First step in investing
Posted on January 22, 2013 by admin
Maybe this year you want to start investing because it is something you know you should do. What next?
Here is some beginning advice to help you and it is a smart thing to do.
Do you need to build a portfolio that will generate cash? Are you more concerned with paying your bills and having enough income than growing richer? If so, you need to focus on something called income investing.
This long-lost practice used to be popular before the great twenty-year bull market taught everyone to believe that the only good investment was one that you bought for ten dollars and sold for twenty. Although income investing went out of style with the general public, the discipline is still quietly practiced throughout the mahogany paneled offices of the most respected wealth management firms in the world.
The art of good income investing is putting together a collection of assets such as stocks, bonds, mutual funds, and real estate that generates the highest possible annual income at the lowest possible risk. Most of this income is paid out to the investor so he or she can use it in their everyday lives to buy clothes, pay for the mortgage, take vacations, cover living expenses, give to charity, or whatever else they desire.
Today, with the pension system going the way of the dinosaur and the wildly fluctuating 401(k) balances plaguing most of the nation’s working class, there has been a surge of interest in income investing and how you can structure your assets to bring in passive income. This is probably the best reason to start looking at investing in a variety of ways though income investing is the best.
The rule of thumb for income investing is that if you never want to run out of money, you take 4% of your account balance out each year. This is commonly referred to on Wall Street as the 4% rule. (Why 4%, you ask? If the market crashes, 5% has been shown in academic research to cause you to run out of money in as little as 20 years, whereas 3% virtually never did.)
When you put together your income investing portfolio you are going to have three major “buckets” of potential investments. These are:
Dividend Paying Stocks: This includes both common stocks and preferred stocks. These companies mail checks for a portion of the profit to shareholders based on the number of shares they own. You want to choose companies that have safe dividend payout ratios, meaning they only distribute 40% to 50% of annual profit, reinvesting the rest back into the business to keep it growing. In today’s market, a dividend yield of 4% to 6% is generally considered good.
Bonds: Your choices when it comes to bonds are vast. You can own government bonds, agency bonds, municipal bonds, savings bonds, and more. Whether you buy corporate or municipal bonds depends on your personal taxable equivalent yield. You shouldn’t buy bonds with maturities of longer than 5-8 years because you face duration risk, which means the bonds can fluctuate wildly like stocks in response to changes in the Federal Reserve controlled interest rates.
Real Estate: You can own rental property outright or invest through REITs. Real estate has its own tax rules and some people are more comfortable with it because it naturally protects you against high inflation. Many income investing portfolios have a heavy real estate component because the tangible nature lets those living on an income investing portfolio drive by the property, see that it still exists, and reassure themselves that even if the market has fallen, they still own the deed. Psychologically, that can give them the needed peace of mind to hang on and stick to their financial plan during turbulent times.
There you have it..start with income investing and you are off to a great start!
Leave a Reply