-- You'd probably love to find a safe, high-yielding investment for your retirement savings.
Unfortunately, safe, high-yielding investments are in the same category as "gentle, caring honey badger" and "non-toxic mercury beverage." There are no safe, high-yielding investments these days.
Your choice, then, is to accept virtually no income from your investments, or to take more risk for more income. If you're willing to do the latter, than you have several alternatives. Today, we'll start with junk bonds.
The entire income landscape is lower than an ant's toenail. The average money market mutual fund yields 0.02%. At that rate, you'll double your money in 3,600 years. The average one-year bank CD yields 0.4%, according to Bankrate.com, meaning $100,000 will give you $33 a month.
Normally, you get a higher rate by locking your money up longer. You still do, but it's not much. Currently, a five-year Treasury note yields just 0.92%. Consumer prices have risen 3.9% the past 12 months, so someone investing in a five-year T-note will probably lose ground to inflation.
The other way you get higher yields is by taking credit risk — in other words, giving up the safety of the government's guarantee. When you give up that guarantee, you open up the possibility of taking a loss. "If you want more return, you have to take more risk, maybe more than you're accustomed to," says Tom Luster, director of investment-grade fixed income at Eaton Vance.
Typically, you could get a bit more interest by investing in long-term IOUs issued by extremely profitable, well-established corporations. You still can — but again, it's not a lot more interest. You can get about 1.3 percentage points more from A-rated investment-grade industrial bonds than you can from Treasury securities with similar maturities, says John Lonski of Moody's Analytics.
To get much higher yields, you have to start talking trash — specifically, high-yield bonds, the genteel name Wall Street gives to junk bonds when talking to the public. Junk bonds are issued by companies with suspect credit ratings. Junk borrowers pay high interest rates, because there's a chance they may not repay the loan.
Currently, high-yield bonds yield 7.18 percentage points more than comparable Treasuries, Lonski says. Bear in mind that a junk bond's yield is like a thermometer: The higher the yield, the more risk you're taking.
On Oct. 4, when conventional wisdom held that we'd all be reduced to eating gravel, junk-bond yields were 8.91 percentage points above Treasuries. At the peak of the 2008 credit crisis, when people thought that only the top 1% would have gravel, junk-bond yields were 22.3 points above Treasuries.
What's the worst that could happen? In the 12 months ended November 2008, the average junk fund lost 30%, including interest.
But that was in the worst meltdown since the Depression. This year, the average junk fund is up 2.1%. Reasons to be optimistic:
•The real garbage is gone. The junkiest bonds were sent to the trash heap in 2008. "The weak links always come out during a recession," says Margie Patel, portfolio manager at the Wells Fargo Advantage Funds. The current default rate is just 2%, Lonski says.
•Rotten companies aren't issuing new bonds. "The amount of distressed companies allowed to issue paper has fallen," says Patel.
•Rates are likely to remain low for some time. The Federal Reserve has said it will keep short-term interest rates at their current levels until mid-2013. And slow economic growth usually means low long-term rates.
Junk shouldn't be your entire income portfolio. In this unusually volatile time, Eaton Vance's Luster suggests that you spread your risks out, using Treasury Inflation-Protected Securities, or TIPS, to protect against possible inflation, and foreign bonds to protect against a falling dollar.
Someday, people won't think "safe, high-yielding investment" isn't the same as "stable European Union." Until then, you'll either have to accept low yields or take a bit more risk.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. See an index of Waggoner's columns. His book, Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. John's e-mail is firstname.lastname@example.org. On Twitter: www.twitter.com/johnwaggoner.