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Wednesday, May 15, 2013

Alternatives Income Producing Strategies

As more and more investors are nearing retirement, bearish or bullish might matter no more. These investors are more interested in innovative, well balanced income strategies that try to not leave them overexposed to market fluctuations or downturns. They want to find alternative opportunities that provide a certain level of confidence and help alleviate their fears about outliving their available income.
The traditional solution to the retirement income dilemma has been to move portfolio assets from equities into a combination of bonds, annuities and/or dividend paying stocks. Increasingly, however, many investors question whether traditional strategies will be able to provide adequate income through their retirement years. At the same time, however, few of them are willing to expose their portfolios to riskier equity investments that might provide the returns necessary to satisfy their income needs.
In recent years, many investors have turned to ETFs to develop new income producing investment strategies. However, the number of income producing ETFs is limited and it is too early to determine how well ETFs correlate with other income alternatives. Also, in light of current economic events, some investors are wary of making long term commitments to investments that have not proven their ability to deliver the anticipated returns.
A Closer Look at Traditional Income Strategies
Interest rates are at historic lows. In addition, inflation and taxes can further reduce already negligible income payments. As a result, government bonds and other "safe" investments could deliver negative returns, possibly for years to come. Allocating a percentage of assets to stocks can help hedge against inflation but can wreak havoc on a portfolio that is taking regular distributions. The chart below shows the impact of a 30% decline in the value of a portfolio.
                            Accumulation Phase       Distribution Phase
Portfolio Decline                    30%                 30%
Income Distribution                   0%                  5%
Return Needed to Break Even          43%                 54%
Given historical market returns, it could take a considerable amount of time to break even-time that is often not available. In the scenario above, a portfolio in the distribution phase may be exhausted in a short time.
Seeking Consistent Income Payments in Today's Environment
More and more investors are searching for investment strategies that will simultaneously help them protect their capital and generate sufficient income throughout their retirement years. In the process, they are realizing some possible investment realities. For example:
  • Passive investing may not be compatible with today's fast-paced, constantly fluctuating political and economic climate. These volatile times may require a flexible and proactive approach to retirement funds management.
  • While diversification is key to capital preservation and income generation, true diversification involves more than changing a portfolio's stock and bond allocation percentages.
  • Liquidity is important. Being able to have access to assets in emergencies and passing them on to heirs intact are also important considerations.
  • Investment success goes beyond yield. What today's investors need are investment options that combine practical, long term risk management strategies with opportunities for asset growth and enhanced returns.

The reality is that no single approach can move both with and against market currents. The use of investment strategies that utilize a combination of approaches may offer a higher probability of long term investment success. These sophisticated strategies seek to:
  • produce a higher return than prevailing interest rates,
  • provide the potential for capital appreciation,
  • achieve a degree of stability - low volatility,
  • preserve capital by managing risk, and
  • provide easy access to capital.

While the development, implementation and maintenance of these complex solutions require sophisticated modeling and constant monitoring of market conditions, they may provide an ideal solution for retirement distributions in today's economic times.

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