It’s important to have financial goals when we invest our money. Sometimes we want to invest for the short term. Other times we won’t be touching our principal for a very long time so we can afford to take on more risk. Here are some investment objectives to consider when take the decision to put our money at risk in the financial markets.
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- Income – To generate dividend, interest, royalties, or other income. One purpose of this could be to sustain a comfortable lifestyle in retirement.
- Preservation of Capital – To seek maximum safety and stability for your principal by focusing on securities and investments that has low volatility and risk.
- Growth – To increase the principal value of your investments over a long period of time. Investments in this category will have a higher than average degree of risk.
- Trading Profits – To increase the principal value of investments often in the short run, by assuming substantially higher risk to an investor’s capital.
- Speculation – To substantially increase the principal value of assets by assuming substantially higher risk to an investor’s capital. This is not recommended for most people.
In today’s post we will be focusing on the first objective, which is to create an income plan from our portfolio. The most common reason for wanting to earn investment income is for retirement purposes. However, it can also be used to stabilize household income by providing a separate source of revenue than active income. For example, if I were to lose my full time job but still earn $1,000 a month from my portfolio, then my investments would act as an income cushion so it would give me some wiggle room and options before I find another job. Each case is different but in general, using the 4% rule, to earn $1,000 per month from investments we’ll need a portfolio size of $300,000. Using 4% as a withdrawal rate is a conservative rule of thumb to follow as it will provide a steady stream of funds while also keeping an account balance that allows funds to be withdrawn for future years.
There are many ways to structure an income generating portfolio. According to Billionaire and hedge fund manager, Ray Dalio, using an all weather portfolio should give the investor a steady amount of income while protecting him or her from economic uncertainties. In terms of asset allocation, Dalio claims that an all weather fund should have at least 30% of the money in stocks such as the S&P 500 or other stock index funds. The important thing is to try and keep fees low. Other than that, 15% of the money should be invested in intermediate government bonds such as 5 year U.S. treasuries. Another 40% should be in long term government bonds, and the remaining 15% in commodities such as precious metals. He recommends holding onto about 7.5% of the portfolio in gold specifically. Gold doesn’t produce any yield for the investor, but it does keep its value over the long run which adds stability to the fund.
The reason it’s called the all weather portfolio is because it’s meant to protect the investor from the 4 financial seasons; inflation, deflation, economic growth, and economic contraction (or recession.) This type of asset allocation will not only generate income, but it should also prevent an investor from making poor decisions or mistakes that could have negative consequences. It’s important to think about a portfolio in terms of personal risk tolerance, interest rates, and market conditions as well. So Ray Dalio’s asset allocation of stocks, bonds, and commodities should only be seen as a rough guide. Investors will have to adjust and create a personalized portfolio for themselves.