The harvesting strategy was adopted by our team in the early 2000s when rates were low on fixed income investments, the outlook for equities was uncertain, and folks were confident that rates would rise to more “normal” levels. Sound familiar? More than twenty years later, retirement investors face a similar set of challenges.
Then, like now, stocks had dramatically outpaced fixed income investments in total return, so our objective was, and still is, to harness their outsized return potential. However, the returns on stocks has always been so unpredictable that counting on the gains from them to meet recurring bills and even large, planned expenditures felt very imprudent.
A popular solution to this industry-recognized challenge was, and still is, to rely on “systematic withdrawal plans” from diversified portfolios. This means that clients liquidate enough shares from their portfolios each month to cover living expenses.
This is a step in the right direction, but still too inefficient of a strategy to rely on. The problem is that when you take a set dollar amount out of a portfolio each month, you end up selling more shares when the market is low, and fewer shares when the market is high. Not quite the same as buying high and selling low, but a detrimental step in the wrong direction.
It is perhaps one reason why balanced portfolios that may have a return expectation of 6-8% or more, can responsibly only be counted on for 3-4% per year of annual withdrawals.
Over 20 years later, we face many of the same fundamental challenges. They are particularly acute when making important decisions with assets that are earmarked to fund a retirement of twenty, thirty or more years.
Rates are low, likely on the rise, and the smart money is betting that stocks will remain volatile for some time to come.
A plan for sustainability was essential then and it is perhaps even more so now.
Here’s how the harvesting strategy worked then and still works today:
Our Harvesting Strategy
The goal of our harvesting strategy is sustainable wealth management. Making your hard-earned wealth last as long as you do – maybe even longer.
We apply a similar planning process to the systematic withdrawal strategies by constructing balanced portfolios of quality investments, diversified across a variety of securities. There are two distinct and important additional steps to our process...
- Fund the retirement income gap—We let the amount allocated to short term bonds, funds, and money markets be guided by how much of your spending needs are funded by new money sources (your retirement income gap). We build your plan to fill this gap from reserves, without the need to sell stocks to do so.
- Invest old money to generate new money—We help keep that retirement income gap lower by avoiding investments that don’t pay dividends or interest. We gravitate towards companies who pay substantial dividends, have a history of raising them regularly, and have the fundamentals in place to continue those dividend payments and increases going forward.
The harvesting strategy gets its name by its sell discipline. When the consumption balance gets low, we replenish these reserves with the portfolio investments that have appreciated. We feel that selling into strength on our schedule as your needs dictate is preferable to selling into potential declines as your resolve fades or your needs arise at inopportune times.
We think of it as living off the fruit of the tree, not the branches, trunk, or roots.
If this type of responsible thought leadership intrigues you, reach out. We’d love to help start you on a path to be able to Harvest your wealth sustainably.