May 23, 2016
As we approach the summer the stock market is calm and news is light. Some developments we’re watching that could affect the markets in the near future are Britain’s proposed vote on exiting from the European Union June 23rd, the second interest rate increase in almost a decade speculated to be coming in a Fed announcement June 14th or 15th, and of course, the presidential election we read about every day.
While we wait to see what challenges these events will bring, we’ve made adjustments to the accounts and most recently finished updating our growth portfolio. In doing so we thought it would be a good time to share with our (mostly income) clients some differences between the growth and income strategies we use from Morningstar.
The goal of the growth portfolio is to outperform the S&P 500 Index over a full market cycle. Companies in this portfolio tend to be faster-growing, with both higher risk and higher return potential than the income portfolio.
The goal of the income portfolio is to earn 8-10% per year over the course of a market cycle, of which 3-5% will come from dividends with 4-6% annual dividend growth.
The downsides of the growth portfolio are inconsistency and volatility. With insufficient dividends to rely on every year and volatility 33% higher than the income portfolio, growth is good for a younger person with a longer time horizon, or as a smaller part of a whole portfolio. The income portfolio is better for investors in or near retirement looking to start making distributions from their accounts.
The total returns as reported from Morningstar of the growth and income portfolios over the last ten years are almost identical – approximately 9.4% per year. We attribute this parity mostly to the great recession we saw in 2008-9. When the economy struggles the more conservative income portfolio will have the upper hand. We would expect the growth portfolio to outperform in any decade with less of a dramatic pull back.
If this more aggressive portfolio is of interest to you or someone you know, please don’t hesitate to call so we can give you more details.