Equity is the most reliable long-term source of income

Equity volatility is a risk worth taking to generate income, according to a survey by retirement income planning firm Chancery Lane.

In its annual white paper, Chancery Lane found that equity-based investments are often the safest revenue solution.

Based on Morningstar data, the white paper shows that high equity allocations reduce the risk of running out of funds.

This means that equity is the least risky asset to long-term income.

Chancery Lane wrote in the white paper: “When investing in drawdown income, there are certainly risks posed by the equity portion of the portfolio, but there is the risk that the equity of the portfolio is too low and not too high.”

In the study, Chancery Lane compared a 100% equity portfolio, a 100% fixed income portfolio, and a traditional 60-40 fund mix.

Next, we looked at how the capital position of each portfolio changed over the 10 and 20 years. 100% equity investment outperformed the other two almost every year.

As a result, Chancery Lane is calling on the industry to reassess its views on equity-related risks.

The white paper states: “Risk is usually defined as volatility, which is the amount by which an asset moves in relation to its own historical value or other assets.

“We believe it is wrong, misunderstood and misleading.

“Volatility is a valid measure of risk, but risk is not one of fluctuations, but the risk of adverse behavior.

“Investors are worried when they see the value of their savings fluctuate, but even those who hate risk prefer some confusion over the possibility that they may not have enough money to live in retirement. maybe.”

Bonds, on the other hand, no longer provide low-risk, safe income, according to research.

Inflation has fallen in recent years, but not enough to offset the decline in interest rates.

The Chancery Lane white paper adds:

“Both bond income and inflation have fluctuated, but the latter has generally remained stubbornly high in recent years, and as a result, bond income has not been maintained for all three periods investigated.”

Therefore, Chancery Lane rejects modern portfolio theory (MPT), which seeks to offset investment risk by diversifying assets.

In a standard MPT portfolio, profits (and therefore risks) come from equities, but containment (and traditionally the main source of income) is provided by bonds.

Chancery Lane believes that the purpose of MPT is not the growth of capital, but the credibility of income. Therefore, generating retirement income is an inappropriate strategy.

Is the 60/40 investment strategy abolished?

As a result, Chancery Lane CEO Doug Brody wrote to the Financial Conduct Authority. This is to encourage regulators to distinguish between the definitions of income risk and capital risk and to revise the rulebook.

He states: “There is no correlation between stock market risk on capital and dividend stability. We need to not only communicate total return payments, but also show Joe Public what our income will be.

“Telling an 80-year-old who isn’t working that he needs to sit in a bond and suffer the consequences of low-yielding assets is illogical and useless, if there are other solutions.

“The entire industry can help itself by displaying the different elements and ingredients that make up a total return cake.

“As a group, if we continue to hide income credibility behind capital volatility, it is partly our own responsibility and regulators still consider it all under one risk banner. It’s no wonder they are. “

Equity is the most reliable long-term source of income

Source link Equity is the most reliable long-term source of income

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