With the investment environment expected to remain challenging for some time, everyone has an opinion on how best to construct a portfolio. With that in mind, WP
sat down with Todd Schlanger, Senior Investment Strategist with Vanguard's Global Investment Strategy Group, to ask for some tips on how advisors can help their clients achieve attractive yield.
“One option is to lower fees,” Schlanger says. “If you look at the real outlook of a balanced portfolio net of inflation over the next ten years, it might be around 3%. If you’re spending 100 basis points on investment costs that’s around a third of your spendable income going to fees. If you’re only spending 20 basis points on fees, that is a single digit of income percentage going towards costs.”
Of course, investors could be encouraged to take on more risk in search of higher yield, but this is a strategy that Schlanger is quick to caution against. “We see investors going to dividend paying stocks or non-traditional bonds and emerging market bonds, and those investments tend to perform much more like equities than high quality fixed income, particularly in a draw down scenario,” he says. “We think it’s important to maintain that high quality bond exposure.”
Schlanger also points out that high quality corporate bonds and investment grade and treasury bonds provide a much-needed counter balance in times of market uncertainty. “We saw that after Brexit. On the day following, equities declined and it was high quality investment grade bonds, particularly government bonds, that provided balance on that day,” he says. “Even though equities declined by a few percentage points on June 24th
, the equities market did recover in just a few days.”
“Some people were trying to alter their portfolios, but there was a real benefit to remaining disciplined even in that time of market volatility.”
For investors still in their working years, Schlanger suggests the option of saving more, which could mean working a few extra years or spending less in the portfolio. “In terms of portfolio construction, we recommend a total return approach: setting up an equity-bond mix consistent with the risk profile,” Schlanger says. “Diversified equities and bonds are yielding around 2%. If you need more than that, we think harvesting the capital from the portfolio for a total return approach is a sensible way of creating a strategy and setting up the portfolio for the draw down years.”
Schlanger encourages advisors to follow four core principles: start with a goal in mind, build a balanced, diversified portfolio, construct the portfolio using low cost investments, and be disciplined with your strategy.
“The only difference in this environment, when yields from diversified investments like high quality bonds have declined, you may need to adopt a total return approach to generate income in the portfolio,” Schlanger says. “We think reframing the conversation from ‘how much yield will my portfolio deliver’ to ‘how can I construct a portfolio with spendable income’ may be necessary in this environment.”
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