Total Return Investing

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on May 24, 2023

What Is Total Return Investing?

Total return investing is a long-term investment strategy focused on maximizing the overall return of a portfolio, which includes both capital appreciation and income generated from investments.

This approach emphasizes the importance of considering all sources of return when evaluating the performance of an investment portfolio.

In this article, we will discuss the various components of total return, strategies for implementing total return investing, and how this approach can be integrated with financial planning.

Components of Total Return

Capital Appreciation

Capital appreciation refers to the increase in the value of an investment over time. This component of total return is often the primary focus of investors seeking long-term wealth accumulation.

Dividend Income

Dividend income is the portion of a company's earnings that is distributed to shareholders in the form of dividends. This income source can provide a steady stream of cash flow for investors and contribute significantly to the total return of a portfolio.

Interest Income

Interest income is generated from fixed-income investments, such as bonds and certificates of deposit (CDs). This income source can provide stability to a portfolio and help offset the volatility associated with other investments, such as stocks.

Reinvestment of Dividends and Interest

The reinvestment of dividends and interest can enhance the total return of a portfolio by allowing investors to purchase additional shares or bonds, which can generate even more income and capital appreciation over time.

Total Return Investing Strategies

Diversification Across Asset Classes

Stocks

Investing in a diversified mix of stocks can provide exposure to capital appreciation and dividend income. By including stocks from various sectors and industries, investors can reduce the risk associated with concentrating their investments in a single area.

Bonds

Bonds can provide a source of interest income and help stabilize a portfolio during periods of market volatility. Including bonds with different maturities, credit ratings, and issuers can further enhance diversification and manage interest rate risk.

Real Estate

Real estate investments, such as real estate investment trusts (REITs) or rental properties, can provide exposure to capital appreciation and income from rent payments. Including real estate in a total return investing strategy can help diversify a portfolio and hedge against inflation.

Alternative Investments

Alternative investments, such as commodities, hedge funds, or private equity, can provide additional diversification and unique sources of return that may not be closely correlated with traditional asset classes like stocks and bonds.

Dividend Growth Investing

Dividend growth investing is a strategy that focuses on investing in companies with a history of consistently increasing their dividend payments. This approach can provide a growing stream of income and contribute to capital appreciation as the value of the underlying stocks increases.

Bond Investing for Interest Income

Investing in a diversified mix of bonds can provide a steady stream of interest income and help manage interest rate risk.

Bond investors can choose from various types of bonds, including government, corporate, and municipal bonds, to tailor their fixed-income exposure based on their risk tolerance and tax considerations.

Portfolio Rebalancing

Regularly rebalancing a portfolio helps maintain the desired asset allocation and ensures that the portfolio remains aligned with the investor's risk tolerance and financial goals.

Rebalancing involves selling assets that have outperformed and using the proceeds to purchase underperforming assets, which can enhance the total return of the portfolio over time.

Benefits of Total Return Investing

Long-Term Wealth Accumulation

Total return investing focuses on the combination of capital appreciation and income generation, which can lead to long-term wealth accumulation and help investors achieve their financial goals.

Flexibility in Income Generation

By considering all sources of return, total return investing allows investors to create a more flexible income stream that can adapt to changing market conditions and personal circumstances.

Reduction of Portfolio Risk

By diversifying across asset classes and focusing on both capital appreciation and income generation, total return investing can help reduce the overall risk of a portfolio. This approach can lead to more stable returns and help investors weather periods of market volatility.

Better Performance Measurement

Evaluating a portfolio's performance based on total return provides a more comprehensive picture of how investments are performing, taking into account both capital appreciation and income generation.

This can help investors make more informed decisions about their investment strategies and better assess the effectiveness of their portfolio management.

Benefits of Total Return Investing

Integrating Total Return Investing With Financial Planning

Retirement Planning

Total return investing can play a vital role in retirement planning by helping investors create a diversified portfolio that generates a combination of capital appreciation and income.

This approach can help ensure that retirees have sufficient income to meet their needs while managing the risks associated with market fluctuations.

Education Funding

For investors saving for a child's education, total return investing can help manage the investment risks associated with tuition expenses and ensure that funds are available when needed.

This approach can provide a more stable source of funding compared to relying solely on capital appreciation or income generation.

Estate Planning

In the context of estate planning, total return investing can help investors manage the tax implications of transferring wealth to their heirs, ensuring that assets are allocated in a tax-efficient manner.

Major Purchases and Financial Goals

Total return investing can also be used to plan for major purchases or other financial goals, such as buying a home or starting a business.

By focusing on both capital appreciation and income generation, investors can better manage the risks associated with these goals and improve their likelihood of success.

Tax Considerations in Total Return Investing

Tax-Efficient Investment Vehicles

Investors should consider using tax-efficient investment vehicles, such as individual retirement accounts (IRAs), Roth IRAs, or 401(k) plans, to minimize the tax impact of their total return investing strategies.

Asset Location

The proper allocation of assets between taxable and tax-advantaged accounts can enhance the tax efficiency of a total return investing strategy.

Generally, tax-inefficient investments, such as bonds and REITs, should be placed in tax-advantaged accounts, while tax-efficient investments, like stocks, should be allocated to taxable accounts.

Tax-Loss Harvesting

Tax-loss harvesting involves selling underperforming assets to offset capital gains, reducing an investor's taxable income. This strategy can help enhance the tax efficiency of a total return investing approach.

Collaborating With Tax Professionals

Working with tax professionals can help ensure that total return investing strategies are implemented in a tax-efficient manner and aligned with an investor's overall financial goals.

Risks and Limitations of Total Return Investing

Market Volatility and Uncertainty

While total return investing can help manage investment risks, it cannot entirely eliminate the unpredictability of market performance. Investors should be prepared for the possibility that their investments may not perform as expected, necessitating adjustments to their strategies.

Inflation Risk

Total return investing strategies may be subject to inflation risk, which can erode the purchasing power of an investor's assets and affect the value of their investments. Investors should consider incorporating inflation-protected investments within their total return strategies.

Concentration Risk

Focusing too heavily on a single asset class or investment type can expose a portfolio to concentration risk, potentially undermining the benefits of total return investing. Diversification across asset classes and investment types is critical to managing this risk.

Behavioral Biases

Investors may be prone to behavioral biases that can negatively impact their total return investing strategies, such as chasing past performance, overconfidence, or loss aversion. Recognizing and managing these biases is crucial to the success of a total return investing approach.

Seeking Professional Guidance

Role of Financial Advisors in Total Return Investing

Total return investing can be complex, and it's essential to have a deep understanding of the investment vehicles used, market trends, and tax implications.

Financial advisors play a critical role in helping investors achieve their financial goals by providing expertise and guidance in managing their investments.

A financial advisor can help investors develop a comprehensive investment strategy, assess and manage risk, and adjust their portfolio as needed to maximize returns and mitigate potential losses.

Importance of Ongoing Portfolio Review and Adjustment

Successful total return investing requires ongoing portfolio review and adjustment. As market conditions change, investors need to adapt their investment strategies to reflect the new realities.

A financial advisor can help investors stay on top of market trends, monitor their investments, and make adjustments to their portfolio as needed. Regular portfolio review ensures that investors are taking advantage of new opportunities and mitigating risks in their portfolio.

Conclusion

Total return investing provides a comprehensive approach to investing that seeks to maximize overall returns while mitigating risk. By focusing on both capital appreciation and income generation, total return investing offers the potential for higher returns than income investing alone.

A long-term investment strategy that incorporates total return investing can help investors achieve their financial goals and build long-term wealth.

Total return investing is not a one-size-fits-all approach, and it's essential to adapt your investment strategy to your changing circumstances. Market trends, personal goals, and tax implications can all impact your investment strategy.

Working with a financial advisor can help you develop a customized approach that reflects your unique circumstances, ensuring that you're taking advantage of new opportunities and mitigating risks in your portfolio.

Total Return Investing FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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