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.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter

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.

Sign up for Kiplinger’s Free E-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
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Oliver Pursche (opens in new tab) is the Chief Market Strategist for Bruderman Asset Management (opens in new tab), 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."
-
-
Major Hyundai Recall of Nearly 570,000 Vehicles for Fire Risk
Hyundai recalls several popular models for electrical short danger and windshield wiper failure.
By Ben Demers • Published
-
How to Protect Your Cash and Investments in a Banking Crisis
A focus on FDIC insurance and Treasury-only money market or bond fund options can help safeguard investments when a banking crisis threatens.
By Peter Newman, CFA • Published
-
How to Protect Your Cash and Investments in a Banking Crisis
A focus on FDIC insurance and Treasury-only money market or bond fund options can help safeguard investments when a banking crisis threatens.
By Peter Newman, CFA • Published
-
Maximize Charitable Giving Tax Savings and Give All Year
Thinking of December as ‘contribution season,’ paired with using tax-savvy giving tools, can help you spread the generosity all year long.
By Mark Froehlich, CPA, MBA • Published
-
Protect Your Retirement: Seven Things You Can Do Right Now
Whether you’re preparing to retire or already retired, a proactive plan is critical to help safeguard your retirement, especially amid uncertainty.
By Jessica Cervinka, IAR • Published
-
Buffer ETFs Can Limit Investing Losses in Uncertain Times
Doing your own risk-reward investing analysis might be easier said than done, especially when markets are volatile. That’s where buffer ETFs can come in handy.
By Kirk Tushaus • Published
-
Three Ways Technology Will Fix What's Broken in Philanthropy
Charities stand to benefit from evolving fintech and artificial intelligence that will make charitable giving more efficient, transparent, relevant, collaborative and impact-focused.
By Stephen Kump • Published
-
Four Steps for Teens Who Want to Test the Investing Waters
Teens who feel ready to try their hand at investing should first get educated, with adult supervision, and then it’s all about diversify, diversify, diversify.
By Kerim Derhalli • Published
-
Is Retirement in 2023 Still Possible?
Yes, it is, if you have a customized plan specific to your retirement. If you do, you’re in the minority, though, so here are some ways to develop that plan.
By Nicholas J. Toman, CFP® • Published
-
Being Rich vs. Being Wealthy: What’s the Difference?
It’s all about where you put the zeros — having a large bank account isn’t the same as having zero regrets and focusing on what brings you joy.
By Andrew Rosen, CFP®, CEP • Published