Investment Strategies (part D)
by
Charles Lamson
Income Strategy
An income strategy shifts the focus from long-term gains to nearer term results. While an aggressive growth strategy is appropriate for the very young, its usefulness begins to decrease as you approach retirement. The reason is the volatility I mentioned in an earlier post. You do not want to be caught in a down market when it is time to begin living off your investments.
As you approach retirement, it makes sense to begin shifting some of your assets out of aggressive growth vehicles and into more moderate growth and income instruments.
The reason you do this is to even out those ups and downs so you will have a more predictable income stream when you need it to live on. Think of this as a turning down the volume on your car radio rather than hitting the off-on switch.
At a very young age, 100 percent of your investments are in aggressive growth instruments. That percentage changes as you age and ends up with a mix of 60 percent income and 40 percent growth by age 65.
An income strategy is also appropriate for those shorter-term goals, such as investing for a child's college education. You do not want to risk a dip in your holdings just as school is starting and those tuition bills are staring you in the face.
Finding investment vehicles for an income strategy is easier than working with a growth strategy. Our growth strategy (from the last post) looked forward to anticipated growth. An income investment vehicle can be found by looking more at history than at the future.
Obviously, if a company has been paying dividends with regularity, it is a potential candidate. The folks at StockQuest have a screening selection that looks at dividends and their growth, but also at the overall health of the company to see if it will be able to continue paying dividends.
However, many investors may choose to use bonds to satisfy the need for stability of return. As we learned in an earlier post on bonds, you can match maturity with a specific expense on a certain date.
For example, if you knew that your child needed $5,000 tuition in September 2022, you could purchase a bond that would hit or be very close to this mark.
This same principal applies for people nearing retirement. Their goal horizon is now short- or mid-term and no longer long-term. It will be safer for them to begin the transition to a more certain income stream.
So what should you invest in for income? Your investment choices for income are fairly simple: bonds or large-cap stocks. Bonds have the advantage of targeting maturity and need, while stocks may provide a better return, since many stocks that pay excellent dividends also show moderate growth.
If you combine stock appreciation with dividends, stocks are going to beat bonds. What you sacrifice is predictability and the chance your stock could go in the dumpster for a variety of reasons.
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