AboutWarren Boroson Expertise Author of "Keys to Investing in Mutual Funds" (Barrons), "Ultimate Mutual Fund Guide" (Probus), "How to Pick Stocks Like Warren Buffett" (JKLasser), and "The Reverse Mortgage Advantage" (McGraw-Hill). Former financial columnist for Gannett News Service.
Experience Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD) about mutual funds and a newsletter, FundDigest.
Expert: Warren Boroson Date: 7/4/2004 Subject: investing for future
Question high yield funds (e.g., HIX) will after reinvesting for many years (e.g.,30+) will buy enough new shares plus some additional investments to then stop reinvesting the dividends and "live off the dividends".
My thought is...
1. Rule of 72 says after about 10 years the principal is doubled. REDUCED RISK
2. No care to principal fluctuation when only care about dividend. WILL USE MORE THAN JUST ONE FUND TO DIVERSIFY
3. This strategy will handle inflation risk.
Your thoughts on this idea.
Answer Dear SB:
Watch out.
The yields may fluctuate. This year, for example, the yields on junk bonds happen to be unusually low. So you can't predict when your principal might double.
Also, bonds inside a mutual fund may default. That not only eats into your principal but lowers your overall yield.
Also, watch out for the highest-paying high-yield funds. They can be hurt the most. There was a fund in the early 1980s, as I recall, that lost 40% of its value in one terrible year.
Mario Gabelli once called high-yield bonds "stocks in drag." Like stocks, they can be very, very risky.
