Retirement: Portfolio For Income And Growth

Retirement: Portfolio For Income And Growth


Most of our work published here is meant for active investors, but this article is written with passive investors in mind.

So, we present a portfolio for passive but conservative investors. We construct a portfolio solely based on funds or ETFs (Exchange Traded Funds).

We also will present a second model by mixing some conservative ETFs with some best-in-class CEFs. This model is a bit more aggressive with a much higher yield.

We then present a dividend stock portfolio based on some of the top holdings from the popular dividend ETFs.

Looking for a portfolio of ideas like this one? Members of High Income DIY Portfolios get exclusive access to our model portfolio. Learn More »

Nikada/iStock Unreleased via Getty Images Most of our work published here on Seeking Alpha is focused on active investors who like to hold individual stocks and may be willing to construct and manage multiple portfolios (baskets of investments). However, we recognize that there are a large number of investors and retirees who do not like to own individual stocks for various reasons. The reasons could be anything like a matter of personal choice or not having enough time, interest, or knowledge. If you are one such investor, usually, your options are limited to common and broad index funds or mutual funds. With index investing, however, it is difficult to earn a high enough income. Moreover, most index funds provide you with over-diversification, and you end up holding good as well as bad securities.

For these reasons, in this article, we are going to construct a portfolio, mostly from ETFs but with specific diversification and income goals. In the second portfolio, we are going to include a few CEFs (closed-end funds) to boost the income to above 4%, but at the same time not compromise on quality or safety of income. With 4%-5% income, there would be no need to withdraw capital by harvesting shares. Many people (including us) don’t particularly like selling shares to generate the needed income. This apprehension is not without reason. Some folks would argue that selling (or harvesting) some shares to generate income is no different from withdrawing the dividends. However, we feel, It is embedded with many risks and uncertainties. For most people in retirement, it is very difficult emotionally to sell assets to draw income, especially during the rough times when the value of the assets may already be down. Also, if there is a deep and prolonged correction just after your retirement, there is a big risk of a deeper drawdown that is difficult to recover from, also known as sequential risk.

Author’s Note: Our regular readers know that we mostly invest in individual stocks and CEFs. In our Marketplace service, we follow a highly diversified systematic investing approach, including a DGI Core portfolio for dividend income, an income-oriented CEFs based portfolio, some Risk-Adjusted Rotation portfolios to protect capital from downside risks.

So, who exactly is a passive investor? We would define him/her as someone who is not particularly interested in individual stocks or does not have the time to research and monitor individual stocks but still believes in the market and wants to benefit from it. These investors just want to invest once and forget it, except for some yearly rebalancing. This article is focused on such passive investors. Many of them are retirees who also need income in their golden years. With these goals, we will try to limit our choices to some low-cost (fees) ETFs. However, folks who need higher income and can tolerate slightly higher volatility and risk could use a few CEFs for some of the specialty assets. Also, we would select our funds based on our income needs. Here’s a summary of our goals:

> Maximum 10-12 securities (mostly ETFs).

The average yield of the portfolio to be 4% plus (3% plus for conservative version).

Average expense (fees) of the ETFs to be < 0.20% (excluding CEFs).

Correlation of the overall portfolio with the broader market (S&P500) to be less than 0.70.

At first glance, it looks like these are not easy goals to achieve with a portfolio of ETFs. However, with a little bit of creativity, they are indeed achievable.

For the believers in individual stocks, in the later section of this article, we will show a simple method of how to construct a portfolio of dividend stocks based on some popular dividend ETFs. Criteria To Select ETFs:

Expenses/Fees: There are very few things that an investor has total […]

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