Dan Dobry
Dan Dobry

Should we focus on creating returns or creating income in the investment world?

A ground-breaking Blackrock research reveals that clients are moving their core assets from passive strategies to real assets that create income.

The face of retirement has changed radically in recent decades. People are living longer. Pensions are increasingly rare. Add to this market volatility, as well as questions surrounding the long-term financial health of Social Security, and it’s no wonder many people feel anxious about funding their golden years.

Is there a way to create a plan that can give you a regular “retirement income”—through sustainable investments, resembling a traditional pension plan, is it possible to provide a guaranteed stream of income that lasts a lifetime and is not affected by the inevitable ups and downs of the markets?

If so, you should consider using an investing technique—”Income investing”.

Income investing is the practice of designing a portfolio of investments that will give you a passive income you can live on. Investments can include real estate, debt, private equity, stocks, mutual funds, and bonds. It’s crucial to consider which types of assets will enable you to meet your passive-income goals and investing philosophy while understanding some common dangers that can affect an income investing portfolio.

What Is Income Investing?

The art of good income investing is gathering a collection of assets such as real estate, debt, private equity, stocks, mutual funds, and bonds, and that will generate the highest possible annual income at the lowest possible risk. Most of this income is paid out to the investor so they can use it in their everyday lives to buy clothes, pay bills, take vacations, help the kids, and live a life of security without worrying about money.

Naturally, income investing is popular with those at or nearing retirement. When you are retired, you need to depend on a steady flow of income to replace the income you once had when you were working. Today, with defined benefit pension plans going the way of the dinosaur and defined contribution holders being spooked by fluctuating balances, there has been a resurgence of interest in income investing. In 2020, the amount of money being moved to incomer strategies was the highest ever.

Though income investing is popular with retirees, it’s not only for retirees. Income investing can be a strategy for any investor seeking a stream of income from their investments.

Defining a target income

To find the monthly income your investment strategy needs to bring in, you on your withdrawal rate, which is how much income you want to pull out from your investments each year.

The rule of thumb in income investing is if you never want to run out of money. You should take no more than 5% of your balance out each year for income. This is commonly referred to on Wall Street as the 5% rule.

Put another way, if you manage to save $3,500,000 you should be able to make monthly withdrawals of $15,000 without ever running out of money.

By the time you retire, you’ll probably own your own home and have very little debt. Absent any major medical emergencies, you should be able to meet your basic needs.

The process of defining needs is defined in the methodology of “Financial Planning” provided by “Certified Financial Planners or European Financial Planners” and this is:

  1. Documenting income, expenses, assets liabilities, cash flows, and defining life goals
  2. Building an asset allocation with as much diversification as the strategy will allow
  3. Stress tests the allocation using “what if scenarios”
  4. Build a tax strategy
  5. Build and Estate strategy

Key Investments for Your Income Investing Portfolio

When you build your income-creating portfolio, you are going to have five major “buckets” of potential investments. These include:

  1. Real estate: You can own rental properties outright or invest through real estate funds or investment trusts (REITs). Real estate has its own tax rules, and some people are more comfortable because real estate offers some protection against high inflation.
  2. Private Debt: Since the global financial crisis, private debt has received increased attention and growth for a variety of reasons. These have included the ongoing low-interest-rate environment, elevated equity valuations, diversification benefits, and higher yield potential offered by private debt. The case for private debt appears to be strong for investors with long-term investment horizons and higher risk tolerances.
  1. Private Equity: Is capital made available to private companies or investors? The funds raised might be used to develop new products and technologies, expand working capital, make acquisitions, or strengthen a company’s balance sheet. Here too diversification is the key, alongside choosing the private equity funds in key growth asset classes by using characteristics you can follow in the long term.
  2. Dividend-paying stocks: Both common stocks and preferred stocks are useful. Companies that pay dividends pay a portion of annual profit to shareholders based on the number of shares they own.
  3. Bonds: You have many choices when it comes to bonds. You can own government bonds, agency bonds, municipal bonds, savings bonds, or others. It is worth it to note that currently in history bonds are trading at the lowest ever and in most developed countries Govt bonds are trading at negative returns.

Can we make a full-time income from investing?

It’s possible to make enough from your investments to cover your costs of living, but this doesn’t happen overnight. It requires years of careful and disciplined investing and patiently allowing your wealth to grow. Once you do have enough invested to earn a full salary’s worth in annual returns, you must be careful not to withdraw more than what your investments earn each year.

About the Author
Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).
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