Growth vs Income Investing
Growth vs Income Investing
The Growth vs Income discussion is one of those that just keeps on going, because there is no right or wrong answer. The real answer is that it depends – on your age, your situation, your investment priorities, your family situation, your appetite for risk, the size of your pension pot, and on many other factors. So, the best we can do is to offer up some features, benefits and disadvantages of each approach, and then leave it to you to decide what is best for you.
The Ideal Investment
Let’s start by looking at what would be the perfect investment – a completely risk free investment that delivered both high growth and a stable and growing income stream that beat inflation. Of course, that “perfect investment” does not exist. Instead, the investment world looks like the triangle in the top left corner.
As you move toward one corner of the triangle you move away from the other two. If you want an investment that is safe, you have to be willing to accept less income and growth. If you want an investment that produces consistent income, you have to understand that it will not grow as much. If you want an investment that grows, you have to be willing to accept less safety.
Determine Your Time Horizon
As retirees, our time horizon is actually our life expectancy, which means that if we retire at the state retirement age of 65 we could still have around 25-30 years, during which we need to ensure a secure financial income for ourselves. Traditionally, investment time frames are split into:
- Short term: money you will potentially need within 1-2 years.
- Mid term: Money you will potentially need within 3-9 years.
- Long term: money you will not need for 10+ years.
For short term money, you should choose safe investments or easily accessible cash savings, for mid term money consider a balanced fund, and for longer term money it is reasonable to consider an element of growth.
The secret is to create a portfolio of investments that match your time horizon and are combined in the right proportions to deliver the results you need. Of course, this is easier said than done. An adviser or financial planner can help with this. Advisers and Financial Planners are slightly different in what they focus on – both can advise on types and mixes of investments to suit your needs but financial planners take a more holistic approach to delivering a financial plan that meets your needs. You can read more about what financial planners can do for you at the Institute for Financial Planning.
Trustnet is a great source of ideas and suggestions for investing, and many of their articles focus on the needs of a retirement audience. Perhaps start with their 10 tips to build a retirement income portfolio and if you like their approach go on to read their thoughts on five equity income funds that may be suitable for a retirement portfolio . This also includes discussion on important considerations such as capital protection and reducing volatility.