Investors aim to create wealth, but not all have the ability to generate enough income from their investments to fulfil their personal financial goals.
Thinking about squeezing income from investments may make many rethink their financial strategy and help them focus on a more dynamic plan.
All investors need to answer some basic questions before they can build an income-generating portfolio to deliver the money they need.
How much risk?
However, investors will also need to decide how much risk they are willing to take to generate that cash and what it is they want from their portfolio – income now or the ability to grow their investments over time?
They will also need to decide on whether they want access to funds to pay for big, unexpected expenses or whether they want to sacrifice their income to help their investment portfolio grow slower to provide more in the future.
Times are changing and investors would have traditionally opted for buying government bonds to produce income, but today these have low yields – often below the rate of inflation.
Obviously moving cash out of savings accounts and bonds in the search for higher returns will increase risk.
Among the options for investors willing to look for higher returns, are actively-managed equity income funds which will help capital grow by investing in companies which pay higher than average dividends.
Investors looking for high rates of yield could consider corporate bond funds which, relative to other equity funds, offer capital stability and a better prospect of risk management. These will include government and investment grade corporate debt bonds.
It’s also tempting to look overseas in the search for greater investment profits but these will be affected by currency exchange rates.
Overseas bond trap
There’s also an issue that investors should be aware of and that’s when interest rates rise, bond markets drop in value.
Compound that with investing in overseas bonds and there is a credit risk attached- in that the issuer of the bond may not have the cash to repay the investment or even the interest.
The other important issue about the bond market is that while it offers a great opportunity of making higher returns on a fixed investment, there are problems that in extreme market conditions the liquidity will be affected significantly – and without warning – which means it will be more difficult to realise your investment.
The bottom line is that investors should decide on their higher yielding investment strategy and discuss it with their financial advisor.