Total Return Investing

Under the total return approach, if spending exhausts the portfolio income, the investor spends from the portfolio’s capital appreciation rather than seeking yield and abandoning a carefully crafted asset allocation.

Total Return Investing

Under the total return approach, if spending exhausts the portfolio income, the investor spends from the portfolio’s capital appreciation rather than seeking yield and abandoning a carefully crafted asset allocation. The total return approach has several advantages, including maintaining portfolio diversification and risk exposure.

In our view this is a totally sensible method of managing retirement income for our clients, whilst at the same time protecting their long term capital and wealth.

We have adopted this practice and applied it to all our clients with a high level of confidence and stability regardless of market fluctuations and other variables beyond our control.

During the period of wealth accumulation, with retirement sometime in the distance, it may well be appropriate to focus on growth rather than income.  It is critical, in our view, to become far more focused on capital preservation as one approaches the independence (retirement) day and throughout retirement years.

Total return investing is a well-known concept which recognises the separation of different asset classes for different outcomes.  It involves a committed, well-researched and hands-on approach to individual client scenarios.  Most importantly it relies on individual clients’ clear definition of their particular financial circumstances, objectives and time frames.

Individuals chasing high income or high growth against the market trend are taking on a significant gamble and are speculators rather than investors.  Too often these same individuals have no specific financial objectives in mind other than trying to “beat the market”.  The fact that this behaviour is encouraged by the fund managers, financial journalists and commentators is a concern in itself but then again, they have least to lose.

Chasing high income (yield) from primarily growth assets, such as shares or even property, exposes capital savings to unknown and often intolerable risk.

Using appropriate asset classes for appropriate purposes and sticking to the long term allocation will provide both consistency of return and protection of capital.

Interest rates are low and possibly heading lower, so the challenge is to search for best returns in the same asset class, such as high quality direct bonds, rather than switching to a different risk position in search of higher return, such as high yielding shares.

A well-structured retirement income plan will separate investment savings and invest them for long term sustainable income and for long term capital growth.  A well managed plan will use both income and capital to re-balance as required and aim for total returns to the individual client as per their stated objectives and changing circumstances.

We strongly endorse this approach in delivering individual client outcomes.

References;

Vanguard, Paul Chin; Low yields,high risk.

Michael A. Pollock; Income’ Isn’t Everything

Greg S. Fisher; Beyond Income Investing; A Total Return Approach to Funding Your Retirement