Finance and Money Management
Managing the Income Portfolio part 1The reason people assume the risks of investing in the first place is the prospect of achieving a higher rate of return than is attainable in a risk free environment…i.e., an FDIC insured bank account. Risk comes in various forms, but the average investor’s primary concerns are “credit” and “market” risk… particularly when it comes to investing for income. Credit risk involves the ability of corporations, government entities, and even individuals, to make good on their financial commitments; market risk refers to the certainty that there will be changes in the Market Value of the selected securities. We can minimize the former by selecting only high quality (investment grade) securities and the latter by diversifying properly, understanding that Market Value changes are normal, and by having a plan of action for dealing with such fluctuations. (What does the bank do to get the amount of interest it guarantees to depositors? What does it do in response to higher or lower market interest rate expectations?)You don’t have to be a professional Investment Manager to professionally manage your investment portfolio, but you do need to have a long term plan and know something about Asset Allocation… a portfolio organization tool that is often misunderstood and almost always improperly used within the financial community. It’s important to recognize, as well, that you do not need a fancy computer program or a glossy presentation with economic scenarios, inflation estimators, and stock market projections to get yourself lined up properly with your target. You need common sense, reasonable expectations, patience, discipline, soft hands, and an oversized driver. The K. I. S. S. Principle needs to be at the foundation of your Investment Plan; an emphasis on Working Capital will help you Organize, and Control your investment portfolio.Planning for Retirement should focus on the additional income needed from the investment portfolio, and the Asset Allocation formula [relax, 8th grade math is plenty] needed for goal achievement will depend on just three variables: (1) the amount of liquid investment assets you are starting with, (2) the amount of time until retirement, and (3) the range of interest rates currently available from Investment Grade Securities.  If you don’t allow the “engineer” gene to take control, this can be a fairly simple process. Even if you are young, you need to stop smoking heavily and to develop a growing stream of income… if you keep the income growing, the Market Value growth (that you are expected to worship) will take care of itself. Remember, higher Market Value may increase hat size, but it doesn’t pay the bills.First deduct any guaranteed pension income from your retirement income goal to estimate the amount needed just from the investment portfolio. Don’t worry about inflation at this stage. Next, determine the total Market Value of your investment portfolios, includ