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Individual Investors Reveal Their Preferred Sources of Investment Income, Return Targets

For the last several years, it has been a struggle for investors to find reliable sources of investment income. It used to be easy to earn generous income safely from your investments: Buy Treasury bonds or certificates of deposit and simple collect the cash from them. But with interest rates at or near record lows for the last seven years, with little indication that significantly higher rates will come about for many years, income-oriented investors and retirees have had to search harder for investment income. Luckily, there are still a number of options available.

Weekly Poll Question:

To get an idea of how our readers generate investment income, we asked them the following question last week:

Which income-generating products are you currently investing in or likely to invest in?

Here is how they responded:

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Almost 50% of respondents look to stocks as a source of investment income through either individual stocks, mutual funds/ETFs or preferred stocks. The overwhelming favorites among our readers as a source of investment income are individual dividend-paying stocks, garnering a quarter of all responses. Another 17% still look for investment income from stock, but they forgo individual stocks and instead invest in equity income mutual funds or ETFs. Sticking with stocks, 7% of respondents invest in preferred stocks to generate investment income. Preferred stocks represent a slice of a company’s capital structure that is senior to the common shares, but subordinate to the debt (both secured and unsecured). As with common stock, dividends aren’t guaranteed and unlike bonds, preferreds usually have no maturity date for when the principal is repaid. However, most can be called or redeemed by the issuer at a specific date and price.

Roughly a third of our readers invest in fixed income instruments in the form of individual government, municipal or corporate bonds. The most favored avenue among these investors is via fixed-income mutual funds or ETFs with 12% of the votes. Following close behind are government or municipal bonds or notes at 11%. Lastly, 9% of respondents invest in corporate bonds as a means of generating investing income.

Six percent of our readers invest in real estate/property to generate income.

Special Question:

Given the low-interest-rate environment in which investors have been operating for the last several years, many have had to re-evaluate their desired rate of return on their investments. Surprisingly, many investors do not have a figure in mind. Even if they do, it is possibly just an abstract number that they use without really considering the question. However, this is something that requires serious thought. After all, this is the money you’re setting aside for your children’s education, for retirement, for buying a house, etc.

Ideally, after choosing your investing goals to have a target rate of return in mind. The investment rate of return you want will determine which opportunities make sense for you. If you are targeting a higher rate of return, you will need to investing in instruments that, historically, generate similar rates of return. Furthermore, if you cannot tolerate the risks associated with the instruments you need to invest in to achieve your desired rate of return, you may have to adjust your expectations or your investment timeframe.

Last week, we asked our readers what their target annual rate of return is on their savings and investments and here is a breakdown of their responses:

 

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In all, 419 readers provided up with a target rate of return. As you can see, the distributions are roughly bell-shaped. The median target rate of return is 7% with the range of responses running from 3% to 20%. Roughly 64% of responses were clustered between 5% and 8.9%. There were 49 responses in the 10% to 10.9% range and of those, 45 said exactly 10%. Although strictly conjecture, it seems that these readers may have defaulted to a round-number value.

There were also a few outliers–with 12 respondents (almost 3%) having a target rate of return at least double that of the median (14% or higher). At the other end, 11 readers (2.6%) have a target rate of return at least have that of the median (3.5% or less).

To put these target rates into perspective, according to data from Wealthfront, between January 1926 and February 2016, U.S. common stocks averaged an average annual return of 10%, while government bonds returned 5.5% a year and U.S. Treasury bills returned, on average, 3.5%.

Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at http://www.aaii.com/memberquestion.

 

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