When it comes to saving for retirement, there are many strategies that can help you make the most of your money. But do you know which strategy best aligns with your goals? If you’re looking for a reliable, long-term way to meet your spending needs, a total return strategy may just be for you.
What Is Total Return Investing? More Than Just Yields.
When considering investment strategies, investors tend to focus on yields, or the amount of income an investment generates. This is often a solid strategy for retirees or anyone that is focused on regularly generating high income that can fund their living expenses. Portfolio growth is generally a secondary concern for investors following this strategy.
Whereas yields are income returns, total returns include both income and appreciation, including interest, capital gains, dividends, and distributions. Essentially, total returns allow you to build portfolios that span across the entire investment landscape.
But what is a total return, exactly? Let’s say you buy 50 shares of Stock X at $40 per share. The initial value is $2,000, but after one year, the share price increases to $44. The new value is $2,200. To figure out the total return, you need to follow this formula:
Total return (%) = investment gains/initial investment value X 100
In our case, the investment gains would be $200 ($2,200 current value – $2,000 initial value). $200 divided by the initial value of $2,000 is .1, or 10% when multiplied by 100. This means the total return is 10%.
In short, a total return is expressed as a percentage, refers to the actual rate of return of an investment, and is an effective way of measuring a portfolio’s performance. Total return investors are focused on generating income through a wide range of sources to maximize these return rates and preserve their principal.
Who Should Use a Total Return Strategy?
Income investing (focusing on yields) is ideal for those looking for large regular payments, similar to receiving paychecks from a job position. Total return investing, on the other hand, is best suited for investors looking to maximize their long-term growth while also receiving a steady cash flow.
Deciding on any investment strategy ultimately depends on your financial goals. If you’re unsure of which approach is right for you, our financial planning services are here to offer the guidance you need.
Breaking Down the Benefits
A DIVERSIFIED PORTFOLIO
With total return investing, investors gain all of the benefits of a highly diversified portfolio: lower impact of market volatility, preserved capital, less time managing portfolios, and more. Plus, a total return strategy gives investors the flexibility to decide which source to pull from to meet income needs.
LOWER RISK
Because a total return approach involves investing in a wide variety of asset classes, it can greatly lower the risk of your portfolio. When taking a yield approach, for example, investors generally use their yield target to inform their asset allocation. A total return strategy uses an investor’s goals and risk tolerance to guide allocations instead. As a result, total return investors are able to meet their investment objectives while maintaing a stable portfolio.
TAX-EFFICIENCY
Total return investors may also pay less in taxes compared to individuals that take an income-focused approach. This is because part of their returns come from capital gains, which are taxed at a lower rate than income.
Curious About Taking the Total Return Approach?
If you have more questions about whether a total return strategy fits into your wealth planning, connect with us today and discover how Ironwood Wealth Management can help.
