Thursday, 27 January 2011

Why Income Investing?

Source
'Income Investing' means that the focus of our effort is on maximising the income stream from our savings and investments - but at the same time keeping an eye on protecting the value of our initial capital.

There are many other investment strategies; for example, 'growth' investment would focus on increasing the capital value of the investment (for eventual re-sale): any income generated at the same time is incidental.

There are a number of reasons for focusing on income:
  • it is simple to understand
  • it is (usually) predictable
  • it is easier to manage (and in fact can be left alone for most of the time)
  • it allows a number of different classes of investment to be compared, making for easier 'capital allocation' decisions between different classes of assets.

The income sources that will be dealt with by this blog comes in different forms:
  • interest on the balance in a bank current account (usually variable-rate)
  • interest on a bank savings bond (fixed-rate)
  • dividend payment from a company share (usually growing)
  • annual (or more frequent) payment (or 'coupon') from a government gilt/bond or corporate bond (fixed-rate)

Some of that income will be simple cash, credited back to your bank account, some of it will grow inside a brokerage account that is (hopefully) shielded from tax (e.g. 'Stock & Shares' ISA in the UK or IRA in the US).

What you do with the income is up to you - and will depend on your particular life stage and situation. If you are younger and working, you may choose to re-invest the income; if you are older and no longer working you may want to use the income as a supplement to your pension.

The key point is that you are focusing on the income and not the capital.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top to ensure that it's right for your specific circumstances.

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