Income Strategy

Published On: March 4, 2022

Written by: Ben Atwater and Matt Malick

It has been a tough start to the year for capital markets. And, seemingly, the volatility is set to continue. Times like this require a coordinated, disciplined, emotionless and repeatable investment process.

If you are in the saving phase of your lifecycle, volatility can be beneficial. You can use volatility opportunistically by putting more money into securities when their prices fall. Savers in the prime of their careers should relish volatility.

But, for those living off their portfolios, volatility can prove a challenge. Living off your investments means pulling money from your portfolio. If you are forced to sell assets that have lost value to fund your spending then, by definition, those investments cannot recover.

This withdrawal rate is akin to a negative rate of return that will compound over time, making it increasingly difficult for your portfolio to recover when markets rebound.

For our clients looking to retire or in retirement, we build our investment philosophy around solving this very problem. We build portfolios that generate income (dividends and interest) and we have an allocation to safe investments.

Clients withdrawing from their portfolios can tap interest and dividends to help fund their spending. Given the low interest rate environment, if these cash flows are not sufficient, then we can look to liquidate safe investments during market downturns to help fund retirement spending.

The worst scenario for retirees is to be in a situation where you need to sell depressed investments to support your retirement. This is how you lock in losses, and it is our priority to avoid this.

By largely building portfolios around individual securities, we have more control and better opportunities to manage cash flows in a volatile market. We can generate cash from a security, whether it be a stock or a bond, which has held up through a tough market. It is far more difficult to do this with a portfolio of funds and investment products.

Additionally, individually managing each account allows us even more flexibility in raising cash. Our accounts are not tied to computer models that require sales to correspond to predetermined allocations. Rather, we can use our full discretion to pick the right places to sell.

Our discipline works both ways in that not only can we strategically harvest cash for distributions, but we can just as effectively rebalance and dollar cost average (buy stocks) as the market falls by taking bond maturities and using cash to reallocate the proceeds to stocks.

Acting strategically across client assets allows us to make the best of a tough market. We are grateful for the opportunity to collaborate with clients who embrace our approach, give us complete knowledge of their assets and allow us the ability to manage according to our process.

If we have learned one thing in our twenty plus years managing investments, it is that trust and process yield the best results. Anything short of that standard is suboptimal.