Investors focused on generating income — especially as they look forward to retirement — may want to consider fine-tuning their “balanced” portfolios, according to recent research from BlackRock. The S&P 500 surged 17% in 2024 thanks to a boom in the technology and artificial intelligence industries. Technology darling Nvidia has risen more than 150% this year and accounts for more than 6% of the weight of the broader market index. .SPX Year-To-Date 2024 S&P 500 Highs As exciting as these gains may be, investors approaching retirement face plenty of risk by letting the run of big tech companies drive their portfolios. “I think people are overlooking the fact that taking an income-oriented approach can generate really strong results,” said Justin Christofel, co-head of income investing, multi-asset strategies and solutions at BlackRock. Returns. “We talk about saving for retirement, college and everything else, but not enough time is spent on what to do when you’re no longer drawing a paycheck,” he added. “When you retire, you’re going to face new risks that you didn’t face when you were building wealth. “Investors can try to manage some of the risk in retirement by investing in income-producing assets. BlackRock found that this could mean moving from a balanced portfolio allocating 60% stocks and 40% bonds to allocating dividend stocks, high-income The 40/60 Approach Asset Management analyzed different combinations of income-focused portfolios over a 25-year period, including the MSCI World High Dividend Yield Index, the Bloomberg High Yield Bond Index. and the Bloomberg U.S. Aggregate Bond Index. BlackRock then compared the returns of this portfolio, which included a 40% dividend distribution and a 60% fixed income distribution, to a traditional 60/40 portfolio. : “A diversified mixed-income portfolio…generally delivers better returns with similar levels of risk. “In other words, over the 25-year period, the efficient frontier of the income portfolio is higher than the efficient frontier of the traditional portfolio. “The efficient frontier is a concept in modern portfolio theory. It describes a set of portfolios that are expected to provide the highest return for a given level of risk. It also suggests that at some point, an increase in portfolio risk will lead to diminishing returns The concept of diminishing returns is particularly important for investors who are approaching retirement and may be inclined to continue to hold large positions in large-cap stocks. These individuals are grappling with a range of return risks, namely the possibility of sharp market declines in their retirement years. , and are forced to withdraw from a portfolio that is declining in value. “Trying to maximize total returns is not necessarily the best strategy,” Christopher said. “If you experience a drawdown, you sell units to maintain the cash flow you rely on to survive.” By taking an income-oriented approach, bond interest and dividend payments can generate sufficient cash flow, he added. , to prevent retirees and near-retirees from selling assets in a declining market. It can also help stop them from selling out of fear. “As time goes on, the market is trending higher,” Christopher said. “After a year or two, you won't be worse off with this income approach because the market may have recovered.” Investors seeking an income-focused approach should work with their financial advisors to realign their portfolio so that they can cost average these assets over time and ensure their allocation reflects their risk profile and objectives. Looking for Income-Producing Assets With the Federal Reserve widely expected to begin cutting interest rates this September, Christopher's team found that dividend-paying stocks were “an attractive way to go higher.” Investors who want to take a diversified approach may want to try mutual funds or exchange-traded funds. Vanguard's Dividend Plus ETF (VIG) has a 2024 total return of 15% and an expense ratio of 0.06%. There is also the iShares Core Dividend ETF (DIVB), which has a total return of about 17% in 2024 and an expense ratio of 0.05%. The research team found that the covered call strategy is another way to increase portfolio income. A call option gives an investor the right to purchase a stock at a given strike price before the expiration date. A covered call strategy involves selling a call option on an underlying security you already own to another investor, a move that helps generate income from the premium. The problem here is that you have to be prepared to sell the stock if its value spikes and you miss out on additional upside. Christofel's team also likes floating-rate bank loans and high-quality AAA-rated mortgage obligations. “Today's bank loans have wider spreads and higher yields than fixed-rate securities of similar credit quality, such as high-yield bonds,” he wrote. Although as the Fed cuts interest rates, the yields on floating-rate instruments may will decline, but these products may still offer attractive returns compared to other fixed income categories. Finally, Christopher's team likes high-quality bonds to provide ballast to the portfolio, including cash coupon and short-term investment grade bonds.
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