Maximizing your Investment Income

For most investors, simplicity is better. However, far too often investors have either too many investment strategies or no strategy at all. One of the major drawbacks of having multiple equity strategies is that it is not necessary, confusing, and can be more costly. It is understandable why a family of mutual funds would have multiple strategies; it is for the sake of marketing to as many people as possible to increase revenue. But why does an individual investor need to choose or switch back and forth from different equity approaches? If you have the right approach, then you do not. If you are picking individual stocks, you need to employ a strategy that outperforms the index over time with lower risk but if you cannot then it is best to pick an equity-based index fund like the S&P 500.

To maximize your investment income, one equity approach is all you need when coupled with an aggregate bond index fund of your desired allocation between the two asset classes. For instance, if you are retired and want to generate a dependable and growing income say for the next 40 years by investing in a blend of equities and bonds, you obviously want the highest and most stable returns possible on the equity portion of your portfolio. Picking the wrong equity portfolio can drastically change your income over your desired time horizon.

Using the S&P 500 and blending that with an aggregate bond index fund could easily generate the desired investment income well into the future. Having a sufficient lump sum investment from your retirement or other savings is also key. Here are the typical returns you can expect when using the S&P 500 and blending it with an aggregate bond index.

With a better equity portfolio, you could get significantly higher returns, which in turn gives you more investment income per year using your desired allocation. Limit your choices and go with the equity approach that generates the highest potential return on your investment dollars. What happens if you used our model portfolio as your sole equity strategy and blended it with an aggregate bond fund? These are your potential returns which certainly spices up your basic asset allocation strategy.

The asset allocation you choose is your choice but if your goal is to maximize your investment income then going with the higher return is best for those cases, especially if the equity portion of your portfolio is more stable than the S&P 500. Also, it would be wise to choose a withdrawal rate that stays at least 2-3 percent below your expected average return. This solution would be easy to implement as the underlying equity portfolio is rebalanced only once per year while providing significantly higher returns than any index fund with lower risk. Finally, the underlying equity portfolio in this example was not optimal, meaning we just used the returns as they were from the back-test. The returns used, nonetheless, provide a Sharpe ratio 25% higher than the S&P 500 whereas the fully optimized results would provide an even higher average return with a 50% higher Sharpe ratio than the S&P 500.

As always, please contact us for any details on our methods and assumptions if there are any questions. If you do not have a great approach, then consider joining “The Collective” and let us provide the solution that you have been looking for to solve your problems.