The reason people take on investment risks in the first place is the prospect of achieving a higher “realized” rate of return than is possible in a risk-free environment … i.e. a FDIC-insured bank account with compound interest.
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Over the past ten years, such risk-free savings have been unable to compete with riskier funds due to artificially low interest rates, forcing traditional “mortgagors” to enter the mutual fund and ETF market.
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(Funds and ETFs have become a “new” stock market, a place where individual stock prices have become invisible, questions about the company’s fundamentals are met with empty eyes, and media executives tell us that individuals are no longer in the stock market).
Risk comes in various forms, but the main concerns of a middle-income investor – is “financial”, and when investing for income without proper thinking – “market” risk.
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Financial risk includes the ability of corporations, government agencies and even individuals to meet their financial obligations.
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Market risk refers to the absolute certainty that all marketable securities will experience fluctuations in market value … sometimes more than others, but this “reality” needs to be planned and fought, never feared.
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Q: Is it the demand for individual stocks that drive ETF funds and prices, or vice versa?
We can minimize financial risk by choosing only high-quality (investment grade) securities, properly diversifying and realizing that changes in market value are actually “harmless to income”. With an action plan to combat “market risk,” we can actually turn it into an investment opportunity.
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What do banks do to get the amount of interest they guarantee to depositors? They invest in securities that pay a fixed rate of return regardless of changes in market value.
You don’t need to be a professional investment manager to professionally manage your investment portfolio. But you need to have a long-term plan and know something about asset allocation … often using the wrong and misunderstood portfolio planning / organizing tool.
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For example, the annual “rebalancing” of a portfolio is a symptom of dysfunctional asset allocation. Asset allocation should monitor every investment decision throughout the year, every year, regardless of changes in market value.
It’s also important to recognize that you don’t need high-tech computer programs, economic scenario simulators, inflation estimates, or stock market forecasts to properly match your retirement income.
You need common sense, reasonable expectations, patience, discipline, soft hands and an oversized driver. The “KISS principle” should be the foundation of your investment plan; the compound yields an epoxy resin that keeps the structure safe during the development period.
In addition, focusing on “working capital” (as opposed to market value) will help you go through all four major portfolio management processes. (Business majors, remember PLOC?) Finally, a chance to use what you learned in college!
Retirement planning
Retirement Income Portfolio (almost all investment portfolios eventually become retirement) is a financial hero who appears on the scene just in time to fill the income gap between what you need to retire and guaranteed benefits that you will receive from your uncle and / or past employer.
How powerful the superhero power is, however, does not depend on the size of the amount of market value; in terms of retirement, it’s the income earned inside a suit that protects us from financial villains. Which of these heroes do you want to top up your wallet?
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A million-dollar VTINX portfolio that yields about $ 19,200 in annual costs.
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A CEF portfolio with a well-diversified million-dollar income that yields more than $ 70,000 annually … even with the same distribution of capital as the Vanguard Fund (just under 30%).
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A million-dollar portfolio of GOOG, NFLX and FB that doesn’t give out money at all.
I’ve heard that 4% raising from a retirement income portfolio is about normal, but what if that’s not enough to fill your “income gap” and / or more than the amount the portfolio produces. If both of these “what ifs” turn out to be true … well, that’s not a pretty picture.
And it gets more disgusting pretty quickly when you look at your real portfolio of 401k, IRA, TIAA CREF, ROTH, etc. and understand that it does not bring even about 4% of the actual income spent. Full return, yes. Realized expenditure income, ‘I’m afraid not.
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Sure, your portfolio has been “growing” in market value over the last ten years, but probably no effort has been made to increase the annual income it generates. Financial markets live on market value analysis, and as long as the market grows every year, we are told that everything is fine.
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So what if your “income gap” is more than 4% of your portfolio; what to do if your portfolio produces less than 2% as a Vanguard Retirement Income Fund; or what if the market stops growing by more than 4% a year … while you are still depleting capital by 5%, 6% or even 7% ???
A less popular (only available in selected portfolios) approach to a closed-end income fund has been around for decades and covers all “what if”. They combined with investment grade equities (IGVS) have the unique ability to take advantage of market value fluctuations in any direction, increasing portfolio returns with each monthly reinvestment procedure.
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Monthly reinvestment should never be a DRIP (dividend reinvestment plan) approach, please. Monthly profits should be pooled for selective reinvestment, where you can get the most profit. The goal is to lower the share price and increase the return on positions … with one click.
The retirement income program, which focuses only on rising market value, has been doomed from the start, even at IGVS. All portfolio plans require a profit-oriented asset allocation of at least 30%, often more but never less. All individual security purchasing decisions must support an operational asset allocation plan “growth target versus revenue target”.
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The “Working Capital Model” is an automated pilot asset allocation system that has been tested for more than 40 years, which largely guarantees the growth of annual income when used properly with a minimum profit distribution of 40%.
The following points apply to an asset allocation plan with individual taxable and deferred tax portfolios … rather than 401,000 plans because they usually cannot generate adequate income. Such plans should be distributed with maximum certainty within six years of retirement and submitted to a personally managed IRA as soon as possible.
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The distribution of “profit” assets starts with 30% of working capital, regardless of the size of the portfolio, the age of the investor or the amount of liquid assets available for investment.
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Starting portfolios (less than $ 30,000) must not have an equity component and no more than 50% before reaching six-figure figures. From 100 thousand dollars (up to 45 years) to 30% of income is acceptable, but not particularly income-generating.
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At age 45, or $ 250,000, move toward a 40% income target; 50% over the age of 50; 60% at the age of 55 and 70% of securities intended for income starting at age 65 or retirement, whichever comes first.
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The revenue side of the portfolio should be maximized, and all asset allocation determinations should be based on working capital (i.e. based on portfolio value); cash is considered part of equity or “growth goal” distribution.
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Equity investments are limited to seven years of experienced CEF and / or “investment-grade stocks” (as defined in the book “Brainwashing”).
Even if you are young, you need to quit smoking and develop a growing income stream. If you continue to grow income, the growth of market value (you have to worship it) will take care of itself. Remember that a higher market value can increase the size of the hat, but it doesn’t pay the bills.
So here’s the plan. Identify your retirement salary needs; start your investment program with a focus on profits; add stocks as you age, and your portfolio will become more significant; if retirement is approaching or the size of the portfolio becomes serious, make the distribution of your income serious too.
Don’t worry about inflation, markets or the economy … asset allocation will allow you to move in the right direction, while it focuses on increasing your income every year.
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This is a key point of the whole “retirement income” scenario. Each dollar added to the portfolio (or earned by the portfolio) is redistributed according to the distribution of “working capital” assets. If the income distribution exceeds 40%, you will see that profits magically grow every quarter … no matter what happens in the financial markets.
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Note that all IGVS pay dividends, which are also divided according to the distribution of assets.
If you’re no more than ten years of retirement age, a rising income stream is exactly what you want to see. Applying the same approach to your IRAs (including a 401,000 carryover) will bring in sufficient income to pay the RMD (required mandatory allocation) and will give you the opportunity to say without reservation:
Neither a stock market correction nor an increase in interest rates will have a negative impact on my retirement income; in fact, I will be able to increase my income even better in any environment.