Question - In 1986 I had $50,000 to invest for income.
A friend suggested I invest $30,000 in Colonial High-Yield Securities at $8.13 a share with a monthly income of $295 and $20,000 in Colonial Federal Securities at $13.27 a share with a monthly dividend of $150.During these 10 years the High-Yield Securities have spasmodically decreased to $184 of monthly income and the price per share has dropped to $6.73. The Federal Securities income has decreased to $87 monthly and the price per share to $10.46.
My question is: With this 10-year record, why do these two funds continue to show up in Money, Forbes and other magazines as the better funds in their category?
If these are better funds, then the others must be in real bad shape! - H.P.
Answer - One reason your income went down is simple: Interest rates declined.
The rest of the story is more complicated but of great interest for retired investors.
These two funds will appear on a lot of lists because their percentile ranking against competing funds has consistently been in the top 50 percent or better.
Colonial High-Yield, for instance, was in the top 8 percent over the last five years and the top 18 percent over the last 10. Similarly, Colonial Federal Securities ranked in the 13th and 19th percentiles in the last five and 10 years, respectively.
The catch is that the magazines and major services rank mutual funds by their total return, with all income reinvested, over periods of time. Over the last 10 years, according to data from Morningstar, Colonial High-Yield Securities (A shares) provided annualized return of 10.40 percent.
You had a very different experience, however, if you took your interest income and spent it.
Not only did the net asset value per share of Colonial decline during the period, but so did the net asset value of each of the top five funds. Kemper High-Yield A shares provided the best return (11.37 percent a year), but its net asset value per share fell from $9.38 to $8.08.
Many fixed-income funds regularly make distributions that are larger than their net income. The result is a slow erosion of principal. That's what happened to you in both funds.
Question - I am a 62-year-old man earning $65,878 a year and plan to retire this November. I have two retirement plan choices:
Plan One: a monthly annuity of $4,695 plus 3/4 of 1 percent cost-of-living adjustment of the consumer price index.
Plan Two: A lump sum of $103,566 up front, tax-free if rolled into an IRA account, and a monthly annuity of $4,377.
I would like to know which is the best option. And where should I invest the lump sum? - G.T.
Answer - Take the cash and put it in an IRA rollover account with a major fund company such as Vanguard or Fidelity or a network such as Schwab.
The annuity's extra $318 represents a yield of only 3.7 percent.