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Income vs. Growth

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At Grace Capital Management Group, we discuss your income needs and put together an income plan that you can use to monitor your financial well-being.

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Focusing on retirement income may be more effective in covering living expenses than relying on the stock market.

Asset management requires focus. It tends to work best when clients have a clear investment objective. For many years, clients became accustomed to extended periods of stock market gain, which generated enough capital appreciation from which they could live. However, for the past decade or more, many markets have proven unreliable in providing the consistent, long-term capital gains required to cover spending needs. Buying and holding investments in the hope that prices will eventually go up may no longer satisfy the lifestyle requirements of many investors.

After a “lost decade” for stock market appreciation, is now a good time to focus on income and capital preservation if consistent income is required?

At Grace Capital, we call this the “Lost Decade” for the stock market — a period similar to 1965 to 1982 in which months of price appreciation were followed by comparable, but opposite, periods of price depreciation.

We therefore ask those clients who are concerned about the future of financial markets to consider a different approach. What if your financial portfolio were able to generate enough income to meet your expenses even in a flat market? If you could secure a dependable foundation of income for at least a portion of your assets, would any additional growth in asset values be a bonus?

At Grace Capital Management Group, we discuss your income needs and put together an income plan that you can use to monitor your financial well-being. Our insurance and investment products are then carefully selected with your income goals in mind. This isn’t a short-term attempt to maximize returns with little attention to risk. Rather, it is a long-term focus on producing regular income to help meet your living requirements while seeking to protect your capital in volatile markets.

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INCOME: THE RENTAL PROPERTY ANALOGY

We often compare our planning methodology to owning a portfolio of rental properties. The first consideration for such a portfolio might be the search for and selection of quality properties in attractive neighborhoods with financially stable tenants. You would look to acquire these properties at a good price, with a goal of providing an attractive level of income and the potential for the property values to appreciate in the future. Ideally, this property and portfolio would produce a consistent rental income stream you can use for living expenses.

Now, imagine you hear the price of property is falling and your portfolio is now worth less than it was just a few months ago. As the primary objective of your property portfolio is income, you probably wouldn’t worry too much about this decline in value, providing the properties are still in good condition and the tenants remain financially sound.

In fact, a drop in property prices may be an opportunity to review your portfolio with opportunity to pick up undervalued property and thereby potentially generate higher income. This is possible because, if the price of an income-producing investment drops while the income remains the same in dollar terms, your income levels (yield) will increase as a percentage.

This is a hypothetical description intended to provide an insight into the income benefits and holdings quality of the DIAS investment philosophy when applied to income portfolios. DIAS Portfolios typically contain liquid securities traded on U.S. exchanges and covering a wide range of asset classes. Although these portfolios may periodically contain a small percentage exposure to property values, it is rarely a significant asset class.

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NAVIGATING VOLATILITY AND PRESERVING CAPITAL

Income investing is a journey with a long-term percentage yield as your destination. Sometimes the ride is smooth. Sometimes it can get bumpy. We believe our job in managing income-generating portfolios is similar to that of an air traffic controller. The goal of an air traffic controller is to keep a number of planes in the air and as close as possible to a planned flight path while avoiding turbulence and storms. Think of each asset class we allocate capital to as an aircraft flying through the sky. Income is only produced if the aircraft is in the air. We actively manage the path of these asset classes, and the investments contained within, to avoid the turbulence our research suggests may be approaching. If an asset class gets too turbulent, we’ll sell it and move to a calmer region or move to cash until brighter skies approach. If we feel the turbulence is temporary, we’ll prepare our investors and portfolios for a bumpy ride. We can’t promise to avoid stormy markets, but we do try to keep the income flowing throughout the journey.

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DIVERSIFICATION: BONDS ARE NOT THE ONLY SOURCE OF INCOME

Today’s global markets offer a wide range of income opportunities. At Grace Capital Management Group, our goal is to construct portfolios that benefit from diversified income streams. Diversification across non-correlated asset classes may increase yields and reduce your exposure to significant losses, although diversification does not ensure a profit or guarantee protection against loss.

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RISK MANAGEMENT

When you make income your primary or one of your primary investment objectives, a number of things can change. Even during short-term price volatility, your investments are intended to pay consistent income. The income generated from a Grace Capital Management Group portfolio can be taken and used to cover your expenses without disrupting the underlying investment portfolio. Alternatively, it can be reinvested to increase your portfolio value.

Price gyrations may be less of a concern to you as an income investor because you no longer need to rely on prices going up to fund your lifestyle.

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Our Investment Philosophy

When markets are buoyant, we seek to participate in additional capital appreciation. However, we don’t need to expose our investors to unnecessary risk by chasing excessive gains.

When markets are falling, we look for emotional overreactions—investors selling on panic. At this stage, we may engage in “bargain-shopping.” Bargain shopping involves the purchase of quality securities that are highly undervalued for temporary reasons.

When the price of an income-paying security falls, the percentage income level (the yield) increases. Purchasing at this lower level “locks-in” the higher yield and opens the possibility of increased portfolio yield and capital appreciation.1

Portfolio yield provides a foundation of income that can be added to any risk-adjusted gains, if and when such gains are periodically available.

At some stage in life, you may need your investments to provide income that covers your living expenses.

When this time comes, is it wise to continuing focusing on investment growth? When income is something you rely upon, consistent investment yield with an element of capital preservation may be more appropriate.

1 Dividends payouts can rise, fall or be suspended. They are regularly subject to the review of their continuation by the board of directors of the issuing company.

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