Investment Returns From a Diversified Portfolio – What to Expect

Investment Returns From a Diversified Portfolio – What to Expect

In previous blogs, I suggested sticking with equities and fixed income and bypassing other elements that can make up a portfolio. I was addressing this to who I felt are typical investors having the goal of long term financial security. Here are some estimates of what can be expected with such a portfolio. These are based on current returns (and will obviously change) so you need to apply the then current rates when you are ready to act.

Stocks

The current yield on equities could be about 2% with the probability of 2% annual increases each in dividend and portfolio values. There are also differences based on whether the dividends are accumulated or withdrawn. For instance, $100,000 invested today would accumulate in 20 years to $219,000 if nothing is withdrawn and $148,000 after another $48,000 of dividends was to be withdrawn. Note: with the same 2% dividends but with annual increases of 4%, the 20 year accumulation of dividends would be $73,000 and the growth would be $147,000 providing a $320,000 portfolio. With dividends withdrawn you would have received $59,000 and stock growth of $119,000 resulting in a $219,000 stock portfolio.

Fixed income

Assuming a 20 year average yield of 3% with the annual interest accumulating at 1%, a balance at end of 20 years of $166,000 will result, or $100,000 after $60,000 of interest is withdrawn.

It would seem that a larger allocation toward equities would be more appropriate for most people not yet at their comfort and security level.

Managing withdrawals

You can apply your own assumptions, but short of a disastrous drop in the stock market, it would appear that equities would provide the better long term returns. As to withdrawals I would suggest that they come entirely out of the fixed income portfolio, both interest and principal, running it down to a much smaller amount than from where you started leaving the stocks to grow and accumulate the dividends. This would allow for greatest growth in your asset base. This is a plan that can be considered to be put into action and while it would be intended to be continued, changes can be made based on developing circumstances.

Not included in allocation

Rainy day funds are not included and should not be considered when constructing your asset allocation. However, to the extent you have those funds set aside, they should be invested in either short term CDs or one of the advertised higher yielding money market funds contributing added interest which will increase overall cash flow. Properly timing the start of your Social Security is another issue that can greatly increase your permanent life time cash flow. Also, for those that simply do not have enough of a base to accomplish their cash flow objectives, a charity gift or immediate annuity for up to 15% of your funds might close the gap.

Conclusion

The object of the investing program is to maximize cash flow – now and long into the future – while maintaining the assets and not subjecting them to undue risk. Although I believe the overall plan suggested in this, and the preceding blogs, accomplish this, I nevertheless suggest you discuss your investment plans and goals with a CPA financial planner or an investment advisor who can assist you in matching what you have and should have based upon your goals. Note that no investment plan or method should be placed on automatic pilot without watching what happens, even though the initial recommendation is to invest in a way where minimal changes are expected to occur. It is your financial security – understand it and watch out for it!