Let me tell you a little about what has formed my own DIY Income Investing thought processes.
To start at the beginning, for any investment, the way I look at it is:
Total Return = Capital Gain (or loss) + Income
And what is more, the corollary of this line of thinking is then: ‘well, how much income is really necessary’, which leads - inevitably - to the question ‘how much expenditure is necessary’.
So, taking this approach, it becomes quite easy to steer your way through life financially. Compare your passive (investment) income with your expenditure - current or in retirement - and you have a good indication of your progress towards your financial goal. You can steer your way by either:
- increasing income
- reducing expenditure
- increasing yield
And as regards increasing yield - beware! If you believe that markets are efficient (although somewhat over-excitable) - with some rare exceptions - then the yield on offer is usually a good indication of the risks involved, even if you don’t immediately understand what all the risks are. There are very few ‘free lunches’. High yield goes with high risk - so a defensive attitude is required: diversify!
(A version of this article was published previously on CityWire Money.)
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.