The days of comfortably living off one’s retirement portfolio income without touching the principal capital are long gone.

Where once a portfolio could offer risk-free high returns in the vicinity of five per cent through term deposits and fixed-interest assets, dampened yields and interest rates at an all-time low mean these same assets are now struggling to offer two per cent.

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As such, some investors are chasing opportunities to generate sufficient income to fund their lifestyle and expenditure commitments by taking on further risk but as a result, exposing their portfolio to potentially unanticipated risks.

“Chasing income on a standalone basis often leads to many portfolios coming unstuck,” says Balaji Gopal, head of product strategy for Vanguard Australia.

“Higher yields are typically found in riskier assets, which leave the client exposed to fluctuations in the market and undermines the ability of the portfolio to ultimately generate income at an important time in the client’s life.”

Returning to a truly diversified strategy, where the focus is on the total return rather than just preserving capital and generating yield, will offer clients peace of mind in this low rate world, says Gopal. Vanguard’s low-cost diversified funds and ETFs provide both income and growth whilst diversifying across asset classes, sectors, geographies and individual securities.


In income only strategy can be damaging to the overall health of a portfolio, Gopal says. Instead, Gopal says experts have found that total return investing – or investing for cash flow and capital appreciation – offers an alternative way for financial advisors to manage retired clients.

A total return strategy includes money earned from interest, capital gains, dividends and distributions realised over a given period of time. In other words, the total return on an investment or a portfolio includes both income and capital appreciation.

“Rather than switching around holdings to generate yield and in turn introduce more risk, this approach periodically rebalances portfolio assets automatically which could supplement income for retirees,” Gopal explains. “It means clients do sometimes dip into their capital, but they are able to live the life they want by spending the total return from the overall portfolio. When it comes to financial advice, it’s the outcome and the goal that needs to stay front of mind.”

Andrew Tratt, senior financial advisor at Australian Wealth Advisors, has never sought out investments for their income potential, and instead always offered his clients a total-return strategy.

“If clients need some money for a holiday, we just sell down some assets to generate that,” Tratt says. “We work hard to be as diversified as possible, and when it comes to the latter stages of someone’s investing life, it’s not about the return, it’s about the protection, so we spread them across a really wide variety of assets.”

Ashley Tindall, director at IVX Financial Planning, says the lower-for longer environment has changed the investing game.

“This environment is redefining what wealthy is in Australia,” Tindall says. “If your objective is to preserve capital and up your yield, to sustain that income using term deposits and cash is beyond most Australians. They need a lot more capital at the get-go.”

Tindall adds that total-return investing is a powerful way to help clients achieve their goals, whether that be living comfortably in retirement or leaving a nest egg for their children.

“Unless you have the capacity to save a lot more money in your accumulation phase, investors need to get comfortable spending some of their saved capital, otherwise they will end up going beyond their risk profile,” he says. “If we reframe the discussion more about the goals, rather than the method, then people can make smart decisions about what will move the needle for them.”


The idea of being an income investor and living off the yield from your investments with no erosion of principal is no longer realistic.

To illustrate the danger of purely chasing income, Tindall points to a recent unpredictable market event that caught many investors out.

“When term deposit rates came off recently, we saw plenty of investors over invest into Australian banks,” he says, adding equities are always attractive as they return a premium compared to fixed interest and cash not to mention that attractive dividend yield.

“But then the Royal Commission swept through, and there was a Labor campaign against franking credits, and the investors who were concentrated in banks lost out during that selloff.”

The only true insurance against unexpected market events – which are impossible to predict – is to create a truly diversified portfolio. And advisors around the country are finding that, rather than rely on yield, if they calculate the total return of interest, capital gains, dividends and distributions they can meet their client’s goals without pushing them into riskier assets.


With investors wrapping their heads around the lower-for-longer environment, one asset class is emerging as a useful diversification tool.

Global credit securities, which include corporate bonds issued by some of the world’s most successful companies tend to pay investors regular coupons with a higher yield than cash or traditional government bonds. Global credit also allows Australian investors to diversify away from Australian investments and achieve a broader spread of exposures across issuers and economic/geographic areas.

Given today’s low government bond yield environment and volatile equity markets, delivering income for clients will continue to be a challenge for advisers.

“For those keen to provide clients with more options than the traditional ‘barbell’ of fixed income and equities, global credit can be an important part of the portfolio mix,” says Vanguard’s Gopal.

Vanguard recently launched its Active Global Credit Bond Fund to provide investors with access to global credit markets, and brings together strong credentials in an actively managed but low cost strategy.

“In Australia, people are beginning to like global credit markets because they offer an opportunity to access a wider, deeper environment.”

Tindall agrees, though he points out the investment is still fairly new.

“Australians aren’t that familiar with credit yet,” he says. “They’re comfortable buying QANTAS shares and taking on that risk, for example, but QANTAS bonds which are less risky raise concerns.”

Yet he sees upside in global credit and points out the volatility is nothing like that which emerges in equity markets.

“Australians have seen volatility, they’ve lived through market events like the dot com crash, the GFC and property events,” he says. “So when a credit investment comes along, and it has priority of payment above other equity investors, that can really pique their interest.

Tratt adds that volatility can spook clients in their retirement phase.

“We’ve looked at the returns between active managers and index investments over the last ten years, and they’ve roughly delivered the same thing,” he says. “So to save our clients having to withstand the huge ride with active managers, we’ve shifted much more firmly towards index investing. That smoother ride is important.”

When thinking about passive or active investing, or indeed a combination of active and passive, there are key elements that should be considered. Knowing that outperforming the benchmark through active management is not guaranteed, advisers need to do their research and due diligence when making their investment decisions.

“Ultimately, advisers need to be satisfied that the active managers they have selected have the skills, a longstanding track record and can deliver the types of returns expected over time”, says Gopal.

How much of the portfolio is skewed to active depends on the outperformance expectation and the confidence that the outperformance can be delivered. Of course, the cost that investors pay – the one thing that they can control – and their tolerance for risk are also critical.


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