Guest Author - Reshma Vyas
When it comes to building a “well-rounded” portfolio, the income component, is often under-emphasized, if not altogether ignored. The focus of many personal investors is primarily on amassing large amounts of capital growth through a variety of investments and then slowly transition from growth to an income-producing portfolio as one nears towards retirement. Investment income is, therefore, often associated with retirement. For individuals who are decades away from retirement, investment income is a low-ranking priority. Yet, think of how having an extra $1500 a year can help you in assisting some of your financial objectives (e.g., help pay monthly household bills). Individuals who are in their twenties and thirties may find it helpful to include considerations for investment income as they formulate their long-term financial goals. Being able to draw upon even a “small but steady stream of income” during pre-retirement years offers several distinct advantages:
1. It can serve as a monetary cushion during gaps of unemployment, long stretches of low income, underemployment or economic uncertainty.
2. Pay for major necessities such as prescription medication.
3. Boost the overall rate of return of your investments.
4. Pare down debt.
5. Fund other financial goals (use investment income to build upon other investments, diversify your portfolio or contribute towards long-term cash savings.).
6. Encourage one to become more proactive and interested in the topic of personal finance. As individuals become heartened by their financial progress and feeling of independence, it spurs them towards greater creativity, personal growth and learning.
What Is Investment Income?
Loosely speaking, investment income refers to income derived from interest, dividends, capital gains or rent. From a practical standpoint, investment income is income generated without the efforts of your physical labor or energy. The income is generated outside of your salary. It is the case of money working for us and creating income.
Investment income can be generated through a variety of vehicles including bonds, certificates of deposit, dividend paying common stocks, equity and income mutual funds, exchange-traded funds, money market funds, preferred stocks, savings bonds and unit trusts. Every investment will possess varying levels of risk. One should carefully evaluate one’s financial goals, personal situation and level of risk tolerance before selecting an investment.
Investment income payments can be variable or fixed. Before choosing an investment, potential investors should have a clear comprehension of how the income will be paid, when it will be paid and the possibility of loss of capital and/or interest, limitations, terms and conditions. Individuals who invest in dividend-paying stocks should be aware that companies can eliminate or reduce dividend payout at any time. Indeed, the dividend payment is never guaranteed. When it comes to selecting an appropriate stock, the dividend yield is simply just one factor to be evaluated. An inordinately high dividend payout can also be a troubling sign that the company is experiencing financial and business difficulties.
Planning For Investment Income
Clearly, the earlier one begins to plan for investment income, the more advantageous it is. Investment asset allocation is a skillful balancing act in terms of planning for long-term growth and income and risk versus reward. There are many types of risk including call or prepayment risk, credit risk, currency risk, default risk, inflation risk, interest rate risk, liquidity risk, market risk, price risk, regulatory risk, reinvestment risk and sector risk.
Additional Points To Keep In Mind:
1. Investment asset allocation is a skillful balancing act in terms of planning for long-term growth and income and risk versus reward. Examples of risk: call or prepayment risk, credit risk, currency risk, default risk, inflation risk, interest rate risk, liquidity risk, market risk, price risk, regulatory risk, reinvestment risk and sector risk.
2. Understand the impact of interest rates on your investment.
3. Anticipate your dividend and interest payments on a calendar (e.g., payments may be made monthly, quarterly or annually).
4. Consider the tax implications of your investment.
5. Find ways to creatively utilize your investment income (e.g., contribute to your emergency funds, strengthen and diversify your portfolio or pay for continuing education classes). Think of investment income as one part of your financial foundation. Look for ways to build upon your financial foundation.
6. Maintain a realistic perspective about your financial goals and progress.
7. Monitor your portfolio diligently and rebalance as necessary.
For informational purposes and not intended as advice and/or recommendation.