Investing for income: protect and increase your moneyPosted on: 27 September 2011 by Chris Rowe
The stock exchange is a turbulent place. However, if you are investing for income there are opportunities for you.
We're living in a period of relatively low interest rates on savings accounts and high inflation, meaning that it's difficult to maintain the value of your money, never mind getting it to work for you and increase its value.
Assuming an average rate of inflation of 2.8% per year over the next 10 years (2.8% being the previous 10-year average), £10,000 today will be worth only £7,527 in a decade's time. That's an effective decrease of well over £2000 in the value of your money. (1)
But if your hard-earned capital is earning you very little, there are alternatives.
Whether it's to supplement an existing income such as your salary or pension, or an extra amount to fund a project, when it comes to investing for income, there are two distinct methods - the first method involves using assets that are designed to produce income, such as Gilts, corporate bonds or even shares. The second method is to buy assets that you hope will increase in value, so that you can then sell some or all of the gain to generate income.
You can access income-producing assets by using an investment fund, which is essentially a collection of Gilts, bonds, shares or even property. This means your money is spread across a number of different assets, helping to reduce risk.
Beware debt defaulters
Gilts are loans to governments - in return for lending them your money, they pay you interest on a regular basis and at a pre determined date in the future, they promise to pay back the original amount you lent them. The UK government has never defaulted on debt payments but other countries have and Greece may well do in the future.
Corporate bonds are similar to Gilts but are loans to companies. Generally speaking, the stronger the reputation and financial position of the company, the lower the interest you will receive on an ongoing basis.
Funds that buy shares can also provide income in the form of a dividend - a payment that is made to you on a regular basis.
The benefits to this method of investing for income are that it's fairly easy to calculate how much income you will get and how often you will get it. It's usually straightforward to arrange the income to be paid to you regularly, say monthly. As long as you draw only the dividends or interest that is being generated, you will never draw on or reduce your original capital amount, though this amount will fluctuate to some degree.
For example, if you invest your £10,000 in a growth fund, in good conditions it might grow by 10%, giving you a total of £11,000. If you only want to take 5% as income, you then have £10,500 of capital to remain invested.
Growth assets and funds
This method of investing for income is slightly more risky than the first. In a falling market, as most major markets have been in recent weeks, then your capital has to work extra hard, and you could lose out by having to draw your income at a time when your investment value has decreased. However, conversely, when the market is rising, you could make larger gains with this method.
A further advantage to investing for income using growth assets and funds is that you can spread your investments over a wider range of companies and assets. Having a diverse range of investments helps to reduce risk. By investing for income using income producing assets, you won't have as much diversity, so you may well have more risk, and you could miss out on beating inflation.
The best funds need a lot of research, talk to your independent financial adviser about which method of investing for income is best for you.
The value of shares and investments can go down as well as up.
Past performance is not a guide to future performance.
Source: (1) What's the cost?
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