One of today’s biggest challenges facing investors in retirement or in semi-retirement is obtaining enough income and growth from their portfolio to match annual expenses. Is it possible to create a mix of steady income, upside potential and longevity protection by a blend of 80 percent bonds and 20 percent stocks?
My definition of income investing is to construct a portfolio with a heavier emphasis on income producing assets. Ideally, the investor does not need to access principal to meet daily living expenses. In a low rate environment, this becomes difficult without relying on high yield bonds for a significant part of the portfolio mix. Another common approach with investors is to hold high paying dividend stocks.
An alternative investment approach is to maintain a more balanced portfolio allocation, understanding that principal will need to be accessed to meet annual expenses. This allows for a higher equity allocation with the possibility for overall portfolio gains with stock appreciation.
The income dilemma highlights how investing is about tradeoffs between different risks. Perhaps more analysis of risk factors and which risks to mitigate would result in portfolio allocation decisions that investors can be more comfortable with.
Some risk factors can be easily addressed—e.g. diversification and keeping fees low. But few investors see these as important if they believe they are missing the next new investment opportunity. I have a neighbor that claims to have recently made a lot of money investing in oil futures. I suggested that while his gamble paid off, that this was not investing. But he cannot see the risks inherent in this strategy, in part, because the gamble paid off. But is this any worse investment behavior then the investor who is so concerned about the next financial catastrophe that he can only purchase insured CDs?
So to meet cash needs, perhaps the investor needs to first address the risks associated with different investment strategies and understand their tolerance for various risks.
For some investors, a comfortable risk tradeoff may well be an 80/20 split between bonds and stocks.