St. Augustine Woman's Journal - Educational Resource to the Women of St. Johns County Since 2009

By Rosa Shala
Shala Financial 

Investing for Income 101

 

June 1, 2017 | View PDF



Shifting your focus to protection and income doesn't mean completely sacrificing growth: it just means no longer making it your top priority, as it likely was in your 30s and 40s. At that age, most people have what I call a "401(k) mindset," or a lump-sum way of thinking. That's where you look at your statement, and if your lump-sum value went up, you'll be in a good mood, but if it went down, you'll be in a bad mood. But after age 50, you no longer have to think solely in terms of your lump-sum-nor should you. I believe you're better off thinking first in terms of income.

Unfortunately, the reason many people fail to make this shift is that they are uninformed or have been misinformed about the world of fixed-income strategies. They may view them as only slightly less risky, but significantly less rewarding, so their attitude is: "It's not worth it." That's especially true in a low-interest-rate environment like the one we're in now because most people believe that when interest rates are low, they must go up, and that when that happens, the value of bonds and other fixed-income securities goes down. While that's basically true, there are two important points these investors should understand. First, with a fixed-income investment like an individual bond, the loss of value is typically only a paper loss because your principal investment is insured by the issuer if you hold the bond to maturity. And second, your income shouldn't change; it is set to be paid through interest or dividends at a fixed amount for the life of the bond, regardless of whether rates overall go up or down. Typically, when I tell people that it's possible to earn 5% interest or dividends annually without the risk of common stock or stock mutual funds, they're shocked. Their own advisor has never told them this, often because he has a stock market-based business model and deals in fixed-income strategies as an afterthought, meaning he's more likely to put his clients in a "murky pool" of mutual funds lacking transparency or a managed portfolio of bond funds.

REAL ESTATE ON STEROIDS

A good analogy for understanding fixed income is to think about investing in speculative real estate versus rental property. With the first, the only way to make money is if the property value goes up and you sell it at the right time-as with a non-dividend stock. With rental property, you're less concerned about the fluctuating value because you have a consistent cash flow from your tenants. The only risk is if someone doesn't renew their lease and the property sits unrented. But, imagine if you could find a tenant who agrees to lease the property for 10 years and then buy it outright at a fixed price after the ten years. That's like a rental property on steroids-and that's basically what an individual bond does! A folksier analogy I like to use is: think of an individual bond like having a chicken. You could eat it, but why would you if it's reliably providing you with eggs? The chicken is your secure principal; the eggs are your income.

One reason people may lack this kind of information about fixed-income strategies is that the financial media and some advisors like to focus only on the more "exciting" and, in many ways, simpler world of stocks and mutual funds. They may even try to scare investors with phrases like "the bursting of the bond bubble." I would argue that anyone using that term today doesn't really understand fixed income. Yes, long-term interest rates have risen recently, impacting bond values, but, like many analysts, I believe low rates overall are now "the new norm." Additionally, even when rates do rise, the bond market never fluctuates as dramatically as the stock market-which is why actively managed fixed-income strategies can potentially strengthen a portfolio against loss, even in a rising interest rate (or "bursting bubble") environment.

So, think about that, and then think once more about how a 30 to 70 percent real loss in the stock market might impact your retirement goals if you should get caught in the next major plunge. Then, ask yourself again (and ask your friends) if making that shift from a growth mindset to a protection and income mindset sounds like it might be "worth it!"

For a frank and informative discussion on managing the risk in your portfolio, contact the office of Shala Financial at 352-207-7920 or rosashala@shalafinancial.com, or register for their next workshop.

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www.ShalaFinancial.com 352-207-7920 • rosashala@shalafinancial.com

THE 10 MOST COMMON MISTAKES RETIREES MAKE WITH THEIR FINANCES

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Thursday, June 29, 2017 6:00PM, Anastasia Island Library

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Client Testimonial:

"I want to thank you for all that you have helped me and advised me with my investments for retirement. When 2 years ago, I was losing money in the wrong investments, you came to help me and changed the whole situation.

Today I'm no longer losing, but yes, adding. Since I started late in age, I do not have more time to lose. I hope that in the future you will be my children's financial advisor too. Once again, thank you for your help with my income tax problems."

- Celia A.

 
 

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