I listen to the radio commercial in my car which goes something like this: “For years David Lerner has been providing steady income to our investors…” - that’s when I change the channel.
I check my voice mail in the office “Hi, this is so and so from so and so investment management, and I want to speak with you about showing your clients our core income strategy…” – that’s when I hit the delete button.
How many financial marketers do you hear that start with an offer of income?
It sounds appealing, especially to those of us in or nearing retirement, but I don’t buy it. In fact, I think it can be harmful to investors. A fixation on income often leads to investor mistakes because “safe” income investments provide little income (today more than ever). So if you stay with safe “income investments” your purchasing power insidiously erodes to inflation.
Often advisers/investors will then “reach” for higher yield and in the process swing too far the other way, assuming too much risk. Perhaps with “high yield” bonds (i.e., junk) And the higher the yield, the riskier the investment is. Or maybe they reach for more yield with preferred securities or high dividend paying stocks.
Look at what investors experienced in the iShares Dow Jones Select Dividend Index Fund (DVY). At the end of 2007, 46% of the portfolio was in banks and other financials. During 2008, the fund’s value fell 33%. (Today the fund has about 15% in financials.) Also, dividend and income-producing investments held in taxable accounts can have payouts eaten up by tax bills.
Forget income. Focus instead on asset allocation and a total return target that is consistent with your financial objectives and long-term plan. The right amount of revenue will come as a by-product.