Rethinking Return: Balancing Yield and Total Return in Investment Strategy

In my earlier days as an investment professional, I often found investors fixated on one question: "What is the yield on the investment?" However, I soon realized that focusing solely on yield could lead to undesirable outcomes. After all, an 8% return is not just about yield; it's a combination of price movement and yield.

Consider this scenario: Would you prefer a 10% yield (with a chance of 30% price depreciation) or a 4% yield (with a high likelihood of 4% price appreciation)? It's a loaded question and a nuanced decision. While many investors prioritize yield, comparing investments based solely on yield can be misleading.

Let's examine these two investments: Investment #1 with a 10% yield resulting in a total return of -20%, and Investment #2 with a 4% yield and an 8% total return. In the case of the first investment, assuming a $1 million investment, at 10% yield, you'd earn $100,000 in income, compared to investment #2, at 4%, with just $40,000 of income. But, in the end, due to total return being a combination of yield and price movement, your account statement would say $800,000 for investment #1 and $1,080,000 for investment #2.

Conversations about yield-centric investing began to dwindle post the 2008-09 Great Financial Crisis, as yields plummeted. Investors shifted focus towards total return, emphasizing price appreciation.

However, as we settle into a, dare I say it, more normalized yield environment, the pendulum swings back towards income-focused strategies. But it is crucial to remember that every investment has its limits. Balancing the quest for income with the risk of price movement or total loss is paramount.

As CEO of Members’ Wealth, I urge investors to consider the broader picture when evaluating investment opportunities. Yield is important, but it's just one piece of the puzzle. By prioritizing total return and carefully balancing income objectives with risk, investors can build more resilient portfolios for the long term.

With all that being said, we do look forward to revisiting several yield-centric investment opportunities with investors in the upcoming months. “High” is an absolute and relative term. Investments that we would not have considered just a few years ago when the “high yield” on these investments was only relatively high, not absolutely high, are “absolutely” starting to hit our targets of investment scrutiny once again.

The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. There is no duty to update this information. Illustrations provided are for presentation purposes only. Actual investment experience will vary with stock selection and changing market conditions. Investment advisory services offered through Member's Wealth, LLC, a registered investment advisor. The Dow Jones Industrial Average (DJIA) is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The National Association of Securities Dealers Automated Quotations (NASDAQ) is an American stock market that handles electronic securities trading around the world. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Bloomberg US Aggregate Bond Index, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

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