Make investments that generate revenue

authored by
Christos Alonistiotis
09.03.2021
Planning for Retirement
6 minutes read

A discussion about retirement is always interesting but will always be treated with less attention than it should be. And this also applies to people who are close to retirement but especially to people who have many years ahead to retire.

In our time, an economic environment has been formed which is completely different from what we were used to. Revenues are lower and returns on savings are zero. However, savers refuse to consider other solutions as their misinformation always leads to the mistaken assumption that the alternative is stocks and that this is a risky investment that they do not want to make.

But the reality is one and everyone who is trying to create the conditions for a comfortable retirement period or even for a better living standard must face it: Savings must be turned into income-generating capital.

Savers need to start looking for what they have lost over the last 13 years. Generating predictable income from their savings.

Creating this "extra" income offers:

Monthly cash flows: By creating an income portfolio, the saver has the ability to turn his funds into a source of monthly income. This strategy offers increased income upon retirement. It can, however, also act as a boost to their income for younger savers.

Capital appreciation in the long run: An Income portfolio always has a long-term horizon. Over the years, the accumulation of dividends, even if they are not reinvested, creates a significant increase of the initial capital.

Diversification: The addition of high dividend ETFs offers great diversification in a portfolio as the exposure can even exceed 3,000 investment products, selected by the world's best asset managers. By differentiating the portfolio, a saver/ investor manages to reduce almost to the absolute the possibility that an issuer will not pay. Large dispersion is the key to achieving a stable income in the long run. Differentiation can offer greater resilience in times of turmoil.

Returns of lower volatility and higher predictability stocks

Investing in high dividend ETFs, in the long run, is more like investing in stocks than investing in highly rated bonds. However, even in this case, investors enjoy the benefits of a monthly dividend payment and lower fluctuation. In fact, an investor gets a prepaid future return.

Investors / savers can take advantage of the high correlation between stocks and high-yield bonds to achieve even better returns and higher dividend yields. This can happen through the reinvestment of their dividends on a regular basis. If this happens, the final return will be much higher than what would be achieved only through the collection of dividends. As a confirmation of the above statement, the chart below shows the overall performance from the March the 23rd lows for the Growth portfolio and the High Income portfolio.

High- yield bonds and high interest rates

There is a diffuse feeling that high-yield bonds record low or even negative returns during periods of high interest rates. However, this is nothing more than a misguided comparison and generalization with the government bond market.

The reality is that when interest rates hike, high-yield bonds record positive and most of the time, significantly positive, returns. This is also captured in the following chart where we compare the high-yield bond index with the Fed's base interest rate.

Reasons why high interest rates can favor high- yield bonds

1. Higher interest rates mean that the economy is growing significantly. In such a cycle, businesses are more profitable and can be more effective in the payoff of their debts. In such a cycle, corporate bankruptcy rates are extremely low.

2. During a period of economic recovery, the financial situation of many companies improves and so there are often credit rating upgrades from international rating houses, which significantly boost the prices of these companies.

3. Many of the high- yield bonds have an early redemption clause as they have a short- time horizon, which usually does not exceed 10 years. They do this so that in case the interest rates start to rise, they can refinance with lower interest rates. This is usually done with a premium of 2.5% -5% and this is another reason for good returns on their prices.

Low cost with maximum profit

A fixed income portfolio is not enough to offer tempting dividend returns, but the investor must receive the full return. For this reason, at XSpot Wealth we create portfolios exclusively using ETFs, which are known for the absolute transparency of their charges but also for their lower cost.

The annual difference in terms of costs between a portfolio with 3 ETFs and a corresponding one with 3 Mutual Funds, can range from 4.5% -6.0%. If we multiply this cost by the years of holding a portfolio, we realize that the investor many years later will only profit form the ETFs solution we propose.





This document does not constitute and shall not be construed as a prospectus, advertisement, public offering, or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction.