Investors — especially 401(k) and other retirement investors — are often presented with investment choices that juxtapose growth versus income. Growth, the theory goes, should be the main focus of longer-term investing, especially for younger retirement investors. And, it’s assumed that this growth should be attained through equity investments — stocks that have the potential to appreciate dramatically in value over the 10, 20 or 30 year period until the investor needs to cash out.
Income investing, on the other hand, is assumed to be for more conservative investors — typically those closer to retirement. Conventional wisdom about income investing is that returns are relatively lower than those from growth investments in stocks, but they’re coupled with less risk, since income is usually generated from bonds and low interest/low risk investments like money market funds.
This notion of two schools of investing — and the idea that you just choose the right blend for your age — is an oversimplification. It may make it easier to decide which fund among your company’s 401(k) options, but, if guides your philosophy for your entire portfolio, it may also lead to suboptimal results. Here’s why:
(1) Income IS growth
Income increases your portfolio value just as surely as stock price appreciation does. What’s more, it creates new funds that can be immediately reinvested — compounding the value of the investment income. Misunderstanding this fact can mean missing out on significant growth in wealth.
(2) Income growth doesn’t have to be substantially lower than stock performance
Long-term growth from the stock market has historically averaged from 5-12%, depending on whose analysis you accept. Fixed income investments, on the other hand, are assumed to deliver well under 5% over the long haul.
However, income investments exist that deliver much more impressive returns than money market funds or muni bonds — if you look beyond the public markets. For example, the trust deed investments offered by Sterling Pacific Financial (and many other reputable firms) can deliver returns that match the most aggressive long-term stock market projections. And, because they are secured by real estate, they can be much less risky than equities.
Trust deeds aren’t the only income-producing investment that has been omitted from the traditional growth-versus-income analysis. Income producing real estate, for example, can also be a significant contributor to portfolio value and generate cash that can be reinvested.
(3) Equity growth is not just appreciation — it’s income, too
The most aggressive estimates of the long-term growth of the stock market always include the contribution of dividends to overall market (or index or portfolio) value. And, of course, dividends are income!
(4) As Keynes said: In the long run, we are all dead
Quoting John Maynard Keynes has become a bit more fashionable in these days of expanded fiscal stimulus — but, regardless of how you feel about the fiscal-versus-monetary-policy debate, it’s hard to argue with Keynes’ assessment of our long-term prospects for survival. And, that has implications for investing.
The notion of statistical growth over the long-run is a key reason stocks have been so heavily favored during the 401(k)-driven boom in retirement investing we’ve experienced over the past 20 years or so. The problem is, what is expected to happen over the long-run might not be what happens to your portfolio, depending what happens during the particular years you’re invested in the market. Most important, timing can be cruel (just ask anyone who planned to retire in 2008, 2009 or 2010 — or, worse, anyone who has already retired and is drawing down their portfolio).
Bottom line: it just makes good sense to look for ways to generate income now — without counting on a long-run that might being longer than you want to wait or can tolerate. The good news is, there are ways to invest for income that will grow your portfolio as impressively as the stock market. You will have to do a bit more homework, though: since this often means investing outside the public markets, you can’t rely on the mainstream financial press — which focuses almost entirely on the stock market — to give you the information you need.