Until the last couple of years, there were limited opportunities for investors to earn a decent income from thier portfolios. Now due to the Fed’s rate hikes, the situation is much different as there are plenty of options for investors. In AdvisorPerspectives, Mike Smith and Mary Erwin of Russell Investments detail some considerations to reduce risk while optimizing for yield. 

During the prior decade when low rates prevailed, many investors were forced to invest in riskier securities in order to generate a decent yield like international bonds, infrastructure bonds, and high-yield bonds. Now, investors can earn similar returns with securities that are much less riskier, but Smith and Erwin believe that investors should continue to have diversified exposure to the asset class given that inflation poses a major threat.

If inflation continues to climb, it reduces the value of these cash flows. Therefore, investors should ensure that their portfolios’ income will grow faster than inflation. Model portfolios can play an important role in this process as it can help build a diversified portfolio and offer exposure to a variety of asset classes with more potential for growth in their income streams.  

Finsum: A major challenge for income investors over the next decade is ensuring that inflation doesn’t eat into their portfolios’ income stream.