Thursday, June 10th, 2010
We see folks from time to time get fixated on generating income from their investments. They focus on investments that generate interest or dividend income, and that’s how they evaluate their investment accounts. I think this is just a huge, huge mistake.
Several months ago, we got a phone call from someone who had been focused on generating income from her investments. She had put almost all of her money in real estate investment trusts (REITs) at a time when, compared to other investments, real estate investment trusts paid higher dividends than other investments.
So she chose (or was talked into) putting over 70% of her money into these real estate investment trusts. Most of them were not publicly traded and most of them, if not all of them, were probably bought at the high point of the real estate market, certainly before the real estate melt-down occurred.
And you can imagine what has transpired since then. Virtually all of these REITs have cut their dividends in half, if they are paying dividends at all. And this poor woman can’t sell these things even if she wanted to! She can’t find somebody willing to pay her 10 cents on the dollar to reinvest her money or to pull money out to get her income back to what it was in some other form.
Maybe this is an exaggerated example. But people shoot themselves in the foot when they look for nothing but high yielding, high income producing investments. If not all at once, over time they end up allocating most of their money into one or two particular investment sectors or areas. And while it may look good when they first invest, no investment is a top-performing investment all the time.
Much more important is the growth and the increasing value of your account. If your account, over time, increases in value, you can sell off a piece of it and use that money to generate income.
So if you’re concerned about generating income from your investments, the biggest mistake you can make is to limit your search or your selection to only those investments that pay a high yield or a high dividend. The key to success is to have as low-risk as possible investment account or strategy that will give you the growth that you need. That way, you can prune your money tree (or your money bush) and take some of those clippings to create the cash flow that you need.
Tags: brian Fricke, certified financial planner, finance, financial advisor, Financial Management Concepts, financial planner, Financial planning, retirement, retirement planning, wealth management
