Capital Appreciation.

just wondering… ok, when we need to grow the portfolio we need capital apprecition. this would be when the client is getting ready for retirement. i.e. needs 2 million in the future as opposed to the 1.5 mill he has presently. right. however, when we need to grow the portfolio to cover living expenses, we also need capital appreciation. we would need the portfolio to grow to offset those increases in Inflation, right? now, in the case of “the Ingrams” we see that the portfolio value is to go from $4 mill to $3mill. Ok, so we don’t need “that” capital appreciation…but! what about the capital appreciation for the inflation to cover the expenses? I know the Inflation expenses are constant at $205,000 but, I don’t understand why its wrong to say we need capital appreciation to cover that $205,000. i.e. shouldn’t we state the portfolio needs “capital appreciation” to cover the expences each year regardless if we’re drawing down on the portfolio?

I think its safe to say that for 99.99% of all portfolios people are looking to “Grow” their portfolios, hence “capital appreciation”

This raises an interesting question. It seems that growth and income/coupons/dividend portions of the portfolio are essentially identically desirable EXCEPT: a) when there is differential tax treatment (usually this favors capital growth over income) b) when you have known liabilities that you are trying to match (which favors using fixed income coupons and principal with known payout/maturity dates). Another practical question: Are zero-coupon bonds treated as entirely capital appreciation, entirely income, or some mixture?

Cap Appreciation b/c there are no coupons hence no income.

I think so as well. I think that this question misleads you into thinking that you need capital appreciation. the answer even side steps it in that it just states that you need an “inflation adjustment for the expenses” an inflation adjustment would mean growing the portfolio (up) to cover those costs in the majority of situations.

Thanks, Intuitively I would have said cap appreciation, but then I would never have intuitively figured out that futures are taxed as 60% LT gain and 40% short term.

I forgot something about income vs capital appreciation (more minor points, though not in fixed income). * Reinvestment of income has two extra disadvantages 1) Extra transaction costs when income is reinvested 2) Reinvestment risk (mostly an issue in fixed income, since equities don’t lock in any yields when you buy them). So this increases the list of things that make income different from capital appreciation 1) Tax treatment 2) Usefulness in meeting known liabilities (generally a FI issue) 3) Transaction costs for reinvestment 4) Reinvestment risk (mostly a FI issue) So my conclusion is that unless you are trying to immunize liabilities, capital appreciation is preferred under almost all circumstances. It’s more tax efficient (though not for tax exempt organizations like pension funds, foundations, and endowments), fewer transaction costs, less reinvestment risk (FI only), and generally means fewer things to keep track of. No wonder only about 1/4 to 1/3 of listed stocks pay dividends. The only real reason to pay dividends is if you don’t see any opportunities that keep your ROE above WACC.