In the current low-yield environment, income-oriented investors may be tempted to search for higher-yielding assets to support their spending requirements. However, many investors seeking income would be better served if they adopted a total return strategy that spends through capital returns in addition to portfolio income yield.
“The total-return approach allows investors to meet spending needs without relying solely on portfolio yield,” said Vanguard ISG’s Jacob Bupp, who along with David Pakula, Ankul Daga, and Andrew S. Clarke has published new work based on Vanguard research originally produced by Colleen M. Jaconetti, Francis M. Kinniry Jr., and Christopher B. Philips. “It addresses portfolio construction in a holistic way, with asset allocation determined by the investor’s risk-return profile.”
After the COVID-19 pandemic jolted financial markets in March 2020, the already low yields on fixed income investments moved lower. At its 2020 low, the 10-year Treasury note yielded 0.52%, a fraction of its historical levels.
“The low-yield environment poses a challenge to income-focused investors who hope to use portfolio income to support spending,” Mr. Bupp said. “Today, a broadly diversified portfolio of equity and fixed income can no longer generate a yield equal to 4% of the portfolio’s value, consistent with conventional guidelines for spending from a portfolio” (Figure 1).
