What is "total return" investing? 13 March at 10:30PM in Savings & investments 12 replies 463 views

waveyjane

I've got some shares that I hope will pay out dividends in my retirement (they're paying them out now in fact, but I re-invest them). I also have some funds that don't pay dividends. They just go up and down in price. 

Thinking about how I'm going to use all this for income when I retire, I read about "total return investing":

https://www.schwab.com/learn/story/how-to-use-total-return-approach-retirement-income

(and some other sites but I've lost them now)

I think I vaguely get it... But can anyone provide a simple explanation?

Is it like: decide on an allocation like 60/30/10 shares/bonds/cash and decide on a safe withdrawal rate (eg 4%).  Then in retirement each year, take dividends and re-balance by selling over-weighted things (including dividend-payers?), buying underweighted, and putting the rest of the proceeds into the income pot if necessary in order to get to the desired income?

The article is not clear 

 

masonic

In a nutshell, companies can do a number of things with their profits that can lead to a shareholder return. They can pay out dividends, reinvest in the business, or buy back their shares. As an investor living off your investments, dividends can be a convenient way of automatically receiving an income from the investments, but even when those profits aren't paid out as dividends by the company, you can still use the resultant growth to provide an income, which you can do by drawing down investments. This may have transaction costs and CGT implications (outside of pension/ISA), so there are negatives, but there are sectors and regions in which companies don't tend to pay out much in the way of dividends, and it would be a shame to exclude them from your portfolio just on the basis of an accounting practice.

dunstonh

What is "total return" investing?

Basically, it is investing to get a total return rather than focusing on one bit of it.  For example, some companies pay good dividends.  Others pay little or no dividends.

Total return has been the best method of investing for over a decade, mainly fuelled on the back of growth stocks.  However, now the market is favouring value stocks, yield investing has come back into play again.

waveyjane

OK, so I get that as a general principle.

But I think my question is, what does it actually entail, in practice in retirement? Is my summary in my original post correct? If so, I can see myself with a sort of Master Spreadsheet with essentially these columns:

Investment name
Value at start of year
Value at end of year
% change
% of portfolio at end of year

So if I needed £10,000 in my spending pot, I'd see what I had in dividends (let's say it's £5,000), then sell, say £6,000 worth of the highest performing investments, put £5,000 into the pot to fill it up, and then buy £1,000 worth of lowest performing ones (or whatever amount was needed to bring them up to my desired allocation(s)).

Correct? If so - are they really suggesting I do this every year until I die? I doubt I'd be able to even open a laptop when I'm 80, let alone remember my password to AJ Bell and then do stock-broker foo!

EDIT: I realise I've called this thread "investing" but I guess it's actually "drawdown",  sorry.

masonic

I think you have a pretty good grasp of it.

The risk of reaching a point where you are no longer able to manage your investments is not restricted to this particular strategy. It's not uncommon for pensions to have an automated drawdown facility, and simplifying your investments to a single multi-asset fund could allow you to avoid the challenge of rebalancing your portfolio if this becomes an issue. There may come a point where you will need help to manage your finances, things like Lasting Power of Attorney are there to deal with just such a situation.

tacpot12

You have spotted one of the problems with "Total Return" investing. It is quite an active process, and more suited to retirees who can afford to pay an IFA to rebalance/sell as needed to provide income.

I manage my retirement pension on my own, and having seen the volatility of the stock markets, I much prefer investing for income, as opposed to total return investing. I am fortunate to have a good sized portfolio, so I can generate the income I need just from dividends. I also have about 8% of my portfolio invested in "Growth" funds, and will sell these in good time to buy more dividend producing funds. This means I should get a multiplying effect from share price growth that will help keep the amount of dividends increasing with inflation. 

I have a monthly withdrawal setup with my SIPP Provider, and all my drawdowns are done as Uncrystallised Fund Pensionn Lump Sum (UFPLS) payments which means I never need to take any decisions about crystalising portions of my pension. I am also a long way away from the Lifetime Allowance, so don't have to worry about that. 

As a result I don't have to do very much to manage my retirement income. I just watch the dividends roll in and decide whether I need to increase my withdrawal to deal with the effect of inflation. I expect I will have sold the Growth Shares by the time I am drawing my state pension (I'm 59 and have 8 years until I can receive my state pension). So my Attorneys (if I lose mental capacity) should not need to do anything other than decide whether I need to draw more money out. Of course they might have to decide to sell some assets at some point, but once my state pension kicks in, I will have a lot less need to sell assets to produce income and a lot more leeway for problems to occur in the portfolio and not have it affect my ability to cover my essential living expenses. 

bostonerimus

In accumulation Total Return means reinvesting dividends and interest and also having some capital gains. For retirement income you take interest and dividends and also sell some stocks or bonds, hopefully taking some capital gains off the table. This can be tricky if you have a loss, so it is often combined with a cash or very short duration bond allocation that you can draw on. One method of using your capital/capital gains is to simply rebalance and take the the required income from the proceeds.

My portfolio is pretty much US and Global cap weighted index funds so there's 2% to 3% in dividends each year and then the rest of the required income could come from sales or cash. Not that difficult!

waveyjane

tacpot12 said:

As a result I don't have to do very much to manage my retirement income. I just watch the dividends roll in 

OK, but have you read this? It turned up in some googling.

masonic said:

 It's not uncommon for pensions to have an automated drawdown facility, and simplifying your investments to a single multi-asset fund could allow you to avoid the challenge of rebalancing your portfolio if this becomes an issue. 

Yes, I've just been looking at Vanguard LifeStrategy. Apparently that could do the job of, say, monthly draw-down automatically, and of re-balancing too. I've got most of my savings in ISAs at the moment, but a fair amount also in pensions. Presumably I'd need to therefore have two accounts, each with LifeStrategy things in them kicking out income. 

Prism

With total return and drawdown in retirement, you are in control. You decide how much your income should be and then sell enough assets to get you that. A rebalance of what you have left is optional and depends on your strategy. With dividend only income you take whatever the companies and trusts decide to pay you, which may not be enough for your requirements. In reality, a mix of both is likely the best.

Linton

As is usually the case with investing if one asks should I do A or B the best answer  is "both".

In my view income investing is best suited to providing for your day to day expenditure.  Yes dividends can be cut but overall my experience has been that with good diversification income is very stable over time in £ terms, far more stable than the value of the underlying investments.

If you hold your income investments in an S&S ISA, possibly depending on your platform, you can arrange for the interest/dividends to be transferred automatically to your current account with zero tax and zero hassle.  The zero tax is important if you are in danger of being a higher rate tax payer in retirement.

Total return,  which in the past this has implied investing for growth, is better suited to providing for significant one-off expenditures as you can withdraw money strategically putting significant sums into cash as appropriate as part of normal annual rebalancing.  This minimises the hassle of organising frequent varying drawdown payments.

JohnWinder

I think you’ve got the idea of managing a withdrawal strategy and the complexity compared to living off dividends only. The problems one might face with a ‘dividends only’ ‘investing for income’ approach are: your investments might not return enough in dividends/coupons/interest to meet your regular needs; and/or they may not return enough to meet your once in a blue moon needs; you might need to invest only in high dividend shares and high yield bonds which by other measures are not likely to be the best choices for your investments. As a result, you’re left with the options of some sort of regular automated pension payment, an annuity doing the same thing, or the total return approach.

Total return has been the best method of investing for over a decade, mainly fuelled on the back of growth stocks (like Apple, Facebook et al).  However, now the market is favouring value stocks, yield investing has come back into play again.

And to give that some perspective, see the chart here: https://www.bogleheads.org/forum/viewtopic.php?p=7165192&sid=69486f7d9f736b7d5fcdd346678bbc52#p7165192
It shows US value and growth stocks leap frogging each other every few years, one doing better and then worse than the other but giving very similar returns over a 30 year period. With the future unknown, safer to hold both than punt on one. How to proceed?
If you take the total return route I don’t think you have to do as much selling/buying and rebalancing as you imply. If you want to be 60/30/10, I don’t think rebalancing comes into it if you have to withdraw 5% of your portfolio this year and it all comes from stocks leaving you 58/32/10 until next year’s withdrawal from bonds corrects the ‘imbalance’. Despite the turmoil of the last few years a 60/40 mix would hardly have needed rebalancing; plenty of sensible people suggest examining whether you need to rebalance only every 4 years or so, and then only do it if it’s way out of kilter.
In short, the only rebalancing you’d finish up needing to do can be done by the necessary selling for income you need.