The proliferation of new ETFs now makes such a portfolio feasible.  However, with more than 200 dividend and income exchange traded products to choose from, you must exercise care when building a sound diversified portfolio that meets your objectives.  Therefore, Capital Cities Asset Management is excited to offer a brand new Dividend and Income Strategy to help investors with their income requirements.

One question that always seems to come up is “how much of my portfolio can I withdraw while increasing the amount each year to keep up with inflation, and at the same time, not run the risk of outliving my portfolio?”

The answer to that question is “it depends.”  It depends on many different criteria, and the answer is going to be different for everyone.  As a starting point, we are going to use the 4% Rule.  Simply stated, the 4% Rule is a rule-of-thumb that suggests limiting withdrawals in your first year of retirement to 4% of your investable portfolio balance.  Thereafter, increase the annual amount you withdraw to offset inflation.  The goal is to minimize the risk of outliving your money.  You can read more about the 4% Rule here.  However, our personalized planning process can help tailor an income plan to your specific needs.

For those of you without a pension, there are four basic approaches to living off your nest egg.  The first two, living off the interest and buying an immediate annuity, will most likely not work in the current low interest rate environment – they struggle to generate enough current income and will almost certainly lose ground to inflation.

The third method is a traditional portfolio total return concept.  With this approach, an investor typically builds a portfolio of 60% stocks and 40% bonds, sells enough holdings each year to meet their financial needs, and then rebalances annually.  This is still a viable approach, but investors must be realistic in their portfolio return assumptions.

The fourth method is an income-generating portfolio, and dividend income has been getting a lot of attention by investors these days.  One of the perceived benefits of this approach is that none of the underlying holdings need to be sold each year.  Instead, retirees can just live off the income stream.

While it sounds nice, there are many pitfalls to this “pure dividend” approach that investors need to consider.  First, the most popular dividend mutual funds and ETFs do not pay enough dividends to meet the first year goal of extracting 4% income.  Second, dividends are not guaranteed – they can be (and have been) reduced.  Third, since the portfolio is 100% invested in stocks, it can be very volatile.

We can design an ETF Dividend & Income portfolio for you that can address these pitfalls and other problems with a pure dividend approach.  We’ve kept what we believe are the best aspects of the dividend methodology and coupled them with the tried and true risk management techniques of the total return approach.

The result is a customized portfolio specifically for you designed to:

• Generate income in excess of 4% the first year
• Provide lower volatility than pure dividend portfolios
• Not lock you in to current low yields
• Take advantage of higher interest rates in the future

If this type of portfolio interests you and you would like more information on Capital Cities Asset Management’s services or portfolios, please call @ 800.767.2595 or email us today.  Thanks and we wish you the very best.

The financial world has rules of thumb, too, and one is garnering more scrutiny as many Americans look towards retirement.  You may have heard about the “4% Rule” for retirement distributions, but few investors understand its genesis and its importance.  Here is a quick primer for those that seek a deeper awareness.

While everyone’s retirement needs vary, the 4% Rule suggests limiting withdrawals in your first year of retirement to 4% of your investable portfolio balance.  Thereafter, increase the amount you withdraw only to offset inflation.  The goal is to minimize the risk of outliving your money.

Like all rules of thumb, this one has fine print.  Here are a few common myths and misunderstandings about the 4% Rule:

1. One size fits all. A rate of 4% (four percent) isn’t a hard and fast rule that applies to every situation.  Remember, it’s a rule of thumb.  Differing needs and moving budgetary targets may dictate a different withdrawal rate for your plan.
2. The 4% Rule lasts forever. The 4% Rule is predicated on a 30-year time horizon – not perpetuity.  Retirees need to be realistic about how long their money can last, even with modest income needs.
3. The 4% Rule will solve your portfolio construction equation. Investors still have to wrestle with asset allocation challenges.  While the 4% Rule can help, other factors will impact this decision going forward.
4. The 4% Rule presumes a world economy. Nope, the study is based on U.S. security returns only.  This is important because U.S. markets have historically had low volatility and strong returns compared to other countries.  International exposure that has become commonplace in portfolios isn’t considered in the study.
5. The 4% Rule is an inflexible dogma.  Again, it’s a rule of thumb – a place to begin.  It can help in your planning.  Still, because the market doesn’t give us straight line returns, there will be times where budgetary surpluses build up.  Conversely, if the market doesn’t cooperate, then a person will need to adjust their spending habits years in advance.
6. This 4% Rule has been used for a long time. The original data used in the study traces back to 1926; however, the study was published in 1998 by three professors from Trinity College in Texas.  It’s a relatively recent planning standard.
7. The 4% Rule is universally accepted. It most certainly is not.  Many economists insist the 4% Rule is not very efficient at all.  While they make a compelling case if you dig into it, deep analysis isn’t very useful if no one can understand and apply it.  The challenge is giving common investors a principle they can understand and build around.  Because of its ease, the rule continues to be one of the better staples of retirement planning.

We hope this helps de-mystify the 4% Rule of thumb for folks.  If used correctly, it gives you a goal worth pursuing.  Still, it’s important to understand the limitations.  If possible, consult a professional to help you work through your retirement plan with the 4% Rule as a reference point.  Good luck and remember to stretch before and after you exercise.

The Quarter in Review

You may have felt like a mouse by the time this quarter ended. “Forget the cheese, just let me out of the trap!” Financial markets posted remarkable daily and weekly swings in both directions.  The net result was a loss for many people.  The S&P 500, even with dividends, fell by -13.9%.  The Nasdaq Composite was off -12.9%, and the Russell 2000 Small Cap Index dropped -22.1%.

As always, a look at sector-level results is revealing.  In this report, we are breaking from our normal practice and listing the SPDR Sector ETFs alphabetically by ticker instead of best-to-worst performance.  First, take a moment to ponder these numbers.

The third quarter wasn’t “good” for any of the equity sectors, but Utilities at least managed a slight gain.  Consumer Staples and Technology kept their losses in single digits.  Everything else was pretty bleak.

We have to remember that some sectors are bigger than others.  Materials, for instance, can be very volatile but typically doesn’t have much influence on the broader market.  Ditto for Utilities – which also had the best 12-month performance.  It was the only sector to show positive results for both the last quarter and the last year.

Three sector ETFs posted losses in both periods: Materials, Financials, and Industrials.  As noted above, Materials is inconsequential in the big picture.  Industrials, as defined by S&P, is dominated by a single company: General Electric (GE).  Since GE is considered by many to be a bank in disguise, XLI is heavily influenced by financial services trends.

The persistent weakness in stock market benchmarks is in large part a result of weakness in financial services stocks, particularly banks.  A cap-weighted portfolio of all stock sectors except financials would have done better last quarter and last year.  The future could be quite different, but if you need a culprit, the banking sector is a good candidate right now.

Recent extreme volatility has some investors considering their options to settle their portfolio down.  Hedging or market neutral offerings are becoming popular with investors.  Therefore, FFCM’s QuantShares has kicked off its lineup using a long-short hedging strategy to attract investors.  Investor’s Business Daily caught up with CCAM’s Chief Investment Officer, Ron Rowland, to get his thoughts on these new additions to the ETF universe.