The search for income is getting harder, and there’s no shortage of suggestions on where to get a little bit more. But what about the cost? We think that focusing on creating a better return sequence can help investors access more efficient income.
Build A Better Path
Ah, the “income conundrum”—the search for income in a world that offers so little of it. Let's break it down: Yields are low against the backdrop of inflation, and taxes are often negative. And risks are extending in many classic income-producing indices, with durations getting longer and credit quality deteriorating. Against that backdrop, there's no shortage of suggestions on where to go for just a bit more income, but not as much attention has been paid to the potential cost of seeking that income in the form of much greater potential drawdowns.
We talk a lot about “build a better path”: the importance of focusing on the sequence of returns over the coming years and the value of up/down capture in doing so. Through the lens of income, we think of that as efficiency of income—income at what potential principal cost.
You know, I get asked all the time, “What is the perfect income allocation?” and the answer is, “It depends on you.” First, what is your unique mix between the income you're willing to seek and the risk you’re willing to take? Also, what role do taxes play for you? Inflation? Liquidity? Do you want to add a growth option on top of just pure income? And finally, where does your income allocation sit in the broader portfolio? Is it classic core? A dedicated income-producing sleeve? Or do we want to add growth into the mix?
There are a lot of things that go into designing your unique allocation, and we have a lot of research around that. I encourage you to reach out to your AllianceBernstein representative and allow us to help you solve the “income conundrum.”