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Investing Specialists

The Error-Proof Portfolio: Don’t Give Thanks for Faux Income

Beware of investments that give with one hand and take away with the other.

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Thanksgiving is a time of fun, food, and football-watching with friends and family, but it's also an ideal occasion to take stock of all of that's right in our lives. And the truth is, most investors have plenty to be grateful for this holiday season. With the exception of a few scary moments like the flash crash and the spring sell-off, both stocks and bonds have generated robust returns for the year to date.

But times have been tough for those who look to their portfolios for current income from their investments. Yields on one-year certificates of deposit are barely above 1%, while most intermediate-term bond funds have SEC yields significantly less than 3%. To generate a livable income stream at this juncture, you'd need to have an awful lot of wealth or venture into some risky investments.

The trouble is, those in the latter camp may not even know they're taking a lot of risk to generate their current level of income and eroding their principal values in the process. Or worse yet, they may not realize their fund is dishing out income that's really just a return of their own cash. Such funds are the equivalent of moving money from one pocket to another.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.