The so-called "income-oriented" portfolios, i.e. oriented towards the generation of income, are very interesting choices especially for those investors who are already retired. From a strictly psychological point of view, these portfolios may appear interesting as they offer an easy way to plan one's investments and seem to avoid the danger of having to dent the primary capital.
Unfortunately, the current market environment of low interest rates makes it difficult for investors to follow this path prudently. Many investors are looking for a higher yield than what would be termed "sustainable." Short-term income is preferred over long-term growth, doing so can lead to a decrease in one's available capital and puts both portfolios and the ability to generate future income at risk.
Financial advisors and promoters can help their clients to have a more careful approach through 4 considerations:
1. Beware of the risks of the "search for yield". Investors view yield as a source of income within their portfolios, but many associate investments that offer an attractive yield with a conservative edge or a higher level of security than it actually is. In fact, this is often not the case – given that higher returns are associated with higher risks – and significant losses can occur.
2. Balance “today's” performance needs with “tomorrow's”. How much income an investor needs is a big decision and can be difficult to determine. This is made more difficult by the fact that the income has to last for a long time. And we don't know for how long. Only the financial advisor and the client can define how much income is likely to be sufficient, and how much it is possible to generate from a portfolio. When comparing funds or investment ideas, therefore, be sure to consider total return and not just the current return.
3. Diversify through multiple sources of returns. In order to successfully balance your current and future income needs, you must consider a diversified approach across multiple sources of return across equities, fixed income and real assets. Many stocks that offer higher yields can be added to a diversified portfolio, but – like many things in life – moderation is key. A diversified approach can offer an attractive return and allow the portfolio to grow – supporting and potentially growing income in the future.
4. Adapt to the risks and opportunities existing on the markets. Just as the current investment environment is different from the past, so the future will be different from today. It is therefore important to be aware of all the risks and opportunities of the market and to consider an income-oriented investment solution that can proactively seek and adapt quickly to changes that may occur. Finally, we don't believe that yield should be the sole driver for investment decisions. If an investor is looking for yield, it may be useful to direct him towards a more diversified approach that seeks to obtain a "sustainable" return. It's all about balancing current and future income needs.
