Insights
&
Musings
The 2024 Periodic Table of Investment Returns
One of my favorite charts has always been the Callan Periodic Table of Investment Returns. This visual masterpiece is a powerful reminder of the unpredictability of financial markets and the critical importance of diversification.
The chart beautifully illustrates the annual performance of key asset classes from 2005 to 2024, showcasing how dramatically returns can shift from year to year. Just look at the wild swings - one year an asset class might be at the top of the chart, and the next, it could be languishing at the bottom.
What makes this chart truly special is how it demolishes the myth of consistently picking market winners. Emerging Market Equity, for instance, has seen returns ranging from a staggering 78.51% to a devastating -53.33%. It's a humbling visualization that underscores why a well-diversified portfolio is crucial for long-term investment success.
“It’s very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is, “reversion to the mean” i.e. what goes up must come down, and it’s true more often than you can imagine.”
The Callan Periodic Table isn't just a chart - it's a financial storyteller that reveals the inherent uncertainty in capital markets. It shows that no single asset class consistently dominates, which is why spreading your investments across different sectors and regions is so critical.
This chart is more than just numbers - it's a powerful tool for understanding market dynamics and making informed investment decisions. It's a reminder that successful investing is about patience, diversification, and avoiding the temptation to chase last year's top performers.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected, including a long term holding period, diversification, and asset allocation. Raymond James is not affiliated with The Callan Institute.
Black Swans
I've had a number of clients who've expressed concerns about the markets and total economic calamity lately. I don't share these concerns but this post from the folks at Dimensional about how to avoid black swans says it better than I've been able to... https://www.dimensional.com/us-en/insights/how-to-avoid-black-swans
What Stock Investors and Roger Federer Have In Common
Stocks are like tennis: Even having just a marginal winning percentage can lead to long-term success. You don't have to win every point to win a match. And you don't have to be up every day, month, or year (and you won’t be) to be a successful investor.
Generating Income from Investment Portfolios: Strategies and Considerations
Investors seeking to generate income from their portfolios have two primary strategies to consider: income-focused investing and total return investing. Each approach has its own benefits and drawbacks, and the choice between them depends on the investor’s goals, risk tolerance, and need for sustainable income that keeps pace with inflation.
I had a call with a client who was interested in starting to draw income from her portfolio last week. While this client and I have been working together for over 20 years, drawing income on a regular basis from the portfolio was a brand new concept. There is more than one way to achieve income goals, which made the learning curve feel even steeper. I wrote this piece to help her wrap her head around the various approaches and each has their pros and cons. Here are some vocabulary terms to remember:
Income = Dividends (from stocks) or Interest (from bonds).
Yield = Income (Dividend or Interest Payment) / Price
Total Return = Income + Capital Appreciation
Investors seeking to generate income from their portfolios have two primary strategies to consider: income-focused investing and total return investing. Each approach has its own benefits and drawbacks, and the choice between them depends on the investor’s goals, risk tolerance, and need for sustainable income that keeps pace with inflation.
Income-Focused Investing
Income-focused investing involves building a portfolio that generates income through dividends and interest payments. This approach appeals to those who prefer not to sell assets and want to maintain their principal. However, it has several limitations:
Risk of Concentration: Focusing on high-dividend stocks or high-yield bonds can lead to a less diversified portfolio, increasing risk if these investments underperform .
Inflation Risk: Relying solely on income can lead to a loss of purchasing power over time, as dividends and interest may not keep up with inflation .
Tax Inefficiency: Income from interest is often taxed at a higher rate than capital gains, potentially reducing after-tax returns .
Market Dependency: Dividend payments can fluctuate with the economy, potentially leading to inconsistent income .
Total Return Investing
Total return investing involves considering both income (dividends and interest) and capital gains (appreciation in asset value) to meet income needs. This strategy offers several advantages:
Diversification: It allows for a more diversified portfolio, reducing risk by spreading investments across various asset classes .
Flexibility: By focusing on total return, investors can adjust their withdrawals based on market conditions, potentially preserving capital during downturns .
Inflation Protection: A total return approach can better protect against inflation, as it includes capital appreciation which often outpaces inflation .
Tax Efficiency: It can be more tax-efficient, as capital gains are typically taxed at a lower rate than income .
However, total return investing also has its challenges:
Complexity: It requires more active management and understanding of market dynamics to optimize both income and capital gains .
Potential Overdistribution: There is a risk of depleting the portfolio if withdrawals exceed sustainable levels, especially if based on past capital gains .
Sustainable Withdrawal Strategies
Regardless of the chosen strategy, maintaining a sustainable withdrawal rate is crucial to ensure the portfolio lasts throughout retirement. A common guideline is the “4% rule,” which suggests withdrawing 4% of the portfolio’s value annually, adjusted for inflation. However, this rate may need adjustment based on market conditions and individual circumstances.
In conclusion, while income-focused investing provides a sense of security by preserving principal, total return investing offers greater flexibility and potential for growth. Investors should carefully assess their financial goals, risk tolerance, and income needs to determine the most suitable approach for generating sustainable income from their portfolios.
Examples
Here are some examples of how an investor might implement income-focused and total return strategies, along with examples of sustainable withdrawal strategies:
Income-Focused Investing Example
Portfolio Composition
Dividend Stocks: An investor might choose stocks from companies with a history of paying consistent and increasing dividends.
Bonds: The portfolio could include government or corporate bonds that pay regular interest, such as U.S. Treasury bonds or investment-grade corporate bonds.
Real Estate Investment Trusts (REITs): These can provide income through dividends generated from real estate holdings.
Income Generation
The investor receives regular income from dividends and interest payments.
For example, if the portfolio is worth $1,000,000 and generates a 3% yield, the investor would receive $30,000 annually in income.
Total Return Investing Example
Portfolio Composition
Balanced Mix of Assets: The portfolio might include a mix of stocks, bonds, and other asset classes, such as international equities and alternative investments.
Growth Stocks: These stocks may not pay high dividends but have the potential for significant capital appreciation, such as technology companies.
Index Funds/ETFs: Broad market index funds or ETFs can provide exposure to a wide range of assets, contributing to both income and growth.
Income Generation
The investor focuses on both income and capital gains.
For example, if the portfolio appreciates by 6% in a year and yields 2% in dividends, the total return is 8%. The investor might withdraw 4% for income, leaving the remaining 4% to grow the portfolio.
Sustainable Withdrawal Strategies
4% Rule Example
An investor with a $1,000,000 portfolio withdraws $40,000 annually (4% of the initial portfolio value), adjusting for inflation each year.
This approach aims to provide a steady income stream while preserving the portfolio’s longevity.
Dynamic Withdrawal Strategy
The investor adjusts withdrawals based on market performance. For instance, they might withdraw less during a market downturn to preserve capital and more during strong market years.
This strategy can help mitigate the risk of depleting the portfolio too quickly.
Bucket Strategy
The investor divides the portfolio into “buckets” based on time horizon:
Short-Term Bucket: Holds cash and short-term bonds for immediate income needs.
Medium-Term Bucket: Contains a mix of bonds and dividend-paying stocks for income over the next 5-10 years.
Long-Term Bucket: Invested in growth-oriented assets for future capital appreciation.
These examples illustrate how investors can implement different strategies to generate income while considering sustainability and inflation protection. The choice of strategy should align with the investor’s financial goals, risk tolerance, and market outlook.
Any opinions are those of Kathy Reisfeld and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
What To Do With A Lump Sum of Cash?
Statistically we know that investing a lump sum in equities beats dollar cost averaging 75% of the time. And we know that dollar cost averaging outperforms a buy the dip strategy 60 - 75% of the time. So it seems like a no brainer to go ahead and put that cash to work all at once. In volatile markets like these that can be a scary prospect though. Right now it seems like the economy and markets could easily get worse before they get better. The good news is you don’t have to choose among these three strategies. You can take a hybrid approach, which combines all three. We know that putting money to work and keeping it invested for the long haul is the most important step one can take towards building wealth, regardless of the exact timing of how you get started. So while statistics tell us that investing a lump sum all at once is a better strategy 75% of the time, it really hurts when you put a lump sum to work and then the markets crash, 20, 30, 40, or 50%! For many clients, they only have a large sum to put to work once or twice in their lives so the pressure feels much greater than a robotic approach to investing might suggest.
When it comes to investing cash you have 3 choices:
Invest it as a lump sum all at once
Average it in over time (dollar cost averaging)
Wait for a pullback (buy the dip) and invest it then
Statistically we know that investing a lump sum in equities beats dollar cost averaging 75% of the time. And we know that dollar cost averaging outperforms a buy the dip strategy 60 - 75% of the time. So it seems like a no brainer to go ahead and put that cash to work all at once. In volatile markets like these that can be a scary prospect though. Right now it seems like the economy and markets could easily get worse before they get better. The good news is you don’t have to choose among these three strategies. You can take a hybrid approach, which combines all three. We know that putting money to work and keeping it invested for the long haul is the most important step one can take towards building wealth, regardless of the exact timing of how you get started. So while statistics tell us that investing a lump sum all at once is a better strategy 75% of the time, it really hurts when you put a lump sum to work and then the markets crash, 20, 30, 40, or 50%! For many clients, they only have a large sum to put to work once or twice in their lives so the pressure feels much greater than a robotic approach to investing might suggest.
Rather than try to time the markets or live in fear of bad timing (unless you have an extremely strong stomach), for most clients, we would generally recommend utilizing a hybrid approach at times like these. Put some money to work as a lump sum. Then average in the remaining balance over 6 to 12 months, and accelerate those contributions for every additional 5% pullback from market highs. It’s a bit complex and requires a bit of extra effort on our part but it takes advantage of the best of all 3 strategies. There will be plenty of times when you wish you’d gone all in at once with a lump sum rather than a strategy like this but hindsight is 20/20 and more importantly a hybrid approach to putting money to work is one that most clients can feel comfortable committing to without fear of major short term regret.
The forgoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opions are those of Katherine Reisfeld and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.