Managing the Income Portfolio

The reason people assume the risks of investing in the first place is the prospect of obtaining a higher return than is attainable in a risk free environment ... i.e., an FDIC insured bank account. Risk comes in various forms, but the average investor's main concerns are "credit" and the "market" risks ... especially when it comes to investing for income. Credit risk includes the ability of businesses, public entities and even individuals, to fill their financial obligations, market risk refers to the certainty that there will be changes in the market value of the selected securities. We can minimize the former by selecting only high quality (investment grade) securities and the latter by diversifying properly, understanding that the market value changes are normal, and by having a plan for dealing with such fluctuations. (What does the bank for the amount of interest, it guarantees to depositors, what makes it in response to higher or lower market interest rate expectations?)

You do not need to be a professional Investment Manager to professionally manage your investment portfolio, but you need to have a long term plan and learn about asset allocation ... a portfolio organization tool that is often misunderstood and almost always incorrectly applied within the financial community. It is important to recognize all that you do not need a fancy computer program or a blank presentation with economic scenarios, inflation estimators, and stock market projections to get yourself lined up properly with your target. You need common sense, reasonable expectations, patience, discipline, soft hands and an oversized driver. KISS principle should be the basis for your investment plan, an emphasis on Working Capital will help you organize and manage your investment portfolio.

Planning for retirement should focus on the additional income needed from the investment portfolio, and Asset Allocation formula [relax, 8th Class mathematics is plenty] needed for goal achievement will depend on just three variables: (1) the amount of liquid investment assets you start with, (2) the time until retirement, and (3) the range of interest rates currently available from Investment Grade Securities. If you do not allow "engineer" gene to take control, this may be a relatively simple process. Even if you are young, you have to stop smoking heavily, and to develop a growing stream of income ... if you hold income grows, the market value growth (which you are expected to worship) will take care of itself. Remember, higher market may increase hat size, but it does not pay bills.

First deduct any guaranteed pension income from your retirement income goal to assess what is required from the investment portfolio. Do not worry about inflation at this time. Next, determine the total market value of your investment portfolios, including the company's plans, IRAS, H-bonds ... Everything except the house, boat, jewelry, etc. Liquid personal and pension assets alone. This figure is then multiplied by a number of reasonable interest rates (6% to 8% right now) and hopefully one of the resulting numbers to be close to the target amount you came up with a moment ago. If you are within a few years in retirement, the better! For some, this process gives you a clear idea of where you stand, and that in and of itself, is worth the effort.

Organizing the Portfolio involves deciding upon an appropriate Asset Allocation ... and it requires some discussion. Asset Allocation is the most important and most misunderstood concept in the investment lexicon. The most fundamental of confusion is the idea that diversification and asset allocation are the same. Asset allocation divides the portfolio into two basic types of investment securities: Stocks / Shares and bonds / income securities. Most Investment Grade securities fit comfortably in one of these two classes. Diversification is a risk-reduction technique that strictly controls the size of individual holdings as a percentage of total assets. A second misconception describes Asset Allocation as a sophisticated technique used to soften the bottom line impact of movements in equity and bond market prices and / or a process that automatically (and foolishly) moves investment dollars from a weakening asset classification to stronger .. . a subtle "market timing" device.

Finally, the Asset Allocation Formula is often misused in an attempt to superimpose a valid investment planning tool on speculative strategies that have no real basis of their own, for example: annual portfolio repositioning, changing market timing adjustments, and Mutual Fund. The Asset Allocation formula itself is sacred, and if constructed properly, should never be modified because of the conditions in either shares or Fixed Income markets. Changes in personal circumstances, goals and objectives for the investor is the only issue that will be allowed in the asset allocation decision.

Here are a few basic Asset Allocation Guidelines:

(1) All asset allocation decisions are based on the cost basis of those securities. The current market may be more or less, and it just does not matter.

(2) Any investment portfolio with a cost basis of $ 100,000 or more must have at least 30% invested in income, whether taxable or tax-exempt, depending on the portfolio. Deferred tax entities (all varieties of retirement programs) should house the bulk of equity investments. This rule applies from age 0 to pensionable age - 5 years. During 30 years, it is a mistake to have too much of your portfolio in return.

(3) There are only two asset allocation categories, and it is never described with a comma. All cash in the portfolio is destined for one or other category.

(4) From the age of retirement - 5 on the allocation of resources must be adjusted upward until "a reasonable interest test," says you are on target or at least within reach.

(5) At retirement, may between 60% and 100% of your portfolio should be in income-generating Securities.

Controlling or implementing the investment plan would be best done by those who are least emotional, most decisive, naturally calm, patient, is generally conservative (not politically), and updated itself. Investing is a long, personal, goal-oriented, non-competitive, hands on, making that does not require advanced degrees or a rocket scientist IQ. Actually be smart, can be a problem if you have a tendency to analyze things. It is useful to establish guidelines for the selection of securities, and for disposing of them. For example, limiting equity participation to investment grade, NYSE, dividend paying, profitable, and widespread enterprises. Do not buy any stock unless it is down 20% from its 52 week high, and limit individual equity holdings to less than 5 % of the total portfolio. Take a reasonable profit (using 10% as a goal), as often as possible. With a 40% allocation of revenue, 40% of profits and dividends to be allocated income securities.

For Fixed Income, a focus on Investment Grade securities, with above average but not "highest in class" yields. With variable income securities, avoid buying near 52-week highs, and keep individual holdings, and less than 5%. Keep individual preferred shares and bonds well below 5% as well. Closed End Fund positions may be slightly higher than 5%, depending on type. Take a reasonable profit margin (more than a year of income for starters) as soon as possible. With a 60% equity allocation, would 60% of profits and interest will be devoted to stocks.

Monitoring ROI Wall Street way is inappropriate and problematic for targeted investors. It deliberately focuses on short-term movements and uncontrollable cyclical changes, which produces a constant disappointment and encouraging inappropriate transactional data response to natural and harmless events. Along with a Media that thrives on sensationalizing anything outrageously positive or negative (Google and Enron, Peter Lynch and Martha Stewart, for example), it becomes difficult to stay on track with a plan as environmental conditions change. First greed, then fear, new products replacing old, and always the promise of something better, when in reality the boring and old-fashioned basic investment principles still get the job done. Remember, your unhappiness is Wall Street's most coveted asset. Do not humor them and protect yourself. Base your performance evaluation efforts to achieve goals ... Yours, not theirs. Here's how, based on the three basic goals that we have talked about: Growth of Base Income, Profit Production from Trading, and overall growth in working capital.

Base income includes dividends and interest earned on your portfolio without the realized capital gains, which actually should be the larger number of much of the time. No matter how you slice it, your long-range comfort demands regularly increasing income, and using your total portfolio cost basis as a benchmark, it is easy to decide where to invest your accumulating cash. Since a portion of every dollar added to the portfolio is reallocated to income production, you are guaranteed to increase the total year. If market value is used for this analysis, you pour too much money in a falling stock market at the expense of your long-range income objectives.

Surplus production is the happy face of market value volatility, there is a natural attribute of all securities. To realize a profit, you should be able to sell the securities that most investment strategists (and accountants) want you to marry! Successful investors learn to sell those they love, and the more times (yes, short term), the better. This is called marketing and it is not a four-letter word. When you can get yourself to the point where you think about the securities you own high-quality inventory on the shelves in your personal portfolio boutique, you have come. You will not see Walmart stretched at higher prices than their standard markup, and nobody should you. Reduce the markup on slower movers, and sell damaged goods, you have kept too long at a loss if you are, and, in the thick of it all, try to anticipate what your standard is the Wall Street bank statement will show you ... a portfolio of shares, which have yet to reach their profit targets and are probably in negative market area, because you have sold the winners and replaced them with new inventory ... compounding the earning power! Also you will see a diverse group of income criticized for following their natural tendencies (this year) to lower prices, which will help you increase your portfolio yield and overall liquidity. If you see a large plus sign, you are not properly manage the portfolio.

Working capital growth (total portfolio cost basis) just happens, and to an extent which will lie somewhere between the average return on interest-bearing securities in the portfolio and the total realized gain on the equity portion of portfolio. It will actually be higher with larger Equity allocations because frequent trading produces a higher return than the safer positions in the allocation of resources. But, and it is too large, but to ignore as you approach retirement, trading profits are not guaranteed and the risk of loss (although minimized with a sensible selection process) is greater than it is to return. This is why asset allocation moves from a higher to a lower equity percentage as you approach retirement age.

So is there really such a thing as an income portfolio to be managed? Or are we really just dealing with an investment portfolio that needs its Asset Allocation tweaked occasionally as we approach the time in life when it has to offer yacht ... and gas money to drive it? By using the cost basis (working capital) as the number that needs growing, by accepting the trade as an acceptable, even conservative approach to portfolio management and by focusing on increasing income instead of ego, this whole retirement investing thing becomes significantly less scary . So now you can focus on changing tax laws, reducing health care costs, saving Social Security, and spoiling the grandchildren.