Investors: Focus on Cash Flow, Not Returns
Investors who zero in on their portfolio’s bottom line are missing the point, and they could be pressured into making a costly mistake.
Thanks to the financial services industry, over the decades investors have been conditioned to focus on the returns their portfolios generate, more than on cash flow. The industry has emphasized returns, as they make a great sales tool for financial professionals. But that hardly helps investors (more on the problem with historical and average returns in my next column).
Of course, it is important to have positive returns, but simply focusing on this elevates what I call “sequence of returns risk.” This refers to the phenomena where portfolio returns in the early part of the investment cycle have a disproportionate impact on the long-term outcome of the portfolio – ergo, a 15% loss in year one has a compounding effect that is much greater than having a 15% lost in later years of the investment cycle.
The psychological impact of this is that it often causes investors to change their investment allocation to a more conservative mix, or worse yet sell near market lows, thereby compounding the impact of the early negative returns and making achieving their investment goals much more challenging. If, however, investors were to simply focus on cash flow, then they probably wouldn’t give in to any temptations to time the market or take corrective actions during a downtown, which is a natural part of a full market cycle.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For instance, take two identical $1 million portfolios, which are set up to distribute $50,000 annually. Investor No. 1 has the unfortunate luck of investing at the peak of the market cycle and being subjected to two negative performance years at the outset. Investor No. 2 experiences positive returns for the first two years.
| Year | Portfolio 1 annual return | Ending balance after $50k distribution | Year | Portfolio 2 annual return | Ending balance after $50k distribution |
|---|---|---|---|---|---|
| 1 | -5% | $945,000 | 1 | 10% | $1,050,000 |
| 2 | -3% | $866,650 | 2 | 20% | $1,210,000 |
| 3 | 10% | $903,315 | 3 | -3% | $1,123,700 |
| 4 | 7% | $916,547 | 4 | -5% | $1,017,515 |
| 5 | -15% | $729,065 | 5 | 7% | $1,038,741 |
| 6 | 20% | $824,878 | 6 | -15% | $832,930 |
| 7 | 1% | $783,127 | 7 | 8% | $849,564 |
| 8 | -3% | $709,633 | 8 | -3% | $774,077 |
| 9 | 8% | $716,404 | 9 | 7% | $778,263 |
| 10 | 7% | $716,552 | 10 | 1% | $736,045 |
Average annual return for both portfolios = 2.7%
Experience has taught me that investors like Investor No. 1 will likely become nervous, and at the very least will doubt their strategy and be tempted to sell. Both portfolios have a 10-year average annual return of 2.7%, and both distribute the desired $50,000. The ending balance between the two portfolios is about $20,000 apart, well within a reasonable margin of error for long-term investment return expectations.
Astute investors know that portfolio returns are heavily influenced by market cycles, which are uncontrollable. By focusing on cash-flow, investors are better able to ignore short-term market gyrations and sequence of returns risk. In my next column, I’ll be discussing the importance and significant impact portfolio costs have on long-term performance.
This column is the third in a six-part series on investor education.
- Column 1 – Understanding your goals
- Column 2 – Why benchmarking to the S&P 500 is not a good strategy
- Column 3 – It’s about cash-flow, not returns
- Column 4 – How much are you paying for your portfolio?
- Column 5 – 5 critical questions to ask your financial advisor
- Column 6 – ‘Senior Inflation’ the not so silent retirement killer
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Oliver Pursche is the Chief Market Strategist for Bruderman Asset Management, an SEC-registered investment advisory firm with over $1 billion in assets under management and an additional $400 million under advisement through its affiliated broker dealer, Bruderman Brothers, LLC. Pursche is a recognized authority on global affairs and investment policy, as well as a regular contributor on CNBC, Bloomberg and Fox Business. Additionally, he is a monthly contributing columnist for Forbes and Kiplinger.com, a member of the Harvard Business Review Advisory Council and a monthly participant of the NY Federal Reserve Bank Business Leaders Survey, and the author of "Immigrants: The Economic Force at our Door."
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.

