clifp
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Oct 27, 2006
- Messages
- 7,733
I am very much in the income approach camp vs total return investing. This is especially true for those retiring 55 or earlier. Never the less I find myself agreeing with much of what M* Christina Benz is saying in her latest article.
While in the past I've been pretty obsessed about purchasing good dividend stocks or MLPs (except for Berkshire) lately with the appreciation of dividend stocks to really high levels I find myself more willing to sell stocks to fund things like home improvement projects and retire home equity loans.
You're retired, and you have two choices to generate the money you need for living expenses. The first entails taking more risk, and the second actually reduces risk in your portfolio.
The right answer seems obvious: For the same return? Heck yeah I'll take some risk off the table.
But taking on more risk, not less, is exactly what many income-focused retirees seem to be doing with their portfolios right now. Meanwhile, a safer way to harvest income from their portfolios is hiding in plain sight: lightening up on stocks through rebalancing and harvesting the proceeds for living expenses....
There's a lot to like about income; on that we can all agree. Who doesn't like a bird in the hand? In the wake of multiple financial scandals and crises that have punctuated the past 15 years, it's not surprising that many investors are still in "show me the money" mode. Focusing on securities with the ability to pay income adds a valuable quality overlay to a portfolio, too, as income production can be an important show of an entity's financial wherewithal. From a practical standpoint, income can also provide a cushion on the downside when the market is falling, and extracting income from a portfolio during retirement is logistically simpler than managing a portfolio for total return and periodically selling off winners. And of course, income has historically been a huge component of the market's total return.
Yet some of investors' recent preferences make me concerned that they're gunning from income while neglecting total return--income plus capital appreciation or minus capital losses. Our asset-flows data show that investors have been shunning high-quality bonds, with their still-meager yields and their perceived vulnerability to rising rates. Meanwhile, yield-rich(er) bond categories have been feeling the love. The bank-loan group is by far Morningstar's top asset-gathering category so far in 2013, but yield-rich categories like high-yield bond, emerging-markets bond, and world bond have also been garnering new investor dollars during the past year. Dividend-rich equities and dividend-focused funds have been similarly popular.
While in the past I've been pretty obsessed about purchasing good dividend stocks or MLPs (except for Berkshire) lately with the appreciation of dividend stocks to really high levels I find myself more willing to sell stocks to fund things like home improvement projects and retire home equity loans.