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.
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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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