Asset management requires focus. It works best when investors have a clear investment objective. For many years, investors became accustomed to extended periods of stock market gain which generated enough capital appreciation from which they could live. However, for the last decade or more, many markets have proven unreliable in providing the consistent, long-term capital gains required to cover spending needs. Buying and holding investments in the hope that prices will eventually go up may no longer satisfy the lifestyle requirements of many investors.
After a “lost decade” for stock market appreciation, is now a good time to focus on income and capital preservation when consistent income is required?
At Stuart Financial Group, we call this the “Lost Decade” for the stock market—a period similar to 1965 to 1982 in which months of price appreciation were followed by comparable, but opposite, periods of price depreciation.
Therefore, we ask those investors who are concerned about the future of financial markets to consider a different approach. What if your investments were able to generate enough income to meet your expenses even in a flat market? If you could secure a dependable foundation of investment income, would any additional growth in asset values be a bonus?
At Stuart Financial Group, we discuss your income needs and put together a plan for the coming years—an income plan that you can use to monitor your financial well-being. Then, our investments are carefully selected with your income goals in mind. This isn’t a short-term attempt to maximize returns with little attention to risk.
This is a focus on producing regular income to meet your living requirements while seeking to protect capital in volatile markets.
This is an alternative approach to asset managers who feel they can always beat the stock market. Always trying to beat the stock market can add significant risk and isn’t very useful when the market produces a negative return, as in 2008.
In our experience, planning for income is much more reliable than relying on market values consistently going up.
Achieving an income level that meets your goals can therefore free you from the constant worry that comes with the need for prices to go up in order to maintain your lifestyle objective.
We often compare our investment methodology to owning a portfolio of rental properties.1 The first consideration for such a portfolio might be the search for, and selection of, quality properties in attractive neighborhoods with financially secure tenants. You would look to acquire these properties at a “good price” which would provide an attractive level of income and the potential for the property values to appreciate at some unknown time in the future. Ideally, this property and portfolio would produce a consistent rental income stream cash you can use for living expenses.
Now, imagine you hear the price of property is falling and your portfolio is now worth less than it was just a few months ago. As the primary objective of your property portfolio is income, you probably wouldn’t worry too much about this decline in value—providing the properties are still in good condition and the tenants remain financially sound.
In fact, a drop in property prices may be an opportunity to review your portfolio with opportunity to pick up undervalued property and thereby generate higher income. This is possible because, if the price of an income producing investment drops while the income remains the same in dollar terms, your income levels (yield) will increase as a percentage.
1 This is a hypothetical description intended to provide an insight into the income benefits and holdings quality of the DIAS investment philosophy when applied to income portfolios. DIAS Portfolios typically contain liquid securities traded on U.S. exchanges and covering a wide range of asset classes. Although these portfolios may periodically contain a small percentage exposure to property values, it is rarely a significant asset class.
Income investing is a journey with a long-term percentage yield as your destination. Sometimes the ride is smooth; sometimes it can get bumpy. We believe our job in managing income-generating portfolios is similar to that of an air traffic controller. The goal of an air traffic controller is to keep a number of planes in the air and as close as possible to a planned flight path while avoiding turbulence and storms. Think of each asset class we allocate capital to as an aircraft flying through the sky. Income is only produced if the aircraft is in the air. We actively manage the path of these asset classes, and the investments contained within to avoid the turbulence our research suggests may be approaching. If an asset class gets too turbulent, we’ll sell it and move to a calmer region or move to cash until brighter skies approach. If we feel the turbulence is temporary, we’ll prepare our investors and portfolios for a bumpy ride. We can’t promise to avoid stormy markets, but we do try to keep the income flowing throughout the journey.
Today’s markets offer a wide range of income opportunities. At Stuart Financial Group, our goal is to construct portfolios which benefit from diversified income streams. Diversification across non-correlated asset classes may increase yields and reduce your exposure to significant losses.
When you make income your primary investment objective, a number of things can change. Short-term price volatility should be less worrying because your investments are paying consistent income. The income generated from a Stuart Financial Group portfolio can be taken and used to cover your expenses without disrupting the underlying investment portfolio. Alternatively, it can be reinvested to increase your portfolio value.
Price gyrations may be less of a concern to you as an income investor because you no longer need to rely on prices going up to fund your lifestyle. When markets become volatile, the most important concern becomes: “Will the company behind the investment still be paying income in five years’ time?” instead of “My principal has fallen and I need to sell into a down market.” Income often provides the conservative investor with a comfort factor in difficult markets.
If asset prices going up and down represents your Investment Pain, receiving regular income is your Investment Gain.
If Stuart Financial Group can manage a portfolio that produces a desired income level, chasing capital gains by taking on more risk may become unnecessary. In challenging markets, we may even reduce income levels temporarily in an attempt to reduce risk and preserve principal.
When markets are buoyant, we seek to participate in additional capital appreciation. However, we don’t need to expose our investors to unnecessary risk by chasing excessive gains.
When markets are falling, we look for emotional overreactions—investors selling on panic. At this stage, we may engage in “bargain-shopping.” Bargain shopping involves the purchase of quality securities which are highly undervalued for temporary reasons.
When the price of an income-paying security falls, the percentage income level (the yield) increases. Purchasing at this lower level “locks-in” the higher yield and opens the possibility of increased portfolio yield and capital appreciation. 1
Portfolio yield provides a foundation of income which can be added to any risk-adjusted gains if and when such gains are periodically available.
At some stage in life, you may need your investments to provide income which covers your living expenses.
When this time comes, is it wise to continuing focusing on investment growth? When income is something you rely upon, consistent investment yield with an element of capital preservation may be more appropriate.
1 Dividends payouts can rise, fall or be suspended. They are regularly subject to the review of their continuation by the Board of Directors of the issuing company.
Phone: (301) 345-1635
Fax: (301) 345-1105
6411 Ivy Lane, Suite 602
Greenbelt, MD 20770