It would be an ideal investment portfolio--a high degree of safety with little to no exposure to loss of principal, strong cash flow, and good growth metrics. We'd call that "The Stairway to Retirement Heaven."

It would be an ideal investment portfolio—a high degree of safety with little to no exposure to loss of principal, strong cash flow, and good growth metrics. We’d call that “The Stairway to Retirement Heaven.” Getting to heaven, as any religious person will tell you, requires work, dedication to purpose, and the willingness to give something up to achieve a higher end. Living God’s law is a balancing act.

A balancing of one thing against another may be seen in the natural universe. Isaac Newton’s Third Law of Motion (1687) postulates, “For every action, there is an equal and opposite reaction.” When objects A and B interact, they exert forces on each other. Every change made to your investment portfolio may alter the dynamic. Take safety versus income.

Today, if you want maximum safety, you must accept low income. As of March 6, 2015, the average money market rate was 0.37%; 5-year CD, 1.49%; 10-year Treasury note, 2.239%. Trailing one year Core Inflation as of January 2015 was 1.6% annually, even as All Items inflation was declining with the lower price of oil. Suppose you decided to lend Uncle Sam $10,000 for 10 years through 2025. You will collect $223.90 per year in income. At a combined federal and state income tax bracket of 25%, you paid $55.98 in taxes. But at 1.6% inflation, you lost $160 in future buying power on your principal. Your net gain after taxes and inflation was $7.92 on your $10,000 investment, or 0.0792%. So you have safety minus inflation and taxation equaling a negligible positive yield. If interest rates rise, as we expect ultimately, if you sell your government bond before 2025, since bond values decline as interest rates rise, you are likely to recover less than $10,000.

What about stocks as a growth and income engine? In the long run, stocks have proven to be a good source of dividends and growth. The problem is that investors worry about the long run, looking intently at recent performance. The nagging fear is another 2008 decline, or even a periodic drop of 10% to 20% from some recent high point. We know that such a “bear market interlude” is out there, and must be planned for.

On Friday, March 6, markets took it on the chin as “good news” was seen as “bad news.” Good job growth numbers brought not cheer, but worry that the Federal Reserve Bank might increase interest rates sooner rather than later. It is not likely that interest rates will climb dramatically in the months ahead but we do know that the major trend is up with “down” from current low levels highly unlikely. At some point Mr. Market may decide that small increases in interest rates are a positive sign that the economy is gaining strength.

You might be content to hold stocks and just rake off dividends periodically if you need cash flow. Re-define the goal. Think “cash flow” and “total return” instead of “interest.” Pure interest is taxed at ordinary income rates. If some part of your “cash flow” could be long term capital gains, so much the better. Covered call option writing could be applied to low tax basis stocks that you wish to hold so as to supplement income. Even covered call option writing requires you to give something up (you may not participate fully in a sudden upsurge in the price of the stock) while you are attempting to increase the cash flow from the holding.

We recently met an investor who “annuitized” his income stream after 2008, buying annuities to preclude market losses in the future. He attained peace of mind but also realizes that he gave up liquidity as well as inflation protection going forward.

Some of the asset classes that did well as investors chased yield, high dividend paying stocks and utilities, have softened lately, while international stocks and the “also-rans” which did not do well in 2014, are showing signs of life this quarter. When you diversify, you give up the prospect of picking the best asset class in a given period.

Successful investing is a function of well-informed compromise and patience. It is fitting that we salute Isaac Newton as Apple stock is added to the Dow Jones Industrial Average while AT&T is eliminated from the classic yardstick. Newton was fond of citing an apple in his demonstration of yin and yang. Little has changed since 1687!

Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com