Investing for total returns vs income stability

I have been reading a theme in a few threads recently where the attraction towards income stability is put higher than total returns even at the expense of slightly lower returns over the long term. For eg. LICs are preferred to index funds/ETFs because of their income stability.

I have always believed in total returns in deciding where I invest my money. So below I have got an example where an investor is happy to accept slightly lower returns in exchange for income stability.

Investment objective: Income stability
Returns: 9% pa compounded
Initial Investment: $100,000
-----------------------------------------
Total after 25 years: $862,308
(incl dividend re-investment)
Assuming 4% dividend income: $34,492



Investment objective: Highest total risk adjusted returns (Index investing)
Returns: 9.5% pa compounded (slightly greater over the long term)
Initial Investment: $100,000
-----------------------------------------
Total after 25 years: $966,836
(incl dividend re-investment)
Assuming 4% dividend income: $38,673

So total returns portfolio generates around 12% more income and obviously has 12% higher capital base. Now, this difference will keep growing and become larger and larger as time passes. After 30 years total returns portfolio will be around $1,522,031 while income stability portfolio would be $1,326,768 about 14.72% less.

In my opinion people who invests for highest total returns are in no way less of dividend growth investors than people who invest for income stability. It's just they accept income would be variable but the trend would be from bottom left to top right over time.

Now, if both scenarios produces the same returns than I can see the advantage of income smoothing. But no one knows for sure what the future will be. Hence, knowing the above scenario is very likely outcome would all of you still in accumulation phase and who prefer income stability be OK to end up getting less income in future?

Cheers,
Oracle.

 

Missing a voting option in my case: BOTH.

And I don’t feel the first option is fairly worded with the assumption being that income stability automatically equals lower income over time in all cases?

 

Read the last paragraph. It doesn't but without guarantee you are basically taking a chance they will be equal but history has shown it's extremely difficult to beat index over the long term so the odds are against you. Hence, is the risk of lower income worth income stability?

Also, the question is more catered towards accumulators who still have 15-20 years of accumulation ahead of them before retiring. You are an exception being retired

Cheers,
Oracle.

 

We have been accumulators for the last 30 years- pension phase this year. Have always gone for total return. At this stage the only thing we have changed is we have significantly increased our cash/near cash to cover the compulsory withdrawals we will now be required to withdraw from our SMSF each year in the event our dividends do not cover these requirements - unlikely but anything is possible. Also have money available for buying opportunities if there is a significant share market correction in the next year or two.

 

Would love to hear how did you go about investing for total returns? Was it LIC, index or individual stock selection?

Cheers,
Oracle.

 

Individual stocks. I must admit I did not know a lot when I started. I started with the float of CBA and just kept accumulating, reinvesting and adding. As I became more confident I would trade shares that I believed were mispriced but was never a trader

 

But I’m still an accumulator, probably accumulating more than most here. I just choose not to work.

I’m feeling discriminated against as he searches the Yellow Pages for a suitable legal representative.

 

I love reading about the investors that saw the future in the mid 1990's about investing in CBA ""Islay""---And re--investing ever cent back into the machine as most are unaware of the true subject of the matter,and as we both know the media drama queens kings are mostly un---successfull people who give the most advice particularly about financial matters...Now you can live the dream and enjoy it 1000%%..

 

Thank you. We have been very fortunate. We still have accumulation accounts as well as pension accounts so I get to enjoy the fruits as well as continue the investment journey. I have loved investing and still do. I ( I'm the investor) have thought about simplifying our holdings but I just can not bring myself to selling down our holdings yet. I follow the market, read the reports, update share prices etc regularly. Bit of a passion really, lol

 

Six votes for indexing, zero for LICs so far. Hopefully given the large sample size this suggests LICs are becoming a less appealing investment leading to large NTA discounts relative to average longer term NTA. This being one of the rare market anomalies potentially enabling higher than average market performance / income growth. But of course that introduces complexity which some may not want to be bothered with.

Anyhow I’m going back to my corner to sulk given I’ve been declared ineligible to vote.

 

The reason for me to bring up this topic is to make people aware of the possibility that there is a small chance their chosen LIC end up providing dividend stability but might underperform the index. If it does underperform then over the long term they might actually have less capital and income. As long as investor is OK with that there is nothing wrong. In fact the LIC could end up outperforming the index which would be fantastic for the investor.

For me personally I love the idea of dividend stability but at the same time I hate the thought of possibility of lower returns at expense of dividend stability because I have done the maths and even 0.5% lower return over the long term can result in huge difference which will continue to keep growing.

Secondly, even Berkshire Hathaway is unable to beat the S&P500 by huge margin over past 20 years. This is inspite Buffett being investor he is and not charging any fees and just taking a modest salary.

This to me is an important lesson where no matter how good you are sooner or later the size of funds under management will eventually matter even if it's best investor in the world managing the fund.

If you are not indexing you are basically taking a chance that your chosen investment will continue to perform the same way irrespective of its size in future and/or systems put in place by management (which will change over time) continues to generate similar returns in future as it did in past.

Looking at above results seems like most people do care about total returns. Hence, I just want to get people to think about above points and make sure they are comfortable in their choice of investments.

Cheers,
Oracle.

 

Excellent post.

In the end it will likely always come back to what feels like the right fit more so than maximum performance. If it was purely about performance everyone would be 100% shares. But for SANF many choose to own Cash / Term Deposits / Bonds as well as shares. For others income reliability from shares might negate having to hold as much in cash / fixed interest.

There will never be a victor in these sort of debates simply because of human nature. The reality is a good portion of those participating in this survey likely haven’t really been put to the test so to speak. Until then they are answering based on their “perceived” view rather than “actual” experience. But I might be wrong.

Then again I’m a retiree and perhaps out of touch. Personally I sleep well with a combination of LICs / Cap Weighted ETFs. Oh and a sizable Cash / TD holding.

So finding an approach that lets one sleep well at night and “stay the course” is far more important than chasing maximal returns and unable to stick with it!

Getting back to the survey the result suggests that I may be out of touch. So maybe it’s a geriatric thing and hence my thoughts are best kept to myself.

 

Another excellent post. Better than mine

Cheers,
Oracle.

 

I doubt it. There comes a point when one has said too much (typically the same thing over and over) and has exceeded their use by date. Boredom sets in, regulars wish he would shut up. The signs become more and more obvious. I can’t help but feel my use by date had expired quite some time ago.

Great posts like yours are a breath of fresh air. Hopefully others will be inspired to follow suit. I’d love nothing more than to be an unknown lurker learning from and enjoying wonderful posts like yours.

Long live Property Chat, a place dominated by long term investors as opposed to speculators / get rich quick fantasies. Please all make an effort to post as variety is the spice of life.

 

Still time to change your vote..

 

Unable to vote. To do so would require me to think. In order to think would necessitate me to look at prices over time, do calculations and potentially increase my stress levels. Increasing one's stress levels in not advisable according to some in the medical profession. It could result in a heart attacks. Ergo, thinking in order to vote is unhealthy.

 

I voted for highest total return.

Still in the "consolidate" phase that Y-Man mentioned for now but I plan on being in the "established" category by retirement. (though not with anything near $300k pa income! hahaha)

 

Answer depends on where you are in your investment journey.

Younger people can afford to take more risks as they have years ahead to ride out peaks and troughs in the market, both in property and shares.

As you get older, you usually have more capital to protect, and less time to allow for market movements.

We are retired. Enough to see us for the rest of our lives even if we buried the money in the backyard! So preservation of capital is more important to us than the additional money it earns.
Marg