Dr. Don, I am 80 years old and my wife is 77. Our main concern is income. We have about $220,000 invested in the (STHYX) Strong High Yield Bond fund, which currently will generate about $28,000 in taxable income. Our Social Security income is $17,000, giving us a pretax income of $45,000. The problem is that our year-to-date income from our bond fund is minus about 10% due to the decline in the NAV net asset value. Can you suggest a better method of receiving approximately $28,000 annually from our investments, which is the amount we need to maintain our current life style? JM


A high-yield fund sounds great to an income-oriented investor until he realizes that the term is just a euphemism for investing in what used to be called junk bonds. High-yield bonds aren't really junk, just noninvestment grade bonds. The bond rating agencies rank bonds from triple A to D. Bonds rated BBB (Baa) or higher are considered to be investment grade. BB (Ba) or lower are noninvestment grade. The lower the credit rating, the higher the risk to the investor that the company won't meet its debt repayment schedule. So it's the additional risk that gives the high-yield investor the expectation of higher income.

The table below identifies the four major credit rating agencies and their nomenclature for rating bonds. Mutual funds will also have credit analysts that review the credit risks associated with bonds and assign nonpublic ratings to those bonds.

According to


, your fund has an average credit quality of B, with about two-thirds of the portfolio invested in bonds with that credit rating. And 14% of the portfolio is unrated or rated below B. Here's how

Moody's defines a B-rated bond: "Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small."

The bottom line is that you're carrying way too much risk in this portfolio.

We've all heard the admonition, "Never touch principal." Well, in a retirement portfolio, when the alternative to spending principal is to push the portfolio's risk position to an extreme in order to chase return, the admonition doesn't make sense. The risk to principal increases, which increases the investor's vulnerability.

Another reason that investors don't like to touch principal is that it allows them to avoid addressing the issue of their own mortality. If they don't spend more than the portfolio makes, than the nest egg will last forever and they don't have to consider longevity in determining a prudent approach to spending down the portfolio. It also allows the retiree to hope that the principal can be passed on to the next generation, allowing their heirs to have a more comfortable life than they would have otherwise.

Once your investments get away from federally insured bank deposits or government securities backed by the full faith and credit of the U. S. government, there's some risk to principal. The higher the perceived risk, the higher the expected return on the part of investors. Expected return doesn't mean realized return -- that's the risk aspect of the equation. So the more risk you take on in your portfolio, the more volatility you will see in the portfolio's returns. Your high-yield fund has even experienced a nice short-term return over the past few weeks, so you're now only down 7.3% year to date instead of down 10%. But the three-year annualized return is 1.1%, and the return over the five-year life of the fund is about 8.67%.

I put together a table that looked at your required income from the portfolio, allowing for an annual cost-of-living adjustment of 2 1/2%. The table isn't interactive here, but shows how the cost-of-living adjustment is a driving force in your need for high returns. With no cost-of-living adjustments, a portfolio averaging 11 1/2% return would have a balance remaining on your 100th birthday. With a 2 1/2% cost-of-living adjustment, the required return also moves 2 1/2 percentage points higher to 14%.

You need to rebalance your portfolio. Consider putting a year's income into a money market fund. That's about 12 1/2% of your portfolio. You should be able to earn over 6% in a taxable money market fund. You'll need some stocks in the portfolio to give you the potential for growth. I'd say that about half of the portfolio should be in a

no-load index mutual fund. An index fund like

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Vanguard Index 500 has an annual expense ratio of 0.18%, which is 0.72% less expensive than the annual expenses on the Strong High Yield fund.

There's still room for bonds in your portfolio. I think you should reduce the risk of the bonds you invest in and look toward an intermediate corporate bond fund. On the short-term side you can look toward certificates of deposit. You can currently lock in almost 7 3/4% in a five-year CD and have the investment be insured by the

Federal Deposit Insurance Corp


None of these recommendations gets you to a point where you can expect a 14% return on your portfolio. Historically, stocks have averaged around 11% before taxes. We've had quite a run over the past decade with the

S&P 500's average annual return of 17.71%, but as we've experienced this year, there's no guarantee of that level of return continuing over time. A mix of investments will reduce the risk of your portfolio and give you more opportunity for growth than your current portfolio.

Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent arecommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at