What is Farrell-Northstar Retirement Income Index?
What is the Farrell Northstar Retirement Income Index?
The FNRI Index is designed as a benchmark for retired investors, or any other investors who must live off the returns from their portfolios. The index has four primary objectives: Current and Stable Income, Growing Income, Principal Stability and Capital Gains. The objectives are listed in order of priority, and the securities in the index are selected for their ability to meet these unique investment objectives.
What is an index?
An index is a hypothetical list of securities. Indexes are created to help investors benchmark certain aspects of the financial markets. For instance, there are indexes for stock and bond markets, and there are indexes that combine sectors of the markets. Investors often use indexes to help structure their portfolios and benchmark their own portfolio performance against an index that meets their investment objectives. For instance, if an investor wanted to only own foreign stocks, the investor would look to benchmark their portfolio off one of the many indexes that track foreign stocks.
Who is the index for?
The FNRI is appropriate for investors who value Current and Stable Income, Growing Income, Principal Stability and Capital Gains - in that order. So if you are more concerned with making sure you have income for spending purposes each year and a certain amount of principal protection as opposed to the potential for capital gains (or losses), then you might select the FNRI Index instead of the S&P 500, which does not have an income or principal stability focus.
Why is the index appropriate for retired investors?
Retired investors are in a unique position because they are no longer adding savings to their portfolios and must take distributions from these accounts for living expenses. In essence, these investors must manage a fixed pool of capital to create consistent and rising distributions that must last at least 30 years. That is a tall order given the uncertainties and volatility of the financial markets. Thus, retired investors must think differently about how they manage risk and how their portfolios are positioned for current income, growing income, principal protection and capital gains. That is very different than simply trying to track the returns of the total stock market. For instance, if the stock market is down 50% and a retired investor’s portfolio is down 49%, he can take pride in beating the stock market index, but he may soon be out of money. The FNRI Index is designed to help investors understand how to manage the unique objectives and risks associated with living off a fixed pool of capital.
What type of securities are in the index?
The FNRI Index is a balanced portfolio of approximately 55% to 60% high quality fixed income securities and 40% to 45% dividend paying stocks. The index weightings will change depending on market conditions and income opportunities, but the basic structure is one that requires more than 50% of the assets in fixed income. This combination provides a great deal of current and stable income from the interest and dividends, principal protection from the high quality bonds, growing income from the potentially growing stock dividends, and capital gains from the potential for price appreciation in the stock holdings. The stocks are not selected for their size, as they are in indexes such as the S&P 500. They are selected for their ability to pay and potentially increase their dividends through good and bad market cycles.
Who decides what goes in the index?
The investment management team at Northstar Investment Advisors, LLC determines what securities go into the index. The securities are selected for what Northstar believes is their ability to create Current and Stable Income, Growing Income, Principal Protection and Capital Gains. If Northstar believes a security no longer meets these objectives, or another security may provide better opportunities, then the security is removed or replaced. As with most indexes, the turnover is low on an annual basis. It is designed to be a passive way to asses returns and risk management for retired investors.
Who does the calculations for the index?
Standard & Poor’s calculates the FNRI Index’s daily price and total return data. They also maintain detailed records on all dividend and income payments and securities weightings in the index.
How is the index different than the S&P 500 or the Dow Jones Industrial average, for example?
The S&P 500 and the Dow Jones Industrial Average are indexes that are designed to help investors understand the returns from stocks. The S&P 500 includes 500 of the largest US stocks and is a good proxy for the stock market. The DOW contains 30 stocks that are selected for what the index managers believe is their ability to replicate the overall economy. These indexes are not designed to provide a benchmark for income oriented investors, or investors who are concerned with principal stability and protection. Thus, structuring a portfolio to attempt to track these index returns may actually expose retired investors to significant risks of running out of money.
Can I invest in the index?
Individuals cannot invest in an index. Again, an index is a hypothetical list of securities. But portfolios can be structured to attempt to replicate the returns of an index by acquiring the securities that make up the index. Thus, an investor can attempt to track an index but cannot invest directly in an index.
Disclosure: The Farrell-Northstar Retirement Income Index is a list of fixed income and equity securities. The FNRI Index is for informational and educational purposes only. Investors cannot invest in an index and the FNRI Index does not represent an actual security or portfolio. Equity statistics are estimates and were obtained from Ford Equity Research for each individual equity holding in the FNRI Index. Historical dividend payments on the S&P 500 were obtained from Standard & Poor’s. Statistics for the master limited partnerships and energy trusts are excluded from the PE calculation as those securities have different financial structures that need to be analyzed under different valuation metrics. Past performance is no guarantee of future returns. FNRI Index returns have been certified by Standard & Poor's. Consult your individual financial advisor prior to making any financial decisions. Investing involves multiple risks, including but not limited to the permanent loss of capital.