My question – what is your number–meaning do you have a target for returns in your portfolio>
I write all the time about my ‘target’–I like to see 7%. Of course in the age of inflation that would seem to be inadequate, but inflation won’t be here forever, at least at the higher level we saw in the last couple of years so 7% will remain adequate for me–for now.
As everyone knows I have a balanced portfolio of the very safe 5%ish levels and the higher risk 7.75% to 9% issues. With the higher inflation we have been somewhat blessed with CDs and Treasuries at levels that make investment there worthwhile and it is really easy to just lay back and collect 5%–and that is fine. Everyone is different-everyone of us has a different plan and level of comfort with that plan.
I suspect that targets for folks drawing income from their portfolios are different from those that are not using that income–right now we (my wife and I) are not drawing any money from IRAs or any investment account. Whether we ever draw money is yet to be determined. We continue to work at jobs, have 2 General Mills pensions and 2 social security checks–with the exception of ‘one offs’ (i.e. new roofs, new vehicles etc) these would seem to be adequate, but who has a perfectly clear crystal ball?
What are your targets?
Sorry for being late to the party. I have a goal, but it is only in my head (I don’t write it down because I would have to explain it to my wife when I miss).
I measure “net” return – which for me is basically total return after share donations (charitable giving- at cost). I try to give a lot of money away, but it is not worth my time to try to adjust for the donations. I don’t count any income/loss from my businesses or overseas investments.
My goal during ZIRP was 6% net. I have bumped that up to 7% as inflation has climbed, but am doing better than that for the moment because of a few “flipping” wins.
There is a case that I do not see mentioned here. My best trade of the week was being in Tim land (Minnesota) instead of the south so I might have missed it. A case I commonly see is where the investor has a high probability of never needing any principal and/or income from their investments. They have enough pensions/social security/etc income combined with an expense level that sustains them. The main variable here is the cost of long term care. Most folks want to stay in their home as long as possible which is doable but 24 hour care is expensive, maybe $150k/year depending on where you live. Then you have to guess how many years of that to plan for. Any assets beyond that are really assets to be passed down to kids/grandkids/charities. Which makes the investment horizon dramatically different if you are investing for the needs of a 99 year old or a 9 year old. And yes both of those are real ages that we manage for.
Life expectancy for all of us is unknowable, but you have to assume some range. Same for long term inflation. Beyond that I would model out what the real objective for the investments should be.
I realize I am commenting on a two month old topic, but I have spent a lot of time this summer helping some older relatives and friends who are likely headed into long term care (LTC) at some point and Tex’s comment came to mind.
We have been helping set up “medicaid trusts” – irrevocable trusts to hold assets so that when the trustor goes into LTC, the assets don’t get counted for medicaid purposes (so the person can qualify for medicaid help to pay for care) and the assets can be available for the trustor’s spouse. Key is that these trusts work best if they are created years before LTC is needed. Medicaid has a long “look-back” period – seven years in the states where I have been working, IIRC. All of this varies by state.
A difficult thing is that by the time most people start thinking about LTC, they are within the “look back” period and things get more complicated.
Medicaid “help” is maybe not relevant to all the fabulously wealthy folks on III, but it can be critical for middle or lower income people who won’t be able to pay for LTC out of pocket.
Good thing to talk about with your estate planning lawyer. I hope everyone on this board has a solid estate plan that has been reviewed with a good lawyer, regardless of your age.
8.7% is my current yield. I am only 43 but feel equities are completely overpriced and generally so poorly managed now a days that it’s show me cash flow or bust. I do keep about a 1/3 in CDs and equivalent. 1/3+ in floating rate preferred and the remainder in MLPs, bond proxies, and REITS.
I believe being a floating rate lender is going to serve well over the next few decades just as being an equity holder did in the past two. I do think rates are ultimately going much higher, even if they take a dip or two first. The crowd is nearly unanimous that rates are going down and I tend to think the crowd is always wrong.
I air on the income level vs a particular % level. Most have touched on core ideas around living on income sustainably. I.e. Not burning through principle is key and keeping up with inflation as a metric of not losing most of your real world buying power Y/Y. I am on the other end of the age spectrum in comparison to most on this site, nowhere near retirement age, which brings one to focus more on capital accumulation as you have to have capital in the first place earn a return on it. With the costs of living rising so rapidly Y/Y it’s hard to really project what you need to be aiming for. MY unfortunate anecdote here is I was recently laid off from a well paying position but luckily had been religious about allocating to my income portfolio and HY savings and am actually able to pay bills with the income until I am able to get on my feet again. To juice the income level I’ve focused on higher yielding securities while accepting the risk/volatility of principle value change in exchange to bring in the much needed additional dollars right now, while telling myself once I am back on my feet with a job I will replenish anything I’ve drawn down on if need be. Life is an adventure right now to say the least.
Best wishes to you Shep, hope you find something that is in your wheel-house that pays well and you enjoy. I had about a 3 year hiatus from my “career”, although I still had a small consulting gig and some other minor income from a hobby. Keep the income compounding if you can, as capital gains have been abundant in the past decade or more, but who knows about the future?
Thanks Tim for the question. And, thanks everyone for your comments.
In today’s market when looking at income producing securities my target is 8%. This is excluding cash equivalents which are about 27% of the pile. I track my cash equivalents and projected portfolio income pretty closely. I will sell puts and calls short and do covered calls. This is not included in the % above.
Generate 4.5% income /year from the risk/equity portion of the portfolio (70%). Principal balance, after draws, stable to up 1%/yr.
I agree with those who’ve said it depends on the inflation rate. I have enough principal at 68 to live comfortably as long as my returns at least equal what I think the real inflation rate is. 15 or so years ago I set a 6% target. I’ve actually averaged 8.37% thanks in no small part to this wonderful site and its predecessor. I’m 75% safe stuff averaging 5.75% and the balance averages over 8%. My overperformance is due to trading the dividend cycles which has juiced the returns. My “play” money is focused on short-term maturities and very high floaters and under par soon to be floaters. Trading TECTP, PMTU and FITBI to mention a few has been great fun with 15% plus returns.
My YOC is about 6.55% but current effective yield is 5.75%. I keep adjusting to try and get current yield around 6.5%
I would be happy with 3%, but with three important conditions:
1) never any capital drawdowns
2) one year Treasuries stay at 3% or above
3) inflation averages 3% or less
If the CBO has it right — but they never do — I’m home free. The relevant projections are on page 12 of the link below:
https://www.cbo.gov/system/files/2024-06/60039-Outlook-2024.pdf
Happy to just keep rolling one and two year Notes. Only zero interest rates or hyperinflation can screw me now.
Any use of TIPS?
Thought about using TIPS, but decided against it in order to avoid the risk of market value fluctuation. Still have about 30% exposure to common stocks and a few remaining preferred stocks and baby bonds.
af, yes you can’t expect to trade in and out of TIPS. They are best kept until maturity. I don’t even bother keeping track of market prices on these things after I buy them
The real problem with TIPS is that I might mature before the TIPS.
I learned my lesson in 2007. I perfectly timed the stock market top. Thinking interest rates would fall, I sold stocks and bought high quality long duration municipal bonds. Great play, right? Wrong!!!! Spreads blew out and even my high quality muni bonds lost about 40% of their value for a period of time. I’m too old for that kind of stress. I’m heading toward maximum exposure to one year and two year Treasury Notes.
2007 — top 10 stocks accounted for 79% of the S&P index gain
2024 — top 10 stocks have accounted for 77% of the S&P index gain and increasing rapidly as NVDA rockets
Speculation and over optimism set up a sentiment reversal and increase the probability of spreads increasing dramatically. I have absolutely no clue whether 2024 will have a similar outcome to that of 2007 — I just know that I no longer have the stomach for the potential volatility.
af, depends on your age and outlook I guess. Both my wife and myself moved everything into bond funds in late 2007.
Yes we lost principal, but nothing like fellow employees who were in stock funds losing 50% and we still had 15yrs at least until retirement. The bond funds recovered quicker than stock funds and we were actually up in value 3 yrs later.
Yes, all is well that ends well — but I have an obsessive compulsive personality and I don’t want to worry ever again.
So here is what I do. I take the face value of all my CDs and Treasury Notes that mature in less than two years. Then I add to that the value of all my other financial assets (i.e. utility stocks, BTI stock, NEWTG) discounted at 40% below market value. I need to be OK with that number or I am assuming too much unnecessary risk.
I’ve owned TIPS a couple times and was never satisfied with the performance. There are several factors other than Infllation, which is underreported anyway. You might expect TIPS to track Inflation but they are bonds first and foremost and their response is mixed.
Martin, that is why I keep them until maturity. All of the complications you describe go away and it becomes a very simple effective investment (really an insurance policy) that performs exactly as intended with as safe as you can get entity behind it. Like all investments, not for everyone.
6.5% for safe distribution especially if qualified distribution.