Many investors desire to invest their retirement savings and live off the income generated. While this is common investment sense, it doesn’t always work in reality. Many investors require more income than their investments generate, and in this current low-yield environment, many investors are stretching for yield and increasing their portfolios’ risk.
Unfortunately, many investors fail to take into account the potential for capital appreciation of their portfolios (total return = capital appreciation + income) as an income source. Any investor that has remained invested in US equites since the great recession has certainly seen their portfolio appreciate.
We believe a common misnomer is that retirees must shift large portions of their portfolio to bonds. I’ve included a slide below from our most recent workshop in our current Wealth Management Series. I am sure you are either already aware or can clearly see the trend of lower interest rates for bonds (orange bars and gold line) and increasing dividends from stocks (blue line and bars):
The key takeaway: For retirees to maintain their desired lifestyle, they can’t solely invest in bonds. They must also invest in income-generating stocks. This doesn’t mean you avoid bonds and load up on stocks. You still should allocate your portfolio according to your financial plan and Investment Policy Statement.
During this low interest rate environment, it’s imperative to control your asset allocation and not take too much risk for yield. Remember that stocks can pay growing, healthy dividends, but can also increase your portfolio’s volatility.
Four practical steps to help preserve your portfolio during this low interest rate environment are:
1. Take some of your capital appreciation off the table
2. Own managers that provide potential excess return
3. Reduce investment costs and attempt to adjust your spending needs
4. As always, keep to your financial plan and Investment Policy Statement!
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Mark Smith and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Dividends are not guaranteed and must be authorized by the company's board of directors. Investments mentioned may not be suitable for all investors. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. Keep in mind that individuals cannot invest directly in any index. Diversification and asset allocation do not ensure a profit or protect against a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation.