Denton County Living Well Magazine Winter 2014 | Page 47

TOTAL-RETURN PORTFOLIO

Unlike an income portfolio, a total-return portfolio maintains a mix of assets for their growth potential
as well as turning their gains into income. You use dividends, interest payments and your principal as a
cash flow for retirement. A more balanced portfolio can provide greater flexibility, risk protection, tax
efficiency and longevity.
Instead of chiefly relying on a corporation to decide when to distribute a dividend and
by how much, you can generate the same amount of cash with
a strategy known as making

“homemade dividends.”

If you sell 10 shares of a $100 non-dividend-paying stock of which you own 1,000 shares,
then you have the same $1,000 as in the scenario used above; however, what you also
have is greater control over the amount you receive and when you receive it.
Investing in broadly diversified investments such as a total stock index fund or
total bond index fund still gives you exposure to income-producing assets but
with lower risk. Additionally, maintaining an exposure to stocks, because of
their high growth potential, can provide a hedge against inflation that you
lose by favoring bond yields in an income portfolio.
A total-return portfolio can also be more tax efficient than an income portfolio. Dividends are taxed at the same rate as long-term capital gains, which is
typically around 15%; however, you are taxed for the entire dividend amount,
whereas shares sold are taxed only on their gain. Further, a portfolio heavily tilted
to bonds could increase your tax liability, depending on your tax bracket, as
interest is taxed as ordinary income.
Although a total-return portfolio means tapping your principal, its growth
potential has been shown to provide a higher probability to last over your
retirement. In a published Trinity University study using historical stocks and
bond returns spanning from 1926 – 1995, researchers found that an all-bond
portfolio had only a 20% chance of lasting over a 30-year retirement period
at a 4% inflation-adjusted withdrawal rate. Meanwhile, a total-return portfolio split
evenly between stocks and bonds had a 95% probability of survival.
Your investment portfolio should be a reliable source of income during retirement. With
that goal in mind, dividends and interest payments are important, but so is growth. A total-return portfolio can help prevent you from trying to fund your retirement while perilously flying too close to the
sun.
To learn more about Portfolio Solutions® visit their website at www.portfoliosolutions.com.

Disclosure Different types of investments involve varying degrees of risk, and there can be no assurance
that any specific investment will be suitable or profitable for a client or prospective client’s investment
portfolio nor that the future performance of any investment or investment strategy (including those Portfolio Solutions’ recommends), will be profitable or equal any historical performance level(s). No current or
prospective client should assume that future performance of any specific investment or investment strategy
(including the investments and/or investment strategies recommended by Portfolio Solutions®) made reference to directly or indirectly by Portfolio Solutions® in its web site, or indirectly via a link to an unaffiliated third party web site, will be profitable or equal the corresponding indicated performance level(s). This
document has been prepared for information purposes based upon information generally available to the
public from sources considered to be reliable. Past performance is not a guarantee of future results.

DENTON COUNTY Living Well Magazine | WINTER 2014

47