Do you need income from your investments?
This is a guest post from Frank Weiler
With so many investors getting closer to their retirement years, income investing is a topic that is much discussed and is likely to continue in the future. Investors nowadays seem to be questioning their current investment strategies more than ever. This is, of course, due to a great extent to poor performance in the stock market, where so many investors have the majority of their funds invested.
The stock market has long been seen as a wealth creator but with so many investors getting older and seeking safety-selling stocks to buy bonds, for example, it is hard for some to imagine robust growth in stock values in the near future in the face of so much selling pressure. So what is a retiree to do?
Retirees need to re-evaluate their portfolios
My belief is that investors in or approaching retirement need to reevaluate whether the investments they own (especially growth type stocks and mutual funds) are going to provide the consistency they need to achieve their goals. As an investor approaches and enters retirement, consistency becomes more important than ever.
The period of stock market volatility we have been living through for the last many years highlights the importance of consistency. In the 1980s and 1990s, the stock market had tremendous gains that were to some extent consistent over a period of a few years. It is easy to see how an investor living through that period could come to think that the stock market is rather consistent. But this is not necessarily the case.
The truth, as highlighted in my acclaimed book: Insync Income, The Must-Read Guide to Investing for Income in Canada, is that the stock market routinely has long periods of outperformance and underperformance. The period we have been in for the last ten years or so has been one of underperformance, and there is no telling how long it could last. The big question that investors ask is whether they should hang in there with the stock market or make a change. A better question may be whether you can really expect to draw income from a portfolio invested for growth. A growth portfolio, often paying very little in the form of dividend or interest payments hardly seems suitable for an income-seeking investor.
Are your investments suitable?
One of the key reoccurring themes in the investing world is that of suitability. Is the stock market a suitable place to invest ten years from retirement? Well only if you can afford and are willing to risk not getting a return over that period.
What I always say is: “income investments for income investors”. As an investor approaches retirement they should start to reduce risk far earlier than when many typically do. Many investors wait until retirement or well into it before reducing risk. Thus exposing themselves to the risk of general underperformance or worse-a sharp decline at the worse time, right when they are about to take money out.
Risk of withdrawing money at the wrong time.
As a person approaches the need to withdraw funds from their savings they are at their most vulnerable point. Why? Because if they need to sell investments at low prices to generate much-needed income, it will affect the longevity of their income stream-they will run out of money sooner. They are very vulnerable to a market decline.
The risk that the fluctuations of the market will work against you when you are withdrawing money for retirement income is called: “sequence of returns risk”. I have not found that this risk is well understood or well heeded by ordinary investors. It is both significant and important. I give some good examples of sequence risk in chapter 1 of Insync Income.
If an investor is invested in income-oriented investments the need to sell units is greatly reduced since the units are paying income directly into the account in the form of a dividend, interest payment or other distribution. An investment that I describe as income-oriented is one that pays a significant amount of income, significant enough to reduce the need to sell units of the investment, thus reducing the risk of having to sell at low prices. I plan to discuss the types of investments that are “income-oriented” in my next post so stay tuned.
My recommendation is to seek the advice of an appropriate financial professional prior to implementing any financial strategy. A good financial advisor will understand “sequence risk” and can help to guide you in the proper direction. Many investors these days are finding comfort in seeking out a fee-only advisor that does not sell products on a commission basis. Invest with advice for the best results.
Frank Weiler, author of InSync Income, The Must-Read Guide to Investing for Income in Canada. He describes himself first as an investor advocate. A former investment advisor with some of Canada’s leading wealth management firms, including RBC Dominion Securities and CIBC Wood Gundy. Frank draws from a dozen years of experience in the financial industry, including years of research, and a lifetime of unfettered curiosity to produce The Income Investor’s Advocate.
Check out Frank’s Blog: The Income Investor’s Advocate where he writes posts to try to help investors understand more about financial topics that he feels are important.
Contest to win Frank’s book
Frank has generously donated 3 books for a draw prize. All you have to do to win is to share a story or a comment below about your experience on how you are coping with the stock market, investing for income or just on retirement given these volatile times. Every comment gets an entry and on December 19th I will announce the winners for Frank’s autographed book.