (or net asset value) of the fund’s underlying assets. 

The risks: Most closed-end funds use borrowed money, or leverage, to invest in portfolio assets. Leverage can work both ways, boosting price returns in up markets but amplifying losses in net asset value when markets decline.

How to invest: Municipal bonds account for about one-third of the closed-end fund market. Muni-focused closed-end funds have struggled a bit over the past year due to the inverted yield curve, which undermines the ability of fund managers to borrow at attractive short-term rates and invest for the long term. 

But herein lies an opportunity, says Steve O’Neill, a portfolio manager at RiverNorth Capital Management. At some point, the yield curve will uninvert as the Fed cuts interest rates. In the meantime, says O’Neill, closed-end muni funds trade at nearly a record discount to net asset value and in the 95th percentile of cheapness by discount over the past 25 years.

One of O’Neill’s picks is BlackRock MuniYield (MYD, $11, 5.7%), which sells at a 9% discount to net asset value and has a 35% leverage ratio, which is about average. The tax-equivalent yield is 7.5%. If you prefer no leverage, he recommends Nuveen Municipal Value (NUV, $9, 4.0%), which trades at a 7% discount. Tax-equivalent yield: 5.3%.

Not surprisingly, higher yields are available on leveraged taxable investments. John Cole Scott, chief investment officer of Closed-End Fund Advisors, likes FS Credit Opportunities (FSCO, $6, 12.0%), which invests mainly in senior floating-rate secured loans, trades at a 15% discount and has 33% leverage. 

Scott is also keen on Brookfield Real Assets Income (RA, $13, 11.0%), which invests in corporate debt and asset-backed securities in the infrastructure, real estate and natural resource sectors. Brookfield sells at a 13% discount to net asset value and carries a modest 17% leverage ratio.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Americans voted real estate as the best long-term investment, according to a new Gallup poll. And in fact, real estate has come out on top of this poll every year since 2014, beating out stocks or mutual funds, gold, and savings accounts or CDs. 

This year, 36% of Americans put real estate on top. Next up was stocks, at 22%, followed by gold, 18%, and savings accounts or CDs, 13%. Coming in at the bottom of the list was bonds, at 4%, and cryptocurrency, at just 3% — not a huge surprise, considering many people are still trying to figure out what cryptocurrency is. 

That real estate has been such a consistent winner this past decade is interesting, though. Now, don't get me wrong: Both real estate and the stock market have historically been great long-term investments. They have both exceeded the rate of inflation, meaning that if you were invested, you saw some great returns in the long-term. They also both generally have higher rates of return than safer vehicles like savings accounts, CDs (even with the high CD rates these days) or bonds. 

But lately, stocks have given a better return than real estate, and those returns have come as investing has gotten increasingly accessible thanks to tools like online brokers and trading platforms. Real estate, meanwhile, has only gotten less accessible, if you're not already a homeowner, as prices have been rising and down payments are a bigger barrier to entry than, say, throwing $100 into a Vanguard account. (That's particularly true now, when people like myself are arguing it is the worst time to buy a house between high mortgage rates and prices.)

If you're an older homeowner or real estate investor, though, it's easy to understand why you'd say real estate is a better investment than the stock market. From 1990 to 2006, returns on housing were higher than stocks, according to Investopedia. 

But since 2006, stock market growth has exceeded housing. Using the S&P 500 vs the Vanguard Real Estate Index, Sean Ross at Investopedia found that from December 2013 to December 2023, the real estate index had a 37% total return — while the S&P 500 had a 155% total return. 

Even so, again, I can understand why people stick with real estate. It's a simple idea, really, which is that real estate feels safer. The stock market has bumps and volatility in short-term segments, while housing generally keeps a more slow but steady climb. And you can't disagree that on a rainy day, a roof over your head feels like a better investment than a GOOGL share in your Robinhood account. 

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Higher interest rates have introduced challenges for bond investors in recent years, leading to a reevaluation of strategies to mitigate risks while capitalizing on the income-generating potential of bonds. Now, with the possibility of falling interest rates and the Federal Reserve's strategic monetary adjustments, investors need to have a nuanced understanding of how to navigate the complexities of the fixed-income market in 2024.

Fixed-income market dynamics

Fixed-income markets are sensitive to changes in monetary policy, particularly those set by the Fed. These changes can profoundly impact bond yields, prices and overall investment returns. Understanding these dynamics is crucial for effectively navigating the fixed-income market.

The relationship between interest rates and bond prices is inversely proportional. When interest rates rise, bond prices fall, and vice versa. This inverse relationship is a fundamental principle of bond investing and plays a critical role in portfolio management strategies.

Between 2008 and 2023, the bond market in the United States saw an average yearly return of merely 2.81%, according to the Bloomberg US Aggregate Bond Index. U.S. Treasury bonds experienced even lower performance, with an average annual return of just 2.35% during this timeframe. This was exacerbated in 2022 when the Fed's hawkish rate hiking commenced, and bond market losses amounted to a staggering 13%.

The Fed plays a vital role in shaping the fixed-income landscape. It uses monetary policy tools, primarily the federal funds rate, to influence economic conditions. Changes in the Fed's policy stance can significantly impact bond yields and prices.

During the March Federal Open Market Committee meeting, the Fed once again paused rate hikes, raising speculation that there could be a pivot to interest rate reduction in the coming months.

Historically, bonds have shown consistent positive performance after Fed pauses in rate hikes. This performance is often linked to the subsequent loosening of monetary policy, leading to falling interest rates.

From August 1984 to December 2021, the average U.S. bond market total returns following the end of a rate hike cycle was roughly 8% after six months and 13% after one year.

Current fixed-income environment

The current fixed-income environment is characterized by higher, but potentially falling, interest rates. The federal funds rate currently stands at 5.5%, up significantly since the sub-1% rates in 2021. This environment presents both challenges and opportunities for investors.

The Fed's stance since 2022 has been geared toward tightening monetary policy to combat inflation. Higher interest rates have led to declining bond prices, resulting in sharp losses for many bond investors. However, these higher rates have also increased bond yields, enhancing the income potential of those securities during that time.

However, based on the Fed's economic projections and policy commentary, the tightening cycle is likely complete unless high inflation reignites. Since October 2023, following a pause in rate increases, the bond market has performed exceptionally well.

There are indications that interest rates may start to fall in the near future, with widespread anticipation for multiple interest rate cuts in 2024. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.

Strategies for navigating the current environment

There are several strategies that investors can adopt to navigate the current fixed-income market environment effectively. For instance, with the prospect of falling interest rates, it may be prudent for investors to decrease their cash and short-term bond positions.

Investing in longer-term fixed-income securities can help lock in higher yields before rates fall. Increasing the duration of a bond portfolio can be beneficial when interest rates peak, as long-term bonds have more significant potential for capital appreciation during periods of falling rates.

Investors should also note that floating rate securities, whose interest rates adjust with market rates, have historically underperformed during periods of loosening monetary policy. Reducing exposure to these securities can help mitigate potential losses.

The fixed-income market's landscape is constantly changing, shaped by shifts in the Fed's tone and monetary policy. By understanding these dynamics and adopting effective portfolio management strategies, investors can navigate the fixed-income market effectively.

Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth.

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Inflation can wreak havoc with your portfolio, too. "Inflation impacts your portfolio in acute and obvious ways and in more sneaky and nefarious ways," says Wylie Tollette, chief investment officer of Franklin Templeton Investment Solutions and coauthor of a 2022 study on which kinds of investments do best in inflationary times. 

Inflation erodes the value of your investments by reducing their purchasing power, for starters. And when inflation is on the rise, central bankers tend to respond with higher interest rates to cool the economy and put a lid on prices. The Federal Reserve, for example, has hiked its benchmark rate 11 times since March 2022. The one-two punch of higher inflation and rising rates sent stocks and bonds reeling, making 2022 the rare year in which both markets tanked. 

More subtly, inflation rates can also influence overall market valuations, or the prices investors are willing to pay for financial assets. In general, the higher the inflation rate, the less investors are willing to pay for stocks. 

One rule of thumb states that stocks are overvalued if the average price-to-earnings (P/E) ratio for stocks overall is higher than 20 minus the inflation rate. Based on a 2024 expected inflation rate of about 3%, that implies a fair value for the S&P 500 index would be about 17 times expected earnings. As of January 31, the S&P 500 index traded at a P/E of 21.7, but that's skewed higher by a handful of giant growth stocks known as the Magnificent Seven.

Likewise, investors are generally willing to lock money up in a bond only if they think the bond's interest rate will beat inflation over its lifetime. "It's all about inflation expectations," explains Rob Arnott, founder of the investment firm Research Affiliates. 

As bad as inflation can be, stagflation (when inflation is rising but the economy is in a rut) can be worse – as can deflation (when widespread, persistently falling prices threaten to destabilize the economy overall). Economists say there are basically five different pricing environments, or kinds of "flation," each impacting your portfolio in different ways. They're listed below with summaries of which types of investments tend to prosper in each. 

Inflation

A little bit of inflation, which is a sustained increase in the price level of goods and services, is generally considered beneficial for the economy. But when prices start rising by more than about 2% a year, policymakers, bankers and businesspeople worry. 

Business managers, fearing their revenues will lag, often start raising prices, and workers demand raises, potentially sparking a dangerous upward cycle. The investments that have historically beaten high inflation include energy stocks, residential real estate held directly (real estate investment trusts have provided much less inflation protection in previous cycles) and Treasury inflation-protected securities. TIPS are federal IOUs that adjust their principal in line with the Consumer Price Index (CPI). 

Commodity funds also tend to beat inflation. For example, the TCW Enhanced Commodity Strategy (TGABX), a member of the Kiplinger 25 list of our favorite no-load mutual funds, returned 44% in the most recent period of rising inflation, from March 2021 through May 2022. 

Stocks in general can be a poor inflation hedge over short periods but serve as potent protection for investors willing to buy and hold for more than five years, Tollette says. Fixed-rate bonds typically underperform during high-inflation periods. 

Disinflation

When the rate at which prices are rising slows, you get disinflation, which is what we have now. During disinflation, unlike in deflationary periods, prices still go up – sometimes painfully. The important distinction is that they are climbing more slowly than in the recent past. 

The good news is that a moderation of inflation, such as the cooling that the economy experienced in 2023, is typically a boon for investors because it bodes well for corporate profitability and thus stock prices. During these periods, investors are often rewarded for taking more risks, such as buying stock in growth-oriented companies. 

Since inflation started declining in July 2022, the growth-oriented Nasdaq Composite index has handily beaten broader measures, such as the S&P 500, for example. Declining inflation also means that bonds bought during the more inflationary period now promise higher "real," or inflation-adjusted, returns. Commodities, however, have done poorly in previous periods of disinflation.

No-flation

Periods of price stability (typically defined as times when consumer prices overall rise by no more than 2% a year) are sometimes referred to as "no-flation." They tend to be a "golden era for financial assets," says Gary Schlossberg, global strategist for the Wells Fargo Investment Institute. 

Think back to 2013 through 2019, when the Consumer Price Index generally stayed below 2%. The S&P 500 notched gains in six of those seven years and produced an above-average annual return of 13.6%. Price and economic stability create a good climate for just about all investments but especially for riskier investments, such as growth-oriented and small-company stocks, Schlossberg says.

Deflation

The prices of some items, such as computers, gasoline and seasonal foods, drop from time to time. But a generalized, economy-wide drop in prices, or deflation, is rare. That's good, because deflation can lead to a vicious cycle: A weakening economy leads to lower wages, layoffs and decreased spending, which in turn ushers in still-lower prices and a further weakening of the economy. 

The U.S. has seen general deflation only twice in the past century: During the Great Depression in the early 1930s and from March through October of 2009, partly overlapping what many call the Great Recession. In both periods, stock prices initially plunged much more than consumer prices and took years to recover. Volatile commodities also tend to suffer during deflation. Bonds that pay a fixed, positive rate of interest offer positive real returns, barring a default.

Stagflation

Inflation that coincides with stagnation in the job market and the economy, known as stagflation, causes truly challenging times for investors. Because economic weakness often prevents companies from raising prices enough to recover their costs, profits shrink, and stock returns fail to keep up with inflation. 

From 1973 through 1982, the annual inflation rate averaged 8.7% and the average unemployment rate topped 7%. But the annual average return of the S&P 500 over that period was just 6.7%, meaning investors lost purchasing power. The economy escaped a stagflation scare during the pandemic. 

If you want to hedge against this type of painful economic malaise, Tollette says your best bet is TIPS, which, if you hold to maturity, are guaranteed to return your investment and move up with inflation. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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"I regularly clean out my closet, especially at the start of a new season," says Alanna Morey, a private wealth advisor at Ameriprise Financial. She often finds outfits that no longer fit her or her style.

"The same thing can happen in our portfolios," she says. "If we aren't regularly reviewing and making changes to our portfolios, they may not be in alignment with our present goals or risk tolerance."

Just as you might reevaluate your closet every spring, you should follow these steps to spring clean your portfolio.

Spring clean your portfolio: Review your style objective

The first step to spring cleaning your closet and your portfolio is to remind yourself of your vision for it and the items within it. What were you hoping to achieve with each of the investments you purchased? Are they doing what you hoped they would?

"If your goals have changed, it is likely that your investments need to be adjusted too," says Lisa Westermark, senior vice president and co-founder of Beverly Hills Private Wealth. "For example, if you decide that you want to retire sooner than planned, that will adjust the time horizon for your goal, which impacts the risk tolerance of your portfolio."

If you have ambitious long-term goals, you may need to lean heavily on riskier securities like equities. Meanwhile, if your goals are more modest or within the next five to 10 years, you should consider more conservative investments that won't overexpose you to the risk of loss when you need to withdraw your money. 

Spring clean your portfolio: Sell stretched-out items

Sometimes, despite your best efforts to follow the care instructions, clothes stretch out. Investments can stretch beyond their intended bounds, too. As great as it may feel to see overachievers in your portfolio, holding onto winners can lead to overconcentration, which can push the risk level of your portfolio higher than intended.

To spring clean your portfolio, you need to pare back your winners so you can reinvest in your less stretched-out investments. In other words: Sell enough of your outsized investments to bring them back in line with your intended allocation and use the proceeds to buy more of the underperforming investments to bring them back up to the size you intended them to be.

If taxes are a concern, you can gift stock that has appreciated in value to charity to avoid having to take the gain yourself.

Spring clean your portfolio: Reconsider the underachievers

Not all underachievers need to be kept, however. Sometimes outfits don't live up to expectations. They look great on the hanger, but when you get home, you find you never actually wear them and so they wilt and wither in the back of the closet.

The same can occur with your investments. Sometimes a security bought with the best of intentions never achieves what you were hoping it would.

"Maybe you have a pet stock that you have held for years, and it is only losing value," Westermark says. Sometimes this means the investment just needs more time to reach fruition, but other times it could be a sinking ship. 

"Don't fall victim to the loss aversion bias," where the pain of loss is so strong that investors refuse to accept defeat, Westermark says. "Consider if you could instead invest in something that better serves your overall goal."

Spring clean your portfolio: Check if you're achieving the look you're aiming for 

Once you've reviewed your investments on an individual level, you can take a view to see if you're doing everything you can to reach your goals.

"Can you increase the amount you are saving towards them?" Morey says. "Now is a great time to make sure you are saving as much as possible toward your 401(k), IRA or other accounts that can support your financial priorities."

Should you invest more aggressively in the hopes of a higher return? Or do you need to reduce your risk to help you sleep at night?

Spring clean your portfolio: Look beyond your closet

Spring cleaning your portfolio doesn't have to end with your investments. You can – and should – evaluate all aspects of your financial life. 

"Review your balances and put together a plan to clean out any debt you can, especially credit card debt," Morey says. Then, assess "your inflows and outflows to determine if you can set up a systematic savings plan to save towards your financial goals."

You should also take stock of where all your accounts are located.

"Many people think it helps to diversify if you have accounts with multiple institutions, when in reality the accounts can be working against each other or have too much overlap to actually be diversified," Westermark says. "You need to have one succinct plan and direction or run the risk of having competing plans."

If nothing else, consolidating accounts will make it easier to spring clean your portfolio next year.

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"We believe the 25/25/25/25 portfolio will outperform the 60/40 portfolio in the 2020s," says Michael Hartnett, a chief investment strategist at BofA Global Research. 

The simplest reason is that interest rates and inflation are higher than in decades past. The 60/40 portfolio worked best when inflation and interest rates were low or falling, says Hartnett. But this decade he expects higher inflation and interest rates, with added volatility, creating market conditions that are well suited for cash and commodities to outperform bonds and stocks.

So far, though, that hasn't played out. Although the 25x4 portfolio did marginally better than a 60/40 portfolio in 2022, over longer periods, it has lagged. A 60/40 portfolio has gained 4.6% annualized over the past three years; a 25x4 portfolio has lost 0.4% on average per year.

Think twice before switching to the 25x4 portfolio 

In short, don't count the 60/40 portfolio out yet. "Over the years, the 60/40 portfolio has held up for investors, and it's actually provided wonderful returns with low risk levels," says Jan Holman, director of adviser education at Thornburg Investment Management. 

This isn't the first go-around for the 25x4 portfolio. It got its start decades ago by way of Harry Browne, the late investment adviser and two-time Libertarian Party presidential candidate (in 1996 and 2000). In Browne's so-called Permanent Portfolio strategy, investors held 25% in cash, 25% in gold, 25% in long-term bonds and 25% in stocks, rebalancing annually. The idea was that the four asset classes would help minimize risk no matter the market or economic condition. 

Browne helped develop a no-load mutual fund tied to the 25x4 strategy called the Permanent Portfolio Permanent (PRPFX), which launched in 1982. But it's not a straight-up version of his approach. Instead, the fund is more "dynamic," says fund manager Michael Cuggino. 

It targets an allocation of 30% stocks, 25% precious metals (20% in gold and 5% in silver) and 45% in bonds and cash (10% of which is denominated in Swiss Francs). The stock side of the portfolio includes a mix of real estate and natural-resources stocks, such as Prologis (PLD) and Exxon Mobil (XOM), as well as aggressive growth stocks, such as Nvidia (NVDA) and Meta Platforms (META). "The fund's goal is to outpace inflation," says Cuggino, a fund manager since 2003. 

The fund's annualized 5.7% return over the past decade has indeed beaten the 2% average inflation rate over the period. And it has been far less volatile over that time than its peers (moderate allocation funds), which typically hold about 60% of assets in stocks. But 63% of its peers did better, generating an average 6.1% annualized 10-year return. 

That's evidence that it's important to think through any allocation strategy carefully before you implement it. "Asset allocation should always be decided on an individual basis and in the context of a comprehensive financial plan, not based on a gimmick," says Gordon Achtermann, a certified financial planner in Fairfax, Virginia. As an alternative, consider a low-cost target-date fund. "You won't beat the market," he says, "but you won't get badly hurt, either."

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here. 

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Most financial metrics are a little too complex to be done in your head. You're going to need a spreadsheet or a financial calculator to calculate the internal rate of return, yield to maturity, or common risk metrics like beta or standard deviation. The beauty of the Rule of 72 is that it can be calculated by the average 9-year old. 

Let's take a look at what the Rule of 72 is, how it works and how you can use it in your financial planning.

What is the Rule of 72 in simple terms?

The Rule of 72 is a straightforward formula that provides a quick-and-dirty approximation of the time it takes for an investment to double in value assuming a fixed annual rate of return. It's a solid tool for estimating the effects of compound interest and can be used to gauge the potential growth of your investments over time.

The formula for the Rule of 72 is ridiculously simple. You divide 72 by the annual rate of return you expect to earn on that investment. For example, if you expect an annual return of 8%, it would take approximately 9 years for your investment to double (72 divided by 8 equals 9).

What are specific examples of the Rule of 72?

Getting more concrete, let's say you own an S&P 500 index fund and you want to map out a few scenarios. If the index rises at its historical average of around 10%, you'd double your money in about 7.2 years (72/10 = 7.2). 

If you believed that the S&P 500 is more likely to return, say, 15% due to strong earnings, you'd double your money in 4.8 years (72/15 = 4.8). And if you believed the S&P would return a more mundane 5% due to, say, a recession, you'd double your money in 14.4 years (72/5 = 14.4).

So far year-to-date, as of mid-May, the S&P 500 has had a return of 11.56%. The Rule of 72 would suggest your investments would double at that rate in 6.2 years — but that's assuming that rate of return stays constant. 

The Rule of 72 can also be used to assess the impact of inflation on your purchasing power. If you want to determine how long it will take for the purchasing power of your money to be cut in half due to inflation, you can use the same formula. Let's say the inflation rate is 3%. You could divide 72 by 3 to get 24 years. Assuming a 3% rate of inflation, your purchasing power would be cut in half in 24 years.  

The most recent Consumer Price Index report put headline inflation at 3.4% on an annual basis. Using the Rule of 72 at that rate, your purchasing power would be cut in half in 21 years, but again, that's assuming the inflation rate stays the same. 

Why should I use the Rule of 72?

The benefits of the Rule of 72 are obvious. It's a simple formula that anyone with elementary school math skills can calculate. It doesn't require a Wharton MBA or CFA Charter. It also allows you to set realistic expectations for your investments and can help you determine whether your financial goals are achievable within your investment time frame.

You can also use the Rule of 72 to compare different investment options. For instance, if you're deciding between a stock fund and a bond fund with two very different expected returns, the Rule of 72 can help you assess which one gets you to your financial goal faster.

Remember though, the Rule of 72 is designed to be a rough estimate and its assumptions aren't always realistic. It assumes a constant rate of return, and stock returns are anything but constant. The average return is far from indicative of the return you're likely to get in any given year. It also doesn't account for taxes, fees or other expenses that can chip away at your returns. And like all financial models, it's only as good as its inputs: Garbage in, garbage out. 

While by no means a comprehensive analysis, the Rule of 72 is a useful tool that provides a quick and easy way to estimate the time it takes for an investment to potentially double. It's valuable in financial planning and in comparing investment alternatives. And again, it's something even a novice investor can put to work. 

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