Thursday, July 5, 2012

Pitfalls of Fixed Income!

Retirees and pre retirees with conservative investing philosophies tend to invest at least part of their portfolios in fixed income


Brokerages have entire departments committed to fixed income.   Read any financial publication today and you will see stories of people pouring money into fixed income.

What is wrong with this?

The problem with fixed income is it is fixed.   If you put all your money in an instrument with fixed income what are you going to do in 10 years when the price of almost everything is going to be more than it is today?

When selecting an instrument with fixed amounts of income, be sure to take into account the maturity of the instrument.   Ladder those maturities so that if interest rates go up you can periodically redeem those instruments and reinvest them at higher yields.

Clearly fixed income usually is the safest of the group of income instruments and you should hold individual instruments (not bond funds as this blog has told you before) for part of your portfolio.  However, you have to consider equities as a source of income.  Because you want increasing income to keep up with the inevitable increases in your cost of living,

Using traditional measures of inflation suggest inflation is not a problem today.   While wages and the price of milk are not going up; taxes on dining out, homeowners’ fees and other service costs are increasing.

Selecting the right equities (using the criteria outlined in this web/blog) will give you increasing income not just fixed income.   Many companies have increased their dividends every year for years.  

An even better technique is to buy income equities during periods of time when you do not need all the income.  Then you can reinvest the dividend; buying more and more shares of the stock sometimes at a discount to your original purchase.  

When you turn on that spigot for cash flow, your dividend cash flow will be higher than you expected when you bought your original shares.   

An even better result occurs when you reinvest dividends and the company increases dividends.   You will be totally surprised at the enhanced income when you broaden your horizons about fixed income and consider equities as an opportunity to buy increasing income.

Start today.  Be not afraid to purchase those first shares.  Look at the 2011 dividend machines list and you will find that randomly buying 100 shares of a dividend machine every week or so, without regard to the stock market’s value, can yield a well diversified source of steady income that increases every year.

Very Truly Yours,

TheMoneyMadam
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