Imagine for a moment that you are a simple farmer cultivating a modest but lush orchard of apple trees. Every year you reap a bountiful harvest of fruit to feed your family, with some surplus to sell for other foods and necessities you can’t grow yourself.
Every once in a while your neighbor comes by and offers to buy all your trees for firewood. Even if he offers you a generous price, accepting it would be foolish: the money you could sell it for would sustain you for a while, but it would not produce new crops for you year in and year out. It would run out where a well-tended orchard could keep providing for you long after.
One day your neighbor comes up to you in a bad mood, still wanting to buy your trees. The timber market has been flooded with cheap wood, cutting into his profits, so now he can only offer a much lower price for your trees.
If you wouldn’t sell your orchard when the price is high, why on Earth would you want to sell it when the price is low? As long as you plan to keep your orchard and live on your fruit crop, it shouldn’t matter to you what price someone may quote for it.
For those of us planning to retire on our investments, we would do well to heed the parable of the orchard and the fruit crop. Many retirees plan to live on a portfolio of income-bearing investments. We know that investments are subject to volatility, and at some point in your retirement you will probably see price swings in your investments—even government bonds and other conservative investments are not immune. But your ability to pay bills and buy groceries doesn’t depend on the market value of your holdings, it depends on the dividends and interest payments they generate. As long as your “fruit crop” is secure, you have no reason to sell your orchard. Therefore it doesn’t matter what someone wants to buy it for.
Investors, like farmers, sometimes suffer crop failures—there are no guarantees. But it is the stability of your income that should concern you first and foremost, not the stability of your price.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.