It’s no secret that retirees and other income-oriented investors continue to face historically low yields that can make funding their current expenses a challenge. And with the recent news that the Federal Reserve Board expects to remain cautious about raising rates, it will likely remain difficult for many investors to generate sufficient income strictly from fixed-income investments.
To help address this challenge and reduce the twin risks of losing purchasing power to inflation and outliving one’s money, investors who are in retirement need to maintain significant allocations to equities.
Horizon’s Real Spend retirement income portfolios are designed with more equity-centric allocations than many retirement income portfolios, in order to generate income from the larger capital appreciation of the equity markets over time. That capital appreciation is used to continually replenish a spending reserve of low volatility, liquid assets to meet current expenses.
To address these issues, many of Horizon Investments’ Real Spend portfolios recently updated their investment holdings (see highlights below), all the while remaining focused on generating long-term growth to see investors through what will hopefully be lengthy retirements.
- Short-term Treasury-related securities in the spending reserve.Rather than solely holding cash (which never appreciates, and loses purchasing power during times of inflation), the spending reserve component of the Real Spend portfolios now includes a position in an ETF that invests in short-term U.S. Treasury securities with durations of one to three years. The combination of these two characteristics (short-term duration, U.S. Treasury-related credit quality) has historically helped the values of these securities to remain relatively stable. As a result, they are expected to exhibit low levels of volatility versus longer-term and lower-quality issues (case in point, during the last five years, this ETF exhibited only about a quarter of the volatility of the aggregate bond market as a whole (as measured by the Barclays US Aggregate Bond Index) and generally moved independently of domestic equity markets). And having the yield that comes with owning Treasury-related securities can help investors better protect their retirement savings against inflation risk and its impact on their real spending rates (currently, the yield on this ETF is just shy of the rate of inflation).
- A new position in preferred stock. Preferred stock features characteristics of both bonds (it pays fixed dividends) and stocks (it has the potential for price appreciation), and is often a good source of higher yields than are available from traditional fixed-income assets. For example, the preferred stock ETF that was recently added to the Real Spend portfolios offers what we believe to be an attractive trade-off between risk and return—currently generating a 5.7% yield, with volatility that is only slightly higher than the overall bond market.
- High-dividend-paying stocks replace value stocks. On the equity side, the Real Spend portfolios are emphasizing companies with above-average dividends and low aggregate volatility. Here again, the risk-return trade-off is attractive: The new high-dividend ETF holding in the portfolios has a yield that is approximately one percentage point higher than the value-stock ETF that it is replacing, with approximately 10% lower aggregate volatility. We believe account holders can benefit from this position, which currently generates dividends and has been shown to maintain its value relatively well in choppy market environments.