Most advisers say that coupon-focused investment strategies (for example, those that rely on dividend or interest payments) are a preferred option for many savers. These strategies are, in fact, easy to understand and manage to protect the initial capital while using a more sustainable approach in the long term. However, prioritizing simplicity and capital protection alone is typically not the best approach.
The limits and risks of an income-focused strategy depend on the approach used. Among the asset classes and instruments that generate income within clients' portfolios, the consultants cite, for example, dividend-paying stocks, REITs, corporate bonds, high yields.
But when evaluating a strategy, consider where this income comes from and make sure you carefully manage the associated risks. Some of these risks, for example, may be underestimated:
• Focus on short-term returns at the expense of long-term growth;
• High yield bonds can turn into junk bonds;
• Too much concentration in terms of asset class or sector;
• Too much focus on own country assets;
• Liquidity of own portfolio.
To help decrease the level of risk and volatility of your portfolio, income-generating solutions should aim for a sustainable level of return through a well-diversified, multi-asset approach that considers 4 factors:
• Balance: balance short-term yield needs with longer-term growth objectives.
• Diversify: Make sure your portfolio is structured around a mix of geographically diverse strategies, asset classes and investments.
• Measure Risk: Avoid going too far in the pursuit of return. The risk must always be appropriate to the profile of the individual investor and his ability to tolerate risks.
• Adapt: Income-producing asset classes may require dynamic adjustments in asset allocation. It is therefore necessary to ensure that a portfolio has the right capacity to adapt quickly and flexibly.
In our view, the best way to manage these factors is to adopt a total-return approach that looks at both interest, dividends and capital appreciation when considering income generating ability.
Refocusing the conversation on the client's goals, preferences and needs can help advisors and promoters build a financial plan that can accommodate short-term needs without jeopardizing the ability to achieve desired financial goals.
When it comes to generating income, therefore, it is important to consider all the risks and potential opportunities in order to encourage the investor to balance his current concerns with strategies that can help him achieve financial security in the future.
