Meeting Your Income Needs with a Total Return Approach

If you need to generate income from your investment portfolio to pay for expenses, the process of selecting investments can seem a lot more complicated. Since almost all bonds, many stocks, and some alternative investments provide periodic income in the form of interest or dividends, almost any portfolio will generate some cash. But in the current low interest rate environment, there aren’t many investments that yield more than a few percentage points.

Instead of trying to generate enough income by limiting your choices to only high-income investments, a better tactic may be a “total return” approach.  This philosophy suggests ignoring your income needs when choosing your investments, and instead focusing only on selecting investments that create the portfolio most likely to have the highest total return (i.e. the combination of income and capital gains) for the amount of risk you’re willing to take.

If you need income from the portfolio, you can then “create your own dividend” by selling a portion of your holdings. For example, if your portfolio happens to only produces $1,000 of income but you need $3,000, you can simply sell $2,000 of your holdings to meet your income needs (of course your calculations need to account for how much you’ll owe the government, since interest income, dividend income, and capital gains are all taxed).

With this approach you can maintain a better-diversified portfolio: focusing on hitting a specific income target can result in a portfolio too heavily weighted toward bonds or too heavily weighted toward stock sectors (such as Utilities and Consumer Staples) that tend to pay higher dividends. By thinking about the total return rather than a specific income target, you don’t have to worry about your income needs skewing your portfolio.

The Weak Link Between Economic Growth and Market Returns



When deciding where to allocation your investments on a global basis, it’s tempting to look for the fastest-growing economies and put your money there. Yet academic studies have shown that there’s only a very weak relationship between how fast a country’s economy grows and how well its stock market performs.

It may seem counterintuitive, but sometimes stock markets in countries with slower economic growth significantly outperform those in faster growing countries.  This year is a  a prime example. The latest World Economic Outlook from the International Monetary Fund estimates that China’s economic growth this year will be 7.6% while Japan’s will be only 2.0%. With the year almost over, Chinese stocks are roughly flat while Japanese stocks are up more than 20% (in U.S. Dollar terms).

Why don’t faster-growing economies also mean faster-rising stock prices? Part of the answer is that since economic growth can be estimated fairly well in advance, expectations for faster growth may already be incorporated into stock prices. In other words, if you know that one country is going to grow faster than another, it’s likely that someone else figured that out before you did.

Another reason is that some aspects of economic growth may hurt many companies rather than help them. New technological innovations can boost a country’s economic growth rate, for example, but the profits from these innovations could go to new start-ups more than the existing large companies that tend to be listed on stock markets.

The upshot is that pouring money into fast-growing countries (or completely avoiding slow-growing ones) isn’t a good investment strategy. Having a portfolio that’s well-diversified internationally is a better alternative.

The Value of “All in One Place”

All In One Place

These days almost everyone has multiple investment accounts, from standard brokerage accounts to retirement accounts such as 401k’s and IRA’s to college savings plans such as 529’s. Being able to view all of your accounts in one place rather than hopping from website to website or monthly statement to monthly statement can make the process of keeping tabs on your investments substantially easier. But being able to see everything in one place isn’t simply a time-saving trick. It can also improve how you manage your portfolio.

Perhaps the most important benefit is the ability to identify issues across more than one account. Let’s say, for example, that in one of your accounts you own a few stocks in the technology sector. By itself this may not be a problem, especially if this one account is a fairly small portion of your wealth. If your other accounts contain funds that are overweight in technology stocks, however, you could end up with a dangerously high overall exposure to the technology sector.

Whether you’re looking at the breakdown of your portfolio by asset class, region of the world, or economic sector, being able to see all of your accounts in one place gives you the 30,000 foot view that makes it possible to figure out if something is off-course and needs to be corrected. The first step to taking control of your wealth is to be able to see it all together.