For retirees who depend on their investments for income, this question is becoming increasingly important:
What’s the best strategy for getting the most out of my investments?
One strategy to consider is total return investing.
Total return investing is a holistic investment approach that takes into account both yield and asset appreciation. With total return investing, your portfolio will change over time according to your needs and goals.
What is total return investing, and does it make sense for you?
The Difference Between Total Return Investing and Yield-Based Investing
There are two main concepts you should understand when considering investing strategies: yield and total return.
What is Yield?
Sometimes referred to as income investing, yield refers to the return on an investment in dividends or interest. Retirees who plan to live off the income their retirement savings generate without touching the principal balance are often most interested in the specific yield of their portfolio. Yield is forward-looking, which means that investors often favor it for its predictability. A bond ladder is one example of a yield-based approach.
What is Total Investing?
Total return refers to the full rate of return over a given period, including interest, dividends, capital gains, and distributions. Unlike yield, total return also includes the capital appreciation of an asset or capital gains.
One way to think of it is that yield refers only to income generation, while total return refers to both income generation and asset appreciation.
In this way, total return is a more comprehensive and holistic way to view a collection of investments since it tracks both earnings and growth. Rather than relying solely on generated dividends and interests, total return investing takes a more flexible approach and also allows investors to draw on capital gains and other assets.
Which Should You Focus On?
Whether you should focus primarily on yield or total return depends on your goals for investing and income needs.
Focusing on yield is a good fit for investments where you’re primarily interested in living off of or otherwise spending the interest without touching the principal.
On the other hand, total return investing is a better way to view long-term investments like retirement savings, where you’re primarily focused on balancing growth and risk tolerance.
Why Total Return Investing?
Total return focuses on goals and risk tolerance first and yield second. A total return approach first considers an investor’s risk tolerance and then decides on an allocation of assets accordingly. Because of this, total return investing is more stable and sustainable than focusing solely on yield.
One way to approach total return investing is to reverse engineer a plan based on your unique goals. By approaching total return investing through the lens of your personal goals, you can create a unique, tailored approach that maintains a holistic view of your investment strategy. Rather than solely focusing on yield, total return investing takes in the big picture and plans for future growth.
Total return investing can also be more tax-efficient in retirement. In some cases, using a total return approach means that more of your earnings will be taxed as capital gains rather than income. Since the capital gains tax is generally lower than the income tax rate, this can save you money come tax time.
How to Take a Total Return Approach
In simple terms, a total return approach means that your portfolio will be more diversified and will shift and change over time according to your goals and needs. You may occasionally draw from the principal balance when needed and sell off assets when appropriate. With this approach, the overall goal of your investments is to provide a mix of stability, flexibility, and growth.
In contrast, by focusing solely on yield, you may expose yourself to riskier investments, your portfolio may not be as diverse, and you may not earn enough on yield alone to support your spending. By focusing on total return, you gain more control over your withdrawals and assets while sustainably growing your wealth.
Playing the Long-Game
Because a total return approach views your investments holistically and takes your personal goals into account, it’s an excellent strategy for planning for the long term. When planning for retirement and beyond, it’s essential to work on building unique, long-term strategies that meet your needs rather than chasing returns and yield and possibly over-exposing yourself to risk.
Here at Goepper Burkhardt, we understand that no two clients are alike. That’s why we design and implement an investment management plan that is tailor-made for you and your loved ones, based on your specific goals, objectives, and risk tolerance. We work with you to create a plan that is optimized to make the most of your particular earnings and assets.
If you’re nearing or in retirement and looking for advice, we’d love to help. Get in touch with us today to learn more about our services!