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The reason people accept the risks of investing in the first place is because of the possibility of getting a higher “realized” rate of return than they would get in a risk-free environment… ie, an FDIC insured bank account that earns compound interest.
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Over the past ten years, such risk-free savings have been unable to compete with riskier instruments due to artificially low interest rates, forcing traditional “savers” into the mutual fund and ETF markets.
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(Funds and ETFs have become the “new” stock market, a place where individual equity prices have become invisible, questions about company fundamentals are met with blank stares, and media heads tell us that individuals can no longer buy stocks.) not in the market).
Risk comes in various forms, but the primary concerns of the average income investor are “financial” and, when investing for income without the proper mindset, “market” risk.
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Financial risk involves the ability of corporations, government entities, and even individuals to honor their financial commitments.
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Market risk refers to the absolute certainty that the market price of all marketable securities will experience volatility… sometimes more than others, but this “reality” needs to be planned for and dealt with. Well, there’s never a need to fear.
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Q: Is it demand for individual stocks that drives up fund and ETF prices, or vice versa?
We can reduce financial risk by choosing only high quality (investment grade) securities, diversifying appropriately and understanding that market price changes are truly “income harmless”. By creating an action plan to deal with “market risk”, we can actually turn it into an investment opportunity.
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What do banks do to get depositors the amount of interest they guarantee? They invest in securities that pay a fixed rate of return regardless of changes in the market price.
You do not need to be a professional investment manager to manage your investment portfolio professionally. But, you must have a long term plan and know something about asset allocation… An often misused and misunderstood portfolio planning/organization tool.
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For example, annual portfolio “rebalancing” is a symptom of passive asset allocation. Asset allocation needs to govern every investment decision throughout the year, every year, regardless of changes in market value.
It’s also important to recognize that you don’t need high tech computer programs, economic scenario simulators, inflation estimators or stock market projections to properly engage with your retirement income goal.
You need common sense, reasonable expectations, patience, discipline, a soft hand, and a sizable driver. The “KISS Principle” should be the basis of your investment plan; The compound yields an epoxy that protects the structure throughout the developmental period.
Additionally, the emphasis on “working capital” (as opposed to market value) will help you with all four basic portfolio management processes. (Business majors, remember PLoC?) Finally, a chance to use something you learned in college!
plan for retirement
The retirement income portfolio (almost all investment portfolios eventually become retirement portfolios) is the financial hero that appears on the scene just in time to fill the income gap between what you need for retirement and the guaranteed payments you’ve received from uncles and/or the past . employer.
However, the market value of a superhero’s power does not depend on the size of the number; From a retirement perspective, it is the income generated inside the suit that protects us from financial villains. Which of these heroes would you like to fuel your wallet with?
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one million dollars VTINX Portfolio Which generates approximately $19,200 in annual spending amount.
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A million dollar, well diversified, income CEF portfolio that generates over $70,000 annually… even with the same equity allocation as the Vanguard fund (just under 30%).
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A million dollar portfolio of GOOG, NFLX and FB that doesn’t cost any money at all.
I’ve heard that it’s common to withdraw 4% from a retirement income portfolio, but what if it’s not enough to fill your “income gap” and/or exceeds the amount the portfolio is producing. If both of these “what ifs” turn out to be true… well, it’s not a pretty picture.
And it gets even uglier when you look inside your actual 401k, IRA, TIAA CREF, ROTH, etc portfolio and realize it isn’t even producing close to 4% in actual disposable income . Total return, yes. Realized disposable income, ‘fear not.
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Surely your portfolio has been “growing” in market value over the past ten years, but it is possible that no effort has been made to increase the annual income generated from it. Financial markets are based on market value analysis, and as long as the market goes up every year, we are told that all is well.
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So what if your “income gap” is more than 4% of your portfolio; What if your portfolio is generating less than 2% like the Vanguard Retirement Income Fund; Or what if the market stops growing at more than 4% per annum… while your capital is still depleting at 5%, 6% or even 7%???
The less popular (available only in individual portfolios) closed end income fund approach has been around for decades, and covers all the “what ifs”. They, in combination with Investment Grade Value Stocks (IGVs), have the unique ability to take advantage of market price movements in either direction, while increasing portfolio income generation with each monthly reinvestment process.
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Please, monthly reinvestment should never become a DRIP (Dividend Reinvestment Plan) approach. Monthly income should be pooled for selective reinvestment where maximum “money return” can be achieved. The objective is to reduce the per share cost basis and increase the position yield with a single click of the mouse.
A retirement income program that focuses only on market value growth is doomed from the start, even in IGVS. All portfolio plans require an income focused asset allocation of at least 30%, at times more, but never less. All individual security purchase decisions are required to support an operative “growth objective versus income objective” asset allocation plan.
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The “Working Capital Model” is a 40+ years tested auto pilot asset allocation system that guarantees annual income growth when used appropriately with a minimum 40% income objective allocation.
The following bullet points apply to asset allocation plans running individual taxable and tax-deferred portfolios… not 401k plans because they generally cannot generate sufficient income. Such plans should be allocated within six years of retirement for the maximum possible protection, and transferred to individually directed IRAs as soon as possible.
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The “income objective” asset allocation begins at 30% of working capital, regardless of portfolio size, investor age, or amount of liquid assets available for investment.
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Startup portfolio (less than $30,000) should not have any equity component, and should not exceed 50% until reaching six figures. From $100k (by age 45), a minimum of 30% of income is acceptable, but not particularly income productive.
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At age 45, or $250,000, move toward a 40% income objective; 50% at age 50; 60% at age 55, and 70% income purpose securities by age 65 or retirement, whichever comes first.
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The income objective side of the portfolio should be kept fully invested to the extent possible, and all asset allocation determinations should be based on working capital (i.e., portfolio cost basis); Cash is considered part of the equity, or “growth purpose” allocation.
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Equity investments are limited to seven-year seasoned equity CEFs and/or “investment grade value stock” (as defined) The book “Brainwashing” ,
Even though you are young, you need to stop excessive smoking and develop a growing source of income. If you keep increasing income, then the market price increase (which you are expected to see) will take care of itself. Remember, a higher market price may increase the cap size, but it does not pay the bills.
So this is the plan. Determine your retirement income needs; Begin your investment program with an income focus; Add equities as you age and your portfolio becomes more substantial; When retirement approaches, or portfolio size becomes critical, get serious about your income objective allocation as well.
Don’t worry about inflation, the market or the economy… Your asset allocation will keep you headed in the right direction while it focuses on increasing your income each year.
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This is the crux of the whole “retirement income readiness” scenario. Every dollar added to the portfolio (or earned by the portfolio) is reallocated according to the “working capital” asset allocation. When the income allocation is above 40%, you’ll see magical growth in income every quarter… regardless of what’s going on in the financial markets.
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Note that all IGVS pay dividends that are divided according to asset allocation.
If your retirement age is within ten years, then a growing source of income is what you want to look for. Applying the same approach to your IRAs (including 401k rollovers), will generate enough income to pay RMDs (required mandatory distributions) and put you in a position to say, without reservation:
Neither a correction in the stock market nor rising interest rates will have a negative impact on my retirement income; In fact, I’ll be able to grow my income even better in any environment.
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