{"id":372,"date":"2019-01-13T07:41:16","date_gmt":"2019-01-13T07:41:16","guid":{"rendered":"http:\/\/forefrontnews.cn\/finance2news\/?p=372"},"modified":"2019-01-13T07:41:16","modified_gmt":"2019-01-13T07:41:16","slug":"dont-just-invest-for-income-its-total-return-that-matters","status":"publish","type":"post","link":"http:\/\/forefrontnews.cn\/?p=372","title":{"rendered":"Don’t just invest for income – it’s total return that matters"},"content":{"rendered":"

In this series we are looking at the issues surrounding investing for income and how it can be used to increase the money you have to spend or grow your wealth.<\/p>\n

In the first part\u00a0James Norton, senior investment planner at Vanguard, looked at the basics of dividends, bonds and interest.\u00a0<\/p>\n

In this instalment, he explores the different sources of income you may have, the distinction between investment income that helps to build your savings, and the income you receive in retirement.<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n

Gains made from investment portfolios serve as an integral part of your income at retirement\u00a0<\/p>\n

Why it’s not just about income – growth matters too<\/h2>\n

The traditional route many investors have taken when managing a portfolio for income has been to buy a number of UK equity income funds\u00a0and balance this with some fixed interest bonds funds to reduce the risk and top the income up.<\/p>\n

The idea being that the income from these combined investments could then be spent and the investments would be left to grow.<\/p>\n

However, this is the wrong approach for most people. In fact, despite the title of this series, the whole concept of investing for income is flawed. Here’s why.<\/p>\n

Assume Bob has a portfolio of \u00a3250,000 and he needs income of \u00a312,500 a year, which works out at 5 per cent of his portfolio value.\u00a0<\/p>\n

Should he care about how he gets that? Does it matter if all of it comes from income, capital growth or a combination of the two?<\/p>\n

Provided the portfolio generates the required return of 5 per cent he should be happy. In fact, given that capital gains receive a more favourable tax treatment than income, there\u2019s an even stronger argument not to focus on income.\u00a0<\/p>\n

The crucial thing is that the portfolio generates a sufficient total return, the combination of income and capital growth, so that Bob does not run out of money.\u00a0<\/p>\n

Why are we so fixed on income?\u00a0<\/h2>\n

Why are so many of us fixated on income?\u00a0<\/p>\n

The reason is simple. When we come to retire, most people find it very hard to contemplate spending capital.\u00a0<\/p>\n

\"Free<\/p>\n

When we retire, we are faced with the fact that we\u2019re not earning money any more, just spending it. And that causes a capital-preservation instinct to kick in. We can no longer make the losses back through earned income.\u00a0<\/p>\n

The result is an unhealthy fixation on making sure the portfolio generates a high income so we don\u2019t have to touch the capital.<\/p>\n

So, while income is an important part of the overall return a portfolio generates, we should not be fixated on income.\u00a0<\/p>\n

We all need money to spend in retirement, but our primary concern should be the total return our portfolio produces, not the income it generates.<\/p>\n

In the earlier example, what use would an income of 5 per cent have been to Bob, if the portfolio\u2019s value fell by 6 per cent?<\/p>\n

Next time:\u00a0In part 3 we are going to look more at the risks of chasing yield and some common traps that investors fall into.<\/p>\n","protected":false},"excerpt":{"rendered":"

In this series we are looking at the issues surrounding investing for income and how it can be used to increase the money you have to spend or grow your… <\/p>\n","protected":false},"author":1,"featured_media":373,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[257],"tags":[169,31,199,27,198],"views":91,"_links":{"self":[{"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=\/wp\/v2\/posts\/372"}],"collection":[{"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=372"}],"version-history":[{"count":0,"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=\/wp\/v2\/posts\/372\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=\/wp\/v2\/media\/373"}],"wp:attachment":[{"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=372"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=372"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/forefrontnews.cn\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=372"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}