Australians have widely varying expectations and goals for their investment portfolios, according to a study of investors by BetaShares.
More than 85 per cent say growing wealth is the primary objective, but the basis for that decision is split – almost evenly. Australians claim to grow their wealth for two reasons: their retirement and income.
Growing wealth and generating income
Investors sometimes think that growing wealth and generating income are mutually exclusive. That is, a focus on growth means forgoing income, and a focus on generating income means sacrificing growth.
This makes portfolio construction tailored to growth or income a primary requirement. But it doesn’t need to be that way.
To some degree, you can have your cake and eat it too, bypassing the investment oxymoron and working towards multiple objectives.
Using the right framework, you can manage the balance between growth and income – not just in portfolio construction, but also with appropriate management. Investors can then focus on maximising their total investment return (based on their personal circumstances and risk appetite) without letting the growth-income oxymoron interfere.
Investment income vs capital gains
The total return of any investment portfolio can be broken into capital gains and income. In the absence of tax effects, the investor should be agnostic as to how returns are generated.
For the same total return, whether it be derived from capital gains, income, or a combination of both, is unimportant. When tax is included, the same applies, just to after-tax total returns, (derived from after-tax income and after-tax realised capital gains).
This is important, because the same portfolio can generate different levels of income or growth through strategic management. In an after-tax framework, income and growth in a portfolio can be used to generate gains or income for the investor. After-tax income can be reinvested to add to the value of a portfolio and generate gains over time.
Alternatively, income – traditionally derived from individual constituents – can be supplemented by strategically selling down parts of a portfolio.
Understanding this allows an investor to tailor the growth or income profile of a portfolio – not only by using the growth or income attributes of the portfolio constituents, but by strategically managing reinvestment of income or selling down assets.
Investment objective
| To generate income | To generate gains | |
| Income-oriented portfolio | Pass portfolio income through to the investor as income | Reinvest to increase portfolio value, enable compounding, and achieve growth |
| Growth-oriented portfolio | Sell down part of portfolio to generate income | Remain invested to allow for compounding |
Income vs growth investing
The primary objective for income generation should be high after-tax total returns. Income can come from distributions or capital gains. If distributions are insufficient, they can be supplemented by selling down parts of the portfolio.
Similarly, a portfolio with a growth objective should also target high total returns, then reinvest income to allow for the benefit of compounding.
In this framework, investors can focus on constructing portfolios tailored to their specific situation, rather than making growth or income the primary driver. Instead, they can focus on overall levels of risk, time horizons and external factors such as an emergency or change in their personal circumstances.
This doesn’t mean the growth or income attributes of portfolio constituents should be ignored. Instead, investors should understand they have some flexibility to achieve their growth or income objectives which is independent from their portfolio’s growth or income attributes.
Investors in different circumstances and at different stages in their investment journey tend to focus on growth or income in specific ways. Understanding how both these outcomes are achieved on an after-tax basis and how growth can feed into an income-generating portfolio and income can be reinvested for growth, means that the primary objective – growing wealth – can be maximised without either growth or income dominating decision making.
Investors can then consider their specific situation, risk appetite and needs and choose investments that aim to maximise total portfolio returns.
Rather than being an oxymoron, growth and income are just portfolio attributes that can work together to grow wealth – either as income or as gains.
BetaShares is a YourLifeChoices preferred partner.
Read more from BetaShares
Retirement investing – What you need to know
Long Term Investing: Navigating Market Volatility
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This article has been prepared by BetaShares Capital Ltd (ABN 78 139 566 868 AFSL 341181) and contains general information only. It does not constitute personal financial advice and should not be relied upon as such. It does not take into account any investors’ individual circumstances, financial objectives or needs and does not purport to provide comprehensive information about any matter.
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