I Want To Grow My Money...Why Would I Need Any Income Investments?

But I’m looking to grow my money. Why would I want income investments in my account?”

This is a common question I get from Wela clients as we talk through the process of developing a retirement savings portfolio to meet their particular objectives. It’s a great question that makes sense. And here’s the answer.

When we think about saving for retirement, we often visual our efforts as growing something -- a “nest egg” that expands with every deposit we make in our retirement account.

But a well-crafted retirement strategy is actually more like a machine than an incubator. It has several moving parts that work together to leverage your contributions and move you towards your goal. The twin motors in that machine are growth and income investments, which work together, with each taking the lead at different times in the journey to and through retirement.

Income investments

Income investments

Growth stocks are shares in companies that currently prioritize expansion and increased market share. These businesses pour most of their profits back into operations, and thus don’t pay dividends. Netflix and Amazon are good examples. If/as a growth company expands, investors benefit from the steady, sometimes dramatic, rise in value of their shares. Growth stocks are what people talk about at the office coffee machine. “Yeah, I bought Acme Corp at $10 a share five years ago and just sold it for $71.”

Income stocks are boring by comparison. They tend to be established companies in mature industries – think Proctor & Gamble, Apple, Disney – that are unlikely to show dramatic growth in share price. Instead they just ton the revenue and pay their shareholders a regular dividend.

Related: Income Investing - Cut Through The Clutter

Bonds, which are essentially a loan to a business or government, are another source of income, as owners of the bond receive regular interest payments. Investors can also receive income from alternative investments, including real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

So, let’s assemble Wela’s version of the retirement investment machine. It consists of three buckets based on the above – stocks, bonds and alternative investments – designed to grow your money while providing diversity to protect you from market volatility.

Stocks – During most of your working career, your portfolio should contain mostly shares in growth companies. Ideally, these stocks will significantly appreciate in value over the years and decades, providing a nice profit when you liquidate them in retirement.

But you should also hold some income stocks to provide diversification and stability. The dividends these shares pay can be reinvested in your portfolio, turbo-charging your growth.

Related: How To Build Your Investment Portfolio To Meet Your Retirement Needs

When you retire, we recommend shifting your focus to income stocks. You can continue to reinvest their dividend income, or use it to help fund your lifestyle. Income stocks also tend to be less volatile than growth shares and thus offer the stability you want in retirement.

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend, “owning your age” in bonds. When you are in your 40’s, bonds should make up 40% of your portfolio. When you are 50, that percentage should be 50%.

Related: Why You Should "Own Your Age" In Your Investment Portfolio

Alternative investments – This smallest bucket of non-stock or bond assets provides more income and some insulation from the gyrations of the stock market.

So, why should you hold income investment when you’re seeking growth? Because income investments – stocks, bonds and alternative investments – can both enhance and protect that growth. The dividends, interest and other payments generated by income assets can be reinvested, even as those assets themselves insulate you from volatility by providing diversity and stability.

Your investment machine isn’t hitting on all cylinders unless you have income assets in the fuel mix.

Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

7 Smart Ways To Get Started Investing

It is easy to dream up great ideas, think through great processes, theorize about potential solutions, but actually starting down the path of a difficult task seems to constantly be put on the back burner.

We see this all the time with investing, and hear excuses like:

“I don’t have enough money to invest”

“I don’t know how to invest.”

And one of the biggest one to date:

“I don’t know where to start.”

It’s time to eliminate this obstacle. As with a ball rolling down a hill, once it gets started it can pick up speed. The same can be true for you and investing. Here are seven ways to get started investing.

1. The Easy Choice – Start contributing to your company’s retirement plan today, if your company offers one. This would be a 401k, 403b or other similar employer retirement plans. This is the easiest option because you can make your savings and investments automatic. The contributions to your investment account will come out of your paycheck. The investments are chosen once and continue to get added to every time you contribute. Boom; you are now an investor.

2. The Alternative – Maybe your employer doesn’t provide a retirement plan. Don’t let that be your excuse. You can easily start saving in your own retirement account. Vanguard offers several investment vehicles that can provide you a simple, low-cost option to start investing on your own. Open up a brokerage account or a Roth account (if eligible). Then set up automatic contributions to the account and select a broad-based investment option like their Vanguard S&P 500 index fund. Once you’ve done this you’ve one-upped your employer while also becoming an investor.

Related: 10 Ways To Start Saving

3. What You Know – Take a look around. Do you see a recurring theme of items within your closet or within your house? Possibly a bunch of Nike shoes and pullovers? Or could it be that your kids’ diapers are a brand of Procter and Gamble. Or Target bags litter your house. Whichever it is, you might as well invest in the companies where you spend the most money. It can be simple and automatic. Head over to computershare.com and find the company that you are most tied to (with regards to your interests) and set up a DRIP (Dividend Re-Investment Program) account. You can set up automatic monthly contributions to this particular account. Now, when you spend money, you’re helping make yourself money!

4. The Conservative – Maybe the stock market isn’t for you. That’s fine, there are options out there for you. Look at Treasurydirect.gov. You can start to buy government bonds here. This will allow you to at least earn some interest on your cash, and it can be your first step to longer term investing.

5. The Lazy Man – The technology age has provided an app for just about everything, and getting started investing isn’t any different. So, if you say that Vanguard and Computershare are your parent’s investment options, then maybe check out Acorns or Digit.co. Both of these products help you save automatically into investment accounts. Acorns looks to take your spare change from your spending and invest those monies into a diversified investment account. While Digit.co analyzes your spending habits, and then invests excess funds from your checking account on a regular basis. The beauty of these apps is that they don’t just save your money, they invest it! So while you are spending, they will work to get you started investing… win, win.

Related: Just The Basics: 9 Common Ways To Invest

6. Not Yet Innovative – Maybe you aren’t ready to move all your investing and saving to the ‘app’esphere.’ That’s ok. Another option for you could be to set up an account with Sharebuilder Investment Plan by Capital One. This is a good, low-cost option of automating your saving into a diverse set of investment options. You can choose from thousands of options and your savings are automatically contributed to each of the investments.

7. The Book Worm – Maybe you want to take it slow to getting started investing. That’s fine. You should learn from the best as a baby step. Make sure to read one of my favorites The Intelligent Investor by Benjamin Graham. He is the guy that Warran Buffett learned from, which I have to say worked out very well! It’s a long read, so for those that are ready to start investing sooner, then take a look at The Little Book of Investing by John Bogle. He is the founder of Vanguard and the father of the index fund (the ETF before ETFs were born). That’s a way to get knowledge from some of the best investors before you start to invest.

Related: 8 Books You Should Read To Be A Better Investor

*Bonus! The Hybrid – You’re ready to get started investing, but you’re looking for a lifeguard before you jump into the deep end of investments. Then you should take a look at Wela. By investing through Wela, you have access to not only our Wela Strategies ETFs which are guided by a team of experienced investment professionals but also our financial tools and resources. Our advisors act as your investing lifeguards, allowing you to jump into the water with confidence. It's easy to get started. Click here to learn more.

The uncertainty has been cleared, the questions about how to actually invest are answered. And you are now full steam ahead to investing in your financial future.

Our team member, Eddie Goepp, always says that the best day to start investing is yesterday. The second best day is today. Head that advice, as it has proven to be successful for many before us and likely for many after us.

Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

How to Build your investment portfolio to meet your retirement needs

There are any number of core investment philosophies, each with it own merits and uses. How do you decide which strategy or philosophy works best for you?

At Wela, we believe both growth and income investing have important roles to play in a successful retirement portfolio. During the front part of your wealth-building years, we recommend a growth strategy in which you invest heavily in stocks that will gain in value over the years (and decades), allowing you to reap significant profits when you cash out.

But as you near retirement we believe in transitioning to an income-driven portfolio consisting largely of assets that generate a steady cash flow that can provide you with a “paycheck” in retirement. That income comes from stock dividends, bond interest and income from alternative investments, such as preferred stocks, real estate investment trusts (REITS) and royalties from energy trusts.

One thing I love about income investing is that a well-crafted income portfolio can meet your retirement spending needs for years while limiting the drain on your capital.

 

Working Years: To understand the benefit of income investing, it might help to think of your retirement portfolio as a house. During your working years, you build your portfolio brick-by-brick -- dollar-by-dollar, asset-by-asset. It begins as a starter home -- functional but not fancy. Over time, you add rooms and amenities; a second floor, basement media room and a deck. With luck, the house appreciates over the decades until it’s worth, say, a million dollars.

Retirement: Now it’s time to retire. How do you get your money out of the house? Well, if it’s a growth “house,” you sell it off piece-by-piece and use the proceeds to fund your retirement. When the last piece is sold, the money is gone.

But if it’s an income house, it generates “rent” in the form of that asset income from stocks, bonds and other investments. That income, previously reinvested while you were “building the house” can now be used to cover your expenses. You may well have to sell some parts of the house over the years, but at a slower rate than the owner of a growth “house.”

How much slower? Well, imagine you have a portfolio at retirement worth $500,000 that can generate $20,000 in annual income. Assuming you can live on that money (plus Social Security, pensions, et cetera) after 10 years you would have derived $200,000 from your portfolio but it would still be worth about $500,000, depending on how the market moves.

In order to derive the benefits of both growth and income investing, we recommend the “bucket” approach to creating an effective retirement investment portfolio. As the name suggests, your investments will fall into one of three categories or “buckets.”

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal. To maximize your return over time you will need to diversify these holdings.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend “owning your age” in bonds. When you are in your 30’s, bonds should make up 30% of your portfolio. When you are 50, that percentage should be 50%.

Stocks – This is where growth comes into play. During your working career this bucket will contain mostly shares in companies that have large growth rates, but don’t pay much of a dividend. Think Netflix or Amazon. Ideally, these stocks will significantly appreciate in value over the years. When you retire, you will shift your holdings into income stocks – shares that show some growth but pay a nice dividend. Apple and Disney are good examples. There are several excellent growth ETFs that allow you to tap into the appreciation of a whole basket of companies.

Alternative Income – This smallest bucket holds income-generating assets that are neither stocks nor bonds. This includes real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

While income investing isn’t the only way to saving for the future, in our experience it’s a way to have your “house” provide safety and warmth during your retirement years.

Interested in learning more about investing? Read how an average family retired with 1 million dollars in savings. Download our free eBook on investing here

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 

What Is Growth Investing And Why Should I Care?

The Wela team is big on income investing – buying stocks that pay dividends that can be reinvested to fuel portfolio growth, or taken during retirement to fund your chosen lifestyle.  But we also know there’s more than one smart way to make money in the stock market.

Growth investing is one of those ways.  It’s a powerful tool for investors who are willing and able to commit a portion of their portfolio for a very long term.  This is the exact opposite of day trading or market timing.  There is by definition no quick score in growth investing.  But when a growth investment does pay off -- in its’ own sweet time -- it can be well worth the wait.

Growth stocks are shares in companies that are pouring every resource, including every dollar of profit, into expanding their product or service and generating more revenue.  These are often companies offering new products or up-ending existing segments.  They are battling to break through in the marketplace and/or make themselves indispensable to consumers.  Two perfect examples are Amazon and Netflix.  Both companies prioritize technological advancement and infrastructure expansion over profit in an effort to dominate their categories.  Their success has driven the value of their shares upward over the past two decades.

Related: Just The Basics - 9 Common Ways To Invest

Dividend stocks, on the flip side, are shares in more mature companies that are generating revenues well in excess of their costs and aren’t looking for the next big thing.  Their products need only the occasional tweak (or clever new marketing) and their distribution systems are pretty well set.  Proctor & Gamble, which owns such brands as Tide, Pampers, Charmin and Swiffer, is a perfect example of a growth stock.  Coca-Cola is another.

Not every stock is so easy to categorize.  The Walt Disney Company would seem like a dividend stock since it’s mature, operates in the established family entertainment sector, and pays dividends from its profits.  But Kiplinger’s recently picked Disney as a promising growth stock, saying the company could exceed the average growth of publicly held companies thanks to its aggressiveness in getting into new aspects of entertainment. (And, maybe because billionaire genius Tony Stark, a.k.a. Iron Man, is now on their team.)

Related: 7 Smart Ways To Get Started Investing

Growth investments can help create a diversified portfolio when mixed in with dividend-paying stocks, international stocks and maybe some bonds.  The growth pieces can also provide nice some appreciation as the years roll by.   But don’t go crazy with growth stocks – especially when you see them soaring.  Volatility is part of the growth game – higher potential upside comes with higher risk of downside. Wild swings are part of the ride.  Not long ago, Netflix, a growth company, saw its share value tumble 37% in just two months – and rebound 33% in two-and-a-half months.  By comparison, during a recent rough patch, Procter & Gamble’s shares fell 17% over two months and took seven months to come back 20%

Every conversation you’ve ever heard in the break room about how much money some dude made or lost on a stock?  That didn’t happen with shares of Ford or The Southern Company.   It happened with growth stocks.  And the reason he lost money was probably because he sold his shares when they were on a downward swing.

To repeat: A successful growth strategy is a long-term play.  Choose companies with products or services you believe in – and hold onto those shares through the cyclical ups and downs, just as you would with your retirement accounts.  Attempting to buy and sell these stocks based on their short-term movement will cost you money in either actual losses or in foregone profits from future appreciation of the stock.

A good way to capture the benefits of growth stocks is to invest in a growth fund like a technology ETF that owns shares in prominent hardware, software, and Internet companies.  Buying a fund allows you to rely on expert analysis regarding what companies are most likely to deliver over the long term, and eliminates the stomach churning you are sure to experience if you own a handful of individual growth stocks.

Related: ETFs VS Mutual Funds - Which Is Right For You?

*Follow, Like, and Tweet Us Your Questions and Let us know how we're doing.

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

How To NOT Get Started Investing

Now you know our thoughts on how you should get started investing (see 7 Ways To Get Started Investing), but what are some ways that you should avoid investing when you're just starting out?

Don’t invest before you have an emergency reserve in place

This is part of building a solid financial foundation. Your emergency reserve should be held in a savings account. Having an emergency reserve allows you to worry less about what is happening in the markets if an emergency suddenly occurs. You don’t want to be in a position where your investment portfolio is down and you need cash due to an emergency. The keys to investing are to invest over the long term and not try to time the markets. Markets go up AND down. You don’t want to take a loss on your investment portfolios because you didn’t adequately plan. 

Related: The Savings Hierarchy: How to Effectively Prioritize Your Savings

Don’t invest in businesses you don’t understand

The likes of Warren Buffett and Peter Lynch (two of my favorites) have lived by this investing philosophy forever, and it has worked quite nicely for them. Too many people read about different companies or hear financial media talking about company "XYZ" on television and decide to invest in that stock. All without completely understanding how the company makes money.

Related: 8 Books You Should Read To Be A Better Investor

Coca-Cola and Home Depot are companies that we all can understand. When we buy a Coke at the store, that goes to Coca-Cola making money. The more of those red cans they sell the better off the company is (and thus my investment). On the other hand, you have companies like Ensco (nothing against it) which financial talking heads seem to always praise, but which most people have never heard of before, don't know what they do, or how they make money. This all adds up to mean that despite what the financial talking heads say, it probably shouldn’t be your first investment ever.

Don’t invest based on your neighbor's hot stock tip (unless your advisor is your neighbor)

These stock tips sound intriguing but tend to not fare well. Well actually, any hot stock tip, doesn’t tend to be so hot. Remember, your neighbor doesn’t know your financial situation. He won’t know what your goals are, how much you are trying to save for retirement in order to generate a comfortable income stream for you. And he doesn’t know what your allocation already is. Make sure that you take advice from someone that has a complete picture of your current financial situation and what your financial goals are. And, do you think your neighbor will care if you lose money in the hot stock? Probably not. So why take advice from someone who doesn’t care about your outcome?

Related: Wela's Hot Stock Pick

Don’t invest in just a single stock or bond

A key to successful investing is to have a diversified portfolio. Having an individual stock or bond isn’t deemed a diversified portfolio. Owning a single ETF or low-cost index mutual fund would be considered a more diversified portfolio. When investors try to invest in just one or two individual stocks or bonds, we call that putting all your eggs in one basket.

The problem with putting all your eggs in one basket is that if that basket falls and your eggs crack, you are left with no eggs. If you have multiple baskets, though, you may still be able to make an omelet or some scrambled eggs with the eggs from the other baskets. The same holds true for your investments. You could be left with nothing if you invest in just one security. You are at least giving yourself a chance of making some money by diversifying within multiple securities.  

Related: Why You Should Own Your Age

Don’t invest when your goals aren’t aligned with your advisor's interest

This goes more towards the individual who wants an advisor to help with them with their investment allocation. You will want to make sure you understand how your advisor makes money.

One option: They can make money via commissions, buying and selling investments… this may not be in your best interest.

Another option: They could charge a fee for the investments they manage (i.e. if you invest $50,000 and the advisor helps manage that money, they would receive a fee based on that amount). If the amount grows the amount the advisor makes goes up, if the amount falls the amount the advisor makes goes down. This is called fee-only, and Clark Howard is a fan.

Finally, advisors may charge a fee on the investments they manage, along with earning a commission on the investments they buy and sell for you. This is called fee-based.

Make sure to utilize an advisor that you believe has your investing goals ahead of their own.

Now that you know how Not to Invest, and 7 ways to get started invested, check out our blog on how to invest with limited funds.

What The Finance Is The Draw Of Las Vegas!?

whatthefinanceisthedrawoflasvegas This week Matt and Eddie are talking about Vegas, baby! The guys are exploring the history and rise in popularity of this iconic city.

First, the guys discuss "Bugsy" Seigel, Las Vegas' gangster founder who ushered in the golden age of Vegas. While Bugsy might be a crook, Matt and Eddie agree that he had a great investment strategy.

Then Matt and Eddie dive into the perceived value of Las Vegas. Is this city really that great?

Interestingly enough, Las Vegas can actually teach us all about a smart investing strategy. No, we're not talking about putting all your chips on your favorite number. They have a good strategy for how to not get caught with your pants down.