Total Return- What is it?

Total Return- What is it?

May 26, 2024

It is important to understand that switching to a conservative investment strategy may affect the amount you can safely spend in retirement without depleting your savings too quickly.

It is important to dig a little deeper to understand why different strategies are successful for different people and gain the knowledge to evaluate them for your own situation.

Most people need to pursue a total return strategy, even in retirement.

 

Total return refers to a combination of growth (capital appreciation, increasing market value, whatever you want to call it) and income (dividends and interest). 

 

A real estate analogy: a homeowner’s equity increases as the value of their property grows over the years.  If you own a house that is worth more than what you paid, PLUS you plan to rent it out for income, you are building wealth in two ways.

 

A diversified portfolio is designed to do the same thing over the years. A key difference is liquidity; you can't very well sell off little chunks of the bathroom or porch if the rents alone aren't paying your bills.

 

The stocks and bonds of high-quality companies pay an income yield of 2-4% per year. 

 

I looked at a 60/40 moderate growth portfolio worth $900,000 in the year 2022.  While the account declined in value -10% or more, the account still generated approximately $30,000 in dividends and interest. 

 

The income yield is the cash we can reasonably expect the portfolio to produce, no matter what the market is doing. 

 

If you don’t need that income it will be reinvested automatically.  Don’t interrupt the compounding!

 

If you want the most conservative, capital preservation investment strategy in retirement, 2-4% annual returns would need to be sufficient to meet your withdrawal needs.

 

Examples: Portfolio of $1,000,000 @ 3.5% yield = $35,000

 

Portfolio of $500,000 @ 3.5% yield= $17,500

 

Is this enough investment income for you each year?  If so, an income-only strategy could be appropriate.  If not, you need to include more growth companies to keep capital from depleting.

 

 

If you don’t find a way to make money while you sleep, you will work until you die.- Warren Buffett

 Don’t sugar coat it, Mr. Buffett!

 

Growth companies and value companies are at different stages and compensate shareholders differently.

Tesla is a growth company- still developing technologies and products.  While we see more Teslas on the road each year, by no means is everyone on board with electric vehicles.

Tesla has returned an average of 30% annually over the past 10 years, and it has been bumpy.  It pays no dividend yet; profits are reinvested into the company. 

Shareholders expect to be compensated with higher returns for taking more risk with a newer, less established company.

Coca Cola is the classic value company- everyone on the globe has heard of this product and consumes it.  No one wants Coca Cola to change its formula or start brewing beer. 

The company is able to return a good part of their profits to the shareholders; the average total return for Coca Cola over the past 10 years has been 9%, and 3% of that return is their dividend payment. 

Value companies aren’t expected to return eye-popping numbers, and the prices aren’t as volatile since earnings are more established.

As I have said before, rarely has anyone oversaved for retirement. 

The bottom line:  Many retirees want to be very conservative with their investments, but they may run the risk of depleting their assets too quickly.  

After factoring in taxes, longevity, and inflation, are your saved dollars maintaining purchasing power? 

It is understandable to want the best of both worlds. We need to make a conscious decision what to stress about- occasional market fluctuations in exchange for higher, long-term total returns, or fewer dollars to meet higher costs.

My goal is to provide support, planning, and education to help you get any stress under control.

Let’s get together and see what changes may help your financial picture!

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.

Securities and Retirement Plan Consulting Program services offered through LPL Financial, a

Registered Investment Advisor. Member FINRA/SIPC. Investment Advice offered through Western Wealth Management LLC, a Registered Investment Advisor. LPL Financial, Kennebec Wealth Management LLC and Western Wealth Management LLC are separate entities.