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.

Thinking Outside The Stock Market With Alternative Investments

The stock market is the best way for most people to build wealth over time.  Despite regular dips, its value has moved steadily upward for 100 years. But stocks aren’t the only effective investment vehicle, of course.  There are several asset categories that can provide nice appreciation and/or income.

When considering these alternatives, use the same rules that apply to your stock market investments:

  • Stay diversified. Over-investing in one alternative asset category could damage your entire portfolio if things go sideways.
  • Don’t be a lemming.  Following the “hot trend” can lead to diminished returns and increased risk, especially if you are tempted in over-invest.
  • Check your emotion. Some alternative investments, including real estate and collectibles, can play on your personal wants, desires and tastes.  Remember: You are buying that house, wine or comic book for one reason, and one reason only:  Make. Money.

Alternative #1: Real estate – This is the first non-stock investment many people consider.  During the pre-2008 go-go years of easy mortgages, it seemed everyone but you was flipping houses or owned three rental properties.  It is still possible to generate a nice return on residential real estate, but there are considerable risks, too.  If you get stuck holding a house for several months that you had planned to quickly flip, the carrying costs could devour a huge portion of your profits.  One terrible tenant in a rental property can do the same thing.

Anyone considering real estate as an investment should do a ton of research and develop some decent expertise before signing a mortgage.  An alternative is to hire professionals to help select, fix-up and/or manage your properties.  That expertise doesn’t come cheap and needs to be factored into your business plan.

Related: Have Some Street Sense When Deciding Whether To Sell Or Rent Out Your House

Alternative #2: Precious metals -- Many people like to hold physical assets.  Gold and silver are the most popular to own because of their universal value and easy of storage.  Well, that and the relentless cable TV advertising that makes it sound like we’re on the verge of an economic collapse that will lead to a “Walking Dead” type world where gold is king.

You can acquire gold or silver as ingots, coins or jewelry and toss it your safety deposit box.  Yes, precious metals do store value nicely, but they really aren’t a great way to grow wealth, and there really isn’t an efficient market for liquidating such holdings. What’s more, when you buy an ingot from that guy on TV, or a gold necklace, you are paying retail and paying for more than just the value of the metal.

Related: Treat Yo Self With Appreciating Assets

Alternative #3: Collectibles – Wine, art, vintage cars, historic memorabilia, comic books.  These are just a few of the collectible assets that have shown reliable growth over the years.  Success in this area requires deep knowledge of the category to choose wisely and avoid getting scammed. You also need significant money to play meaningfully in this arena.  Investing in two or three bottles of wine is like buying just a handful of Apple share.  Nice, but probably not life changing.  And, again, you must keep the emotion out of these investments.  You may not be a Donald Duck fan, but one of his comics is up 16% in value year-to-year.

Related: [PODCAST] What The Finance Is Up With Investing In Wine!?

Alternative #4: Peer-to-peer lending -- Online companies like Lending Club and Prosper can match you with businesses and individuals looking for loans.  An Atlanta company called Groundfloor allows small investors access to private real estate deals.  If all goes well, you get a higher return than you’d earn from, say, a money market account, and the borrower gets a lower rate than a bank would charge.

Be careful with this category.  Remember that many candidates are seeking P2P lending because they couldn’t qualify for traditional financing.  Dig deep before you write a check.

Bonus: Treasury bonds – Since you have read this far, you deserve a bonus alternative. This low-risk alternative investment sits at the opposite end of the spectrum from investing in Ferraris, or lending $10K to three college kids who are developing an app that will allow pizza places to bid for you next order.  Treasury bonds don’t pay much interest, currently about 2.5%, but they carry nearly zero risk.

All of these investments can add value and diversity to your portfolio.  But as I noted up top, the plain ol’ vanilla stock market generates wealth like a boss.  Make sure you’re taking full advantage of the market – by, for example, maxing your 401k contribution -- before getting too deep into other investments.

Related: 7 Smart Ways To Get Started Investing

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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.