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Income hopes clash with reality

By Sheyna Steiner ·
Thursday, March 28, 2013
Posted: 5 pm ET

Expectations and reality rarely overlap, particularly when it comes to investing. That goes double for fixed-income investors recently. The distance between what income investors want and what they're getting in terms of returns is exactly 260 basis points, or 2.6 percent, according to a recent survey of 500 affluent U.S. investors by the global asset management firm Legg Mason. The survey questioned 3,028 well-heeled investors from 13 countries.

In the survey, investors who use income-generating products reported that they would like returns of 8.5 percent, compared with their actual average returns of 5.9 percent.

This is pretty striking as lots of people identify themselves as income investors or are interested in generating income.

"It's top of mind as a global phenomenon," says Matthew Schiffman, managing director and head of global marketing at Legg Mason Asset Management. "Seven out of 10 affluent investors place income as a top priority. In the U.S., 2 out of 3 said it was important to extremely important."

Clearly there are many investors globally who feel they have an underperforming set of investments. Consistently falling short of investment goals could put the long-term objectives of any investor in jeopardy. For instance, if you're hoping to finance up to 30 years of retirement with a portfolio built over 30 working years, the amount you save and the way you invest will be based on a couple of assumptions, including the return on your money.

The level of return needed will dictate how much risk is in your portfolio. The investors in the Legg Mason survey need to take more risk in their investments to reach higher returns. When questioned, 51 percent of respondents said they were willing to take on more risk to achieve greater investment income.

They just hadn't done it quite yet.

International investments may be essential

Speaking of fear and trepidation, the American investors in the survey had only 11 percent of their income-producing assets invested internationally. Americans weren't alone in sticking close to home; investors all over the world have a home bias when it comes to investing. But individual investors in the U.S. have "the lowest allocation to international investments in any of the 13 countries surveyed," says Schiffman.

There are many arguments in favor of global diversification and a proliferating, possibly bewildering, number of ways to get there. It's not as though "international" is just one giant amorphous blob -- it's a vast world with lots of investment options that all have varying risks and benefits. Very broadly, there are exchange-traded funds, actively managed funds and index funds on both the equity and bond side that may span many countries or just one country.

Figuring out how to navigate them and align hopes with reality takes some education or professional advice -- maybe some of both.

How much do you allocate to investments outside the U.S.? Is your portfolio performing up to your expectations?

Follow me on Twitter: @SheynaSteiner.

Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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