Investment management strategies involving income asset allocation are critical in the current low income interest rate environment. The Federal Reserve policy of keeping short term rates near zero are causing investors to hunt for yield and move out on the risk curve in order to obtain income. The result is an environment unlike any we have seen in our lifetimes; requiring investors to rethink their entire investment management strategy, particularly income asset allocation.
Income Asset Allocation
Bonds
The case against Bonds is compelling. Record low yields and record high bond prices make bonds a lower return higher risk asset than we have seen in decades; possibly ever. This means inflation indexed bonds or TIPS are the only viable long term bonds I would have in my portfolio due to the possibility of high inflation eroding purchasing power in the long run. In my opinion, the lower coupon yield of TIPS is well worth receiving the inflation indexing on the bond interest and value.
Dividend Growth Model
The dividend growth investor can reap the benefits of growing dividends. Through exponential growth of dividend growth compounding investors can achieve competitive returns regardless of whether the price of the common stock increases in value or not. The key to dividend growth investing is always reinvesting dividends to take advantage of compounding and dollar cost averaging.
Cash and Cash Equivalents
The returns on cash are so low I basically use a 0% rate or return assumption. Hopefully, we will return to a more normal interest rate environment where savings is rewarded instead of penalized, but for right now the earnings on cash are non-existent. This does not mean you should abandon the safety and liquidity of cash. Cash provides capital for investment when bargains are available in other assets and provides the important function of preserving portfolio assets when other assets are declining.
Income Asset Allocation Plan
A tactical asset allocation strategy allows an investor the flexibility to consider valuation when setting asset allocation targets. With most bonds being overvalued consider a combination of TIPS and high paying dividend stocks for income. Part of your overall risk management plan should include a healthy amount of cash when valuations are high. It’s more important to preserve capital in bear markets that it is to capture all the gains in rising markets.
What if you had a model asset allocation portfolio to provide you with asset allocation and investment management strategies? Would that give you the confidence to manage your own money?
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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