Pages Menu

Posted by on Apr 15, 2014 in ETF Strategist

Time to Get Real About Income Investing

by Roger Nusbaum AdvisorShares ETF Strategist

Over the weekend Barron’s had a “special report” about retirement that consisted of two articles; one on the optimal time to take Social Security and one on income investing.

This is a very fun topic to write about and explore because the evolving nature of what retirement will mean for boomers and succeeding generations when compared to previous generations. Many people will have to create their own innovative solution that goes beyond merely living off of investments and Social Security while spending thousands every year on exotic trips.

For years I have been saying I do not expect to get Social Security or at best, get a very watered down of Social Security as we know it today. What I think will happen is that there will be means-testing such that people who do the right thing (maintain an adequate savings rate for many years) will lose out here, some will read that and think responsible people will be punished for having been responsible.

The article on alternative income solutions and strategies covered a lot of ground so not a lot of detail but was a good starting point for people starting realize that income investing is becoming more complicated. Buying a bunch of long-dated treasuries is no longer a favorable one-way trade. The article touched on ladders, all-ETF portfolios, actively managed solutions (funds and separate accounts), munis, closed end funds and a couple of others.

There was also mention of dividend stocks as bond substitutes but also the warning that dividend stocks are not bonds they are stocks. If some dividend stock near and dear to your heart went down 20% in a down 50% world as was the case with some stocks in 2008 and 2009 you’d probably be pretty pleased. If you were expecting a dividend stock to trade like a bond you’d probably be pretty disappointed with a 20% decline. Most investors do not want to take on equity-beta in the fixed income portion of their portfolio even if they don’t realize that now.

While this would be an opportunity to tout AdvisorShares funds, the reality is that there are good products from many fund providers that can be part of the solution here. In general terms, I have written many times about seeking out smaller allocations to various markets segments, like the ones mentioned by Barron’s along with some individual issues. While 30% in emerging or high yield seems very aggressive, 5-10% seems reasonable when combined with other exposures that have different attributes and so will react differently to rising rates, widening or narrowing of spreads and any other drivers of return.

The “innovative solution” theme is fascinating for hearing about what other people have done and because this forces people to learn more about themselves as they explore this idea once they start to understand where they stand financially.

For many years I’ve been writing about the need for many folks to have some form of earned income but this does not need to come from staying longer in your primary career as opposed to what I have referred to previously as monetizing a hobby or what James Altucher recently referred to as having a plan B.

As Altucher notes sometimes things go along as planned and hoped for but that when they don’t, you need a plan B. Your plan b will have a much better chance of being successful if you put in the time like you would your plan A which is why I have framed this as monetizing a hobby; something you enjoy and would otherwise do for free.

Your plan A is probably a combination of portfolio income and Social Security but if you need a plan B hopefully it can be something you enjoy.