How to Ensure Sustainable Return on Investment

March 31, 2014
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March+Blog+4+-+Image+-+ROI-ol8tiFor the typical investor, generating a sustainable return on investment (ROI) that meets the investor’s needs, without withdrawing from the principle is considered good enough. Regrettably, under today’s economic climate that can be a challenge. As interest rates have been historically low since the Global Financial Crisis (GFC), the typical investor is likely meeting his or her needs from a mixture of capital gain income from interests and dividends, as well as liquidating some of the assets from the existing portfolio.

Therefore, the key question now is how to ensure a sustainable income from investments that will not deplete the portfolio. In order to find out how much an investor can withdraw over a sustained period, several factors need to be considered. Such as the current interest rate environment, portfolio volatility, and the time horizon of periodic withdrawals. Investors, who would like to maintain the value of their portfolio and earn a reasonable return, have only two viable options, investing in bonds or dividend paying stocks.

Bonds
Bonds are considered the safest investment vehicle for the typical investor. However, historically low yields on U.S. Treasuries and high quality corporate bonds aren’t helping investors earn enough interest to keep up with the inflation rate. On the other hand, corporate bonds offer better yields, but investors are exposed to much greater credit risk. In the long-term, investing with corporate bonds instead of the U.S. Treasuries can increase the portfolio volatility. Municipal bonds (munis) can offer a balance between higher yield and lower credit risks, but it has the potential to create greater portfolio risk than many investors would like to acknowledge. Currently, munis are selling at premiums of 10% to 15% above their value at maturity and those are subjected to various alternative minimum tax (AMT).

Dividend Paying Stocks
In the equity market, preferred or dividend paying stocks often offer better return on investment compared to bonds. However, income from preferred stocks are not guaranteed. A stock dividend may be reduced or eliminated for certain years due to depressed quarterly earnings. Moreover, stock prices are subjected to market volatility, which can expose the portfolio to losses.

The investment arena offers a better rate of return, but there is a trade-off in terms of risk. Under the current low interest environment, investing in foreign high yield assets may seem like a lucrative opportunity, but those are subjected to uncertain political risks. The latest Crimean crisis illustrated the political risk involved in such offshore investments. The only way to ensure a sustainable return on investment that can sustain long-term periodic withdrawal is to put together a comprehensive wealth plan, then implementing it, and sticking to it.

If you’re ready to get started on a personalized wealth plan where the goal is to help you continue to enjoy the lifestyle to which you have grown accustomed, please contact HFG Wealth Management.

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The material presented on our website is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. Important: all investing is risky, and no investor should decide to commit funds without first consulting with a competent professional adviser.

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