Switching investments from growth to income

Do you want your investments to grow or deliver an income? Defining the goal of your investment portfolio can help you build a strategy that’s right for you.

For many investors, their investment goals start with focusing on growth with a long-term view of aspirations that are some years away. You may have started investing with your retirement in mind several decades away. Eventually, you may decide you want to start receiving an income. So, how should you invest if you’re at a stage in your life where you want investments to deliver income?

When you’re investing for growth, you want to back companies that are expanding. Depending on your risk profile, this may have included firms that are in the early-stage companies to maximise the initial amount you’ve put in. This means short-term investment volatility is to be expected. Investment values can fall, but with a long-term outlook, these dips should smooth out to deliver growth.

When investing for income, those that payout relatively high dividends are sought after. This will often be companies that are more mature and don’t invest as much of their profits into the business, providing investors with dividends. As a result, these firms typically don’t grow as much and can be seen as less risky. However, all investments involve risk and it’s important to consider this when investing for income as much as when investing for growth.

Investing for income

After years of investing for growth, to grow your pension or investment fund as much as possible, it can be difficult to know what to do.

As a dip in income delivered could affect your lifestyle, it’s important to look at the track record of both delivering income and preserving capital. This includes looking at how investments have performed during a downturn. As you’re accessing income now, rather than in the long term, volatility could impact your immediate and long-term goals. However, it’s impossible to predict how investments will perform in the future, past performance is not a reliable indicator. As a result, you also need to consider what other income streams you have.

You also need to consider when dividends will be paid. Will it be enough for your desired lifestyle and does it fit in with plans? Most dividends payout twice a year, if you’ll be relying on them to make up the bulk of your income, it can make budgeting more difficult. There are solutions to this, such as choosing investments that payout at different points in the year, or find that an alternative solution is better suited to you.

If you decide to go ahead with switching investments to an income focus, you have two options: build your own portfolio, selecting which stocks you want to invest in, or use an income fund.

They both have pros and cons that are important to weigh up in relation to your circumstances. But whichever you decide, diversification remains important, both geographically and in terms of sectors. It’s a step that can offer some protection against sharp market movements and preserve your income.

You don’t have to choose between investment or growth either. You can build a balanced portfolio that contains both elements if it’s in line with your wider plans.

When should you switch to an income strategy?

Traditionally, investors would have moved to an income-based strategy as they reached retirement. It’s an option that can provide additional income that supports your retirement lifestyle.

However, you may not need an income boost. If a Defined Benefit pension, an Annuity or other sources of income are providing what you need for retirement, you may decide that a growth strategy is still right for you. Retirements have also gotten longer as life expectancy has improved. It’s not unusual for today’s retirees to spend 30 or 40 years enjoying retirement. As a result, you still have time to invest for growth and switch to an income later in life when you need it.

There’s no right time to switch your investment to an income strategy. In fact, it may never fit with your wider financial plans.

What is important, is that you consider your investment goals and aspirations. Your investments should help you achieve your aims, whether this is to retire early or leave a nest egg for loved ones. Please contact us to discuss how your investment can help you move towards goals now and in the future.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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