Income: Navigating Volatility & Preserving Capital
Income investing is a journey with long-term sustainable income and income growth as your destination. Sometimes the ride is smooth and sometimes it can get bumpy. We believe our job in managing income-generating portfolios is similar to that of navigating a vessel at sea.
The goal in navigation is to take into account all the factors affecting your vessel at any one time in order to arrive at your destination in the safest, most direct and timely manner. Re-routing the vessel in order to avoid a storm may lead to a greater distance travelled, but ultimately help the vessel arrive more quickly and safely to its destination.
Think of each asset class we allocate capital to as both components of the vessel (stability, trim, speed, etc.) and factors (weather, waves, current, etc.) affecting the vessel. A Captain would balance the components of his vessel with the external factors to best arrive at his destination. Similarly, we actively manage and take into account asset allocation and market forces to best balance the income production and growth of your portfolio.
If research suggests certain asset classes may be less efficient or that a storm may be approaching in some areas - we adjust by reducing exposure or moving to cash until the storm has blown over. If we feel the storm is temporary, we'll prepare our clients and portfolios for a bumpy ride. We can't promise to avoid all stormy markets, but consistent cash flow helps smooth the ride and we will always do our best to keep the income flowing and growing throughout the journey.
Preserving Capital - Risk Management
When income is your primary investment objective, a number of things can change.
- Short-term price volatility should be less worrisome because your investments are paying consistent income.
- The income generated from your portfolio can be taken and used to cover your expenses without disrupting the underlying investment portfolio.
- As long as the income remains consistent - you can be spared the pain of having to sell into a down market and alternatively have the opportunity to reinvest when prices are down and yields are higher.
- Your focus shifts from worrying about price levels to thinking about how consistent and strong the growth in income of your assets will be.
Disclaimer: There is no assurance that these techniques are suitable for all investors or will yield positive outcomes.