Financially Fit & Fabulous - Investing for IncomeMonday, May 10, 2021
THERE are only two income sources – you at work or money at work for you. Between 25 and 65 it is important that you are channeling your income, in a disciplined way, into investments that will serve you in later years. Investing is critical to wealth creation as it will be difficult for you to amass a large net worth with just your regular savings. Making the right decision about how to invest and where to invest are equally important.
Before making any major investing choices, you first need to think about what you expect to gain from your investments. Do you want your investments to grow significantly over time, or is it more important for you to realise immediate gains from investing your money?
While investing is definitely an important route to accumulate wealth for the future, there are several reasons why you may also need to invest towards short-term goals or to satisfy your cash flow requirements. Let's look at some of the benefits of investing for income:
Supply retirement income
One reason to own investments which supply income is to ensure that there is a steady stream of cash to cover your retirement needs. Sometimes your pension payments may not take care of all your expenses when you're retired, so these investments can help to boost your cash flow. There are collective investment schemes, example mutual funds and unit trust products that are designed with an income generating feature that can provide an income stream which can be used offset your living expenses during retirement.
Supplement working income
You don't have to wait until you're retired to benefit from your investment income. Placing a lump sum on a short-term income-generating investment can provide you with regular cash flow to help cover your regular bills, or a periodic amount to take care of expenses such as school fees.
Reinvest to build wealth
Another reason to invest for income is that you can reinvest the earnings from your investments. Instead of just using your working income or other personal sources of funds to purchase investments, you can utilise your returns to buy additional units or to invest in other options. This is compounding effect. Compounding is the process by which an asset's value increases as the earnings (which can include capital gains, dividends and/or interest) increase over time. This increase is exponential over time because earnings grow on not only the principal but also on the total growth of the investment – as well as the growth on that growth, and the growth on that growth, and so on. When you understand the power of compounding, time is arguably the most important ingredient in the formula for successful investing and the only question you will have is “why didn't I start investing earlier?”
Choose appropriate investments
To ensure that your objective of receiving an income is met, you have to consider investments which are designed to provide cash flow. Some options include money market instruments such as government treasury bills, debt instruments such as bonds, and stocks which pay dividends. Investing and risk are a package deal and so it is recommended that your portfolio a is mix of all available asset classes. Investing success is hinged on managing risk by using time and diversification to your advantage. No single asset class is consistently among the top performers, and the best and worst performers can change form year to year. A diversified portfolio of different asset classes provides the opportunity to participate in potential gains of each year's top asset classes while aiming to lessen the negative impact of those at the bottom.
Understand your options
Money market instruments are ideal for meeting your short-term income needs, while bonds can supply you with a fixed income amount for several years. Stock companies with established dividend payment policies will consistently pay out some of their annual profits to shareholders.
Get expert advice
When making investment decisions, it's always best to consult with a professional who can help you to select the types of investments that will suit your needs. Your goal for investing, appetite for price fluctuations, timeline for investing are important considerations in making an investment decision.
While the goal is always to maximize income with the lowest possible risk, keep in mind that uncertainty is a silent partner in every investment opportunity. This is best managed through diversifying your investment portfolio and resist the urge to try and time the market. An investment portfolio designed to meet your financial needs will experience some level of fluctuations in performance and volatility based on market conditions, but it is important to keep your investment goal in mind and remain invested. Even you started your investment portfolio on the day the economy is experiencing the worst performance, your portfolio can still potentially generate positive results over the long term. This is because the longer you hold an investment, the smaller the impact market highs and lows will have on your total return.
This may feel overwhelming, but that's where a Scotia Investments advisor can help to guide you in designing an investment portfolio that's right for you.
Here are a few questions to discuss with your advisor:
- How can I increase my returns?
- How am I going to achieve my goals/meet obligations?
- How do I cope with the changing local and international economic environments which impact investment risks and returns?
- What is the right investment for me?
When it comes to investing, these principles can help you harness the power of compounding to accelerate the growth of your portfolio.
- Invest early
- Invest regularly through a Pre-Authorized Contribution
- Diversify your investment portfolio
- Stay invested
Schedule an appointment to speak with a Scotia Investments Advisor who will guide you in creating an investment portfolio that's right for you.
Latoya Haylette is a licensed Investment Advisor from Scotia Investments Jamaica Limited.
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