How to get income, safely

Originally Published on switzer.com.au - Monday September 23

The greatest dilemma for investors today is how to earn income safely. Anyone looking for capital gain, that’s easy, because the stock market has been delivering that nicely since March 2009. This chart of the S&P/ASX 200 Index proves that very clearly.

Source: au.finance.yahoo.com

Over the 10 and a half years since March 2009, the stock market has gone up around 100% and you can actually factor in around 4.2% for dividends. So it shows that when markets don’t crash, the share market is the place to be. However, as we get into the 10th year of a bull market, many investors are wanting to protect their capital and boost their income.

These people long for the day when they could slam all their money into government-guaranteed deposits at 5% but a lot of these ‘yearners’ for yesteryear would even accept 4% from a beautiful bank deposit, if only they could get it!

This is why we are holding on our Switzer Income Conference in November, where we’ll showcase the alternative investment options for anyone who really wants to nail down the maximum amount of income with the smallest of risk.

This is a big ask but someone has to try to answer this. And that’s what we try to do at our income product expo.

Locking down good income returns is what a lot of our financial planning clients want and progressively we’re raising their exposure to income-paying assets and reducing their capital gain opportunity, as this bull market meets the Trump trade trickiness.

Right now I’m not scared of the stock market but I am wary that a trade war escalation could trigger a global recession and Wall Street, as well as all the stock markets that play follow the leader with it, will slump. It might even crash if Donald loses it and throws the switch to “I’m mad as hell and I won’t take it anymore!”

My current plans for clients is to play along with Trump and expect to see another leg up for stocks on some kind of acceptable trade deal. I know he says there probably won’t be a deal before the November 2020 election but we all know he says one thing and thinks and does another.

The stock market thinks a deal or something OK will happen or else it would be selling off right now. This chart shows that the Dow Jones Index is up 15% this year, which has to be a market-endorsement of Donald’s strange ways.

That said, some of Wall Street’s smartest think a 10% plus gain could come out of a trade deal, while others think 2020 could bring an overdue recession. Given that, sweating on another leg up and then going towards a safer, income-oriented portfolio of assets could be the preferred option for the risk-averse, income hunters out there.

Apart from bank deposits, you can get non-government guaranteed income from real estate income trusts or REITs, bonds, bond funds, non-bank higher yielding deposits, mortgage funds, stocks that pay dividends, funds that specialise in dividend-paying stocks (local and overseas), listed investment companies that search for yield and, of course, there’s always an investment property.

In a perfect world, an investment adviser (or you as your own adviser) should go for a diversified portfolio of a mixture of these income-payers. That’s why we provide a smorgasbord of these different income-delivering assets.

In a low interest rate world, we might have to scale back our expectations of what we want in terms of yield but if you need more than 4% or 5%, you will have to diversify and put together a balanced group of investment assets.

For the first time ever, Paul Rickard and myself will do an investor masterclass at the conference to show how you can blend your asset selection to raise the yield and in-build some capital protection. It’s easier said (or written) than done but it will require someone to understand that your capital might have to go down a bit in a stock market crash but if you select the right assets, a reliable supply of income over that time when your capital has fallen should keep you happy until the capital comes back.

This chart, my favourite, shows that despite crashes, stock markets resume rising and continue to trend higher. Follow the blue line as $10,000 between 1970 and 2009 goes to $453,166! And 2009 was one year after the stock market crashed 50%! 

The blue line adds up capital gain and dividends, so it’s called an accumulation index. History shows that over a decade, the Index will pay around 10% with half of the return being income.

In a perfect world, an investor could rely on a portfolio that tracks the Index but it would mean they’d have to learn to live with the ups and downs of the stock market and their capital.

The best investor I’ve ever met did exactly that, using a built-up buffer of savings to make up for lower income returns in market-crash/recession times. But not a lot of people can invest like a champion.

That’s what we try to do at the Switzer Income Conference. And frankly, it’s what we do here week in week out and it’s the whole point of the Switzer Report, which is our premium-subscriber investment newsletter.

Hope I see you at the conference but if you can’t make it, keep reading! And go to Switzer Financial + YouTube to get our latest finance TV show.

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