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Life Planning Partners, Inc.
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Carolyn's Blog:
"The Quest for Simplicity"
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Greetings,
One fun habit I developed many years ago is to look back at the previous year and list out the meaningful events that occurred personally, professionally, and in any other facet that interested me. I compare that with my list of New Year's resolutions that I made at the beginning of the year. The fun part is that very few of the resolutions were fulfilled, and so many other good happenings in the year more than made up for my lack of "intended" outcomes.
One pleasant surprise for me last year was the state of the world by the end of the year. People were very contentious about politics, health care, and the economy. You would swear the world was going to fall apart any minute. And what was one of the outcomes that delighted me? It wasn't really talked about, but our economy improved. The stock market did well, inflation was held in check, and we are all breathing a little easier. I'll enjoy it for the moment and be grateful we had a good year overall. I've learned good things sneak up on you when you least expect it.
So what does the next year hold? I hope more of the same as last year on the economic and investment front. As for Life Planning Partners, we plan to continue delivering great planning for whatever comes ahead. Last year, we focused on improved estate planning - we learned much from clients and are still refining the process. Our goal is to finish the in-depth advanced planning for each of our clients this year. I will be presenting our "findings" on how to walk clients through advanced planning at a couple of large conferences this summer and fall.
On the tax side, Congress kept us too busy in December and January. We are finally digging out of that rubble. The custodians are supposed to have the 1099 from all the accounts available by February 15, and we will get your "tax happenings" to you or your accountant in the next couple of weeks. I do hope Congress doesn't have any last minute tax packages to surprise us with at the end of this coming year!
Our shredding party last year was a great success. We've had numerous requests for another one, so start saving your shred-ables. We'll send out invitations in the next couple of weeks. Put the date on your calendar- March 28th.
Finally, on the personal side... Victoria has decided she would like to move to the "horse country" around Ocala, Florida. She will continue to work with us while we look for another great addition and while she looks for a job closer to the life she loves. We wish her the best in her next adventure.
We appreciate feedback on how we are doing! Please send your thoughts, questions, comments, or suggestions on how we can be better at any time.
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The Pursuit of Yield
by Tim Utecht, CFA
Yield is on the mind of many investors, particularly those relying on their portfolio for a paycheck. People wanting to preserve a retirement portfolio for a lifetime often view investment income as the key to making it happen, and yield is a measure of the income generated by dividends and interest.
Unfortunately, with record low interest rates, investment income is not easy to come by these days. Consequently, investors are on the hunt for more yield wherever they can find it. Boosting yield might seem like an intuitive way to protect a portfolio, but the reality is, chasing yield can alter the structure and risk level of a portfolio in unintended and harmful ways.
For example, an income (yield) focus can make it tempting to hold more bonds in a portfolio, as bonds tend to generate a higher yield than stocks. But standard bonds do not provide much in the way of inflation protection, meaning a higher current income due to a heavy weighting in bonds could be at the expense of future spending.
Higher yields from longer dated or lower quality bonds might also seem enticing. But these hefty yields are not the product of generous bond issuers. Higher yield means higher risk, and potentially higher losses (e.g. defaults).
Investors also seek yield with dividend paying stocks, which come with their own set of problems. Stocks carry significantly more risk than quality bonds. A majority of U.S. stocks do not pay a dividend, so a yield focus will eliminate much of the market from consideration. High dividend payers also tend to come from particular market sectors, resulting in a concentration of risk and poor diversification. And corporations have been paying out less of their earnings as dividends in recent years, making yield harder to come by.
It's also worth noting that dividends are not "free money." All else equal, a dividend payment reduces the inherent value of a stock, since the payment reduces the assets of the company (cash). Essentially, it's similar to selling a portion of the stock, except the company is making the decision for you.
This underscores the important fact that yield is not the same as return. A stock paying no dividends (i.e. zero yield) that doubles in price over seven years has produced a return of 10.4% annually. Yield can be a component of return, but it doesn't provide a complete picture. Return is the critical measure, whether it comes from income or appreciation.
So what is the alternative to the pursuit of yield? A total return focus, regarding income and gains together and evaluating the portfolio as a whole. It's nearly impossible to chase yield without altering risk exposure, and if your appetite for risk hasn't changed, exposure to higher-yielding assets shouldn't change either. A spending policy should be set based on reasonable return expectations, and asset allocation should be tailored to your risk tolerance, not distorted by a desire for income.
So how does Life Planning Partners, Inc. meet your cash flow requirements and make certain you have money for your future? Understanding your needs and planning in advance is the key. We call this the "bucket approach" and take the following steps.
- We create a plan to understand your cash flow needs in the short, intermediate, and longer term.
- Short term needs are kept in very liquid assets - cash and short term bond funds.
- Intermediate term needs are kept in laddered individual bonds and bond funds.
- Longer term needs are diversified across equities, alternative assets, and bonds based on your investment policy statement.
- Dividends, interest, and capital gains from your investments are added to your short term assets or reinvested in the intermediate and longer term allocations.
a. Good markets will result in higher returns, adding to the intermediate and longer term buckets.
b. In years with poor market returns, cash flow needs will be met with assets specifically designated to fund short term needs.
We can expect that good and bad markets will continue in the future, and in the good years we set aside money for the bad years. By preparing for the inevitable "lean" years, your spending needs will be met without worry.
With people living on their portfolios for decades, the old approach of "live off the income" is no longer practical. The "bucket approach" prepares for current and future needs, and most importantly, allows for restful sleep whatever way the market moves.
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As always, thank you for allowing us to have wonderful jobs and letting us help you find financial peace so you can make a great life.
Sincerely,
Carolyn, Tim, Victoria & Krissy
Life Planning Partners
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