Sometimes an income investor wants to determine how much money they're going to make.
This can be especially true of young and retired investors.
People Want to Know the Future so They Can Plan for It
Young investors need some motivation and want to look forward to a certain amount of money by a certain age. Maybe they've received a substantial inheritance and want to retire early.
Retired investors and income investors fast approaching retirement want to have a concrete idea of their post-work income so they can plan a budget.
Young people who invest for income have the excuse of youth and inexperience. Older people should know better.
Unfortunately, the Future is Not Predictable, Especially in Investing
As the government forces advertisers to explain -- but unfortunately it's widely ignored instead of taken as gospel as it should be -- past performance does not guarantee future results.
I've seen other financial experts advise people that if they want big returns in the future, buy up some risky stocks.
Frankly, when it comes to market price, all stocks are risky. It is true that some go up (and down) more than or less than the market as a whole. Financial professionals call this risk.
I call it volatility that should be ignored by people investing for income.
However, if you're aiming to grow your stock portfolio's market value, it is a risk. When you want to sell, stocks may not be at the price you want them to be.
Both Stock Growth and Stock Dividends Cannot Be Controlled or Predicted
Some stocks are riskier than others, but that doesn't mean they'll grow on schedule. The current Dow Jones figure was first reached in spring of 1999, meaning it's gone nowhere for nearly eleven and a half years.
When you invest in stocks that pay dividends, you can determine their current pay out. You cannot determine how much they will pay per share next year or in five, ten or twenty years. However, in general a good, diversified selection of companies that provide basic needs will at least keep up with inflation.
Bond Interest Income Can Be Controlled -- Somewhat
The closest you can come to precisely determining your income from investments is to buy bonds. They pay a fixed rate through the life of the bond.
However, Treasury bonds right now pay a very small amount of interest. Corporate bonds have higher coupon rates, but if interest rates go down in the future (though you have to wonder how much lower they can go before you have to pay for the privilege of owning a bond), your bonds can be called away.
Plus, bonds don't last forever. If you just retired, chances are you will still be alive in twenty years when new bonds today mature. Then you can receive only the market rate of interest prevailing at that time, and that's unpredictable.
Bond Interest Income Doesn't Go Up With Inflation
Plus, because bond interest payments don't change, they don't keep up with inflation. What seems like a comfortable income today will seem like a financial straight jacket in the future.
Inflation has slowed down a lot, but many people now fear 1970s style inflation -- or worse -- will come back, thanks to the huge federal budget deficit.
Nobody knows for sure. Some people believe we'll have deflation.
Deflation sounds good to retirees on fixed incomes, but it's devastatingly brutal to the economy as a whole. A true deflationary spiral would make the current recession seem like a walk in the park.
The best an income investor can do is prepare for any future by choosing companies that provide basic human needs and reinvest their investing income as much as possible.
Author Resource:
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