Risk: Corporate earnings are seen peaking right now and dividend payments could suffer. There is also the risk that if profits fall, so will share prices. The 2008 and 2009 period saw the most cuts in history.
6. Floating-rate funds: The opposite of high-quality, fixed-rate investing, these funds are growing in popularity as an income solution. In part, this is because they differ from traditional bonds and bond funds in that their value does not fall as interest rates decline. Floating-rate fund managers invest in a wide variety of short-duration notes and floating-rate securities to limit the risk of a default. It also limits principal risk and provides stable value. They have paid yields in the 3.5 percent to 4.5 percent range over the past couple of years.
Risk: In an all-out credit crunch like the one that hit in 2008, the corporate-debt market came to a virtual standstill. In an all-out financial meltdown, you don't want to be here. So if you fear a repeat of that crisis, don't go there.
Schwartz explains that for floating rates, "If the coupon payments of the bonds [in the floating-note fund] rise with prevailing interest rates, the net asset value of the fund is presumably stable."
Floating rate, however, is not a panacea for income investors. "This is just another sector of the bond market. There are many multisector bond funds that have the ability to increase and decrease exposure to this sector as the manager sees fit," he adds.
Investors have been seeking out the stability of fixed income in response to stock market volatility. Fund investors have overwhelmingly favored income funds over equity in recent years.
It sparked a big debate in recent days as Bill Gross, the famed PIMCO bond manager, said the "cult of equity" is dead, and took issue with Jeremy Siegel, a Pennsylvania professor who has long advocated the merits of long-term stock investing and continues to do so.
That debate is as old as the Buttonwood Agreement (the Manhattan meeting in 1792 that set up the New York Stock Exchange). But few would debate Gross's argument from a recent tweet that "Boomers can't take risk." And they have more money, so financial services are offering more income products. Collateralized debt obligations, government-sponsored entity debt, master limited partnerships, and annuities are others.
Each of the investments has its own set of risks, though, requiring more planning about how to create a diversified portfolio. One solution may be to look for multisector bond funds that change their holdings to reflect changes in the economy, market sentiment, and corporate earnings.
Regardless of investing preferences, Schwartz said, "Investors should continue to maintain a well-balanced fixed-income portfolio."