Approaching your retirement means shifting your investing more towards income-based investments and faraway from equity-based investments. You’ve much less time to extract from equity losses and wish to rely on investment income. Here’s why…
In the centre of income-based investments are loans. One of the most prevalent income form is interest payments for the use of your fixed dollar-denominated loan with a institution. Samples of such investments are savings accounts, CDs, newly issued bonds, and stuff like that. You loan your $1,000 for some savings institution or company and so they promise to offer you back that fixed dollar amount – $1,000 – along with paying you interest for the use of your money.
These are generally essentially contract arrangements; and being so, tends to suppress risk. Recovering your money to you personally with interest for the use tend to be critical concerns to you and the institution or company.
At the heart of equity-based investments is ownership. You acquire ‘into’ some enterprise – as a shareholder. Companies along with their shares are dollar-valued investments. By that I mean no matter the company – or your shares- will be worth is ‘valued’ by people bidding to purchase it. Which level of dollar bid for the value changes with time.
Growing price of an equity-based investment – a company – is the chief concern from the company owners. Its value increase due to better production, better services, or more demand by buyers due to the services and goods for numerous reasons. But lack of demand could also quickly decrease its ‘dollar value’ giving a reduction to owners and shareholders.
Equity-based investments provide potential for large increases in value (your reward) but often most importantly increases in lack of value (your risk).
So, generally equity-based investments are riskier than income-based investments. Higher rewards include and the higher chances. Needless to say each of these two categories of investments has a sliding scale of riskier and much more rewarding examples within them.
Inflation will be the bane of fixed dollar-denominated investments (income investments). It’s almost an assured risk – or rather loss. For the ‘value’ of your dollar – i.e. its purchasing power – generally decreases after a while.
But by the same token, dollar-valued investments (equity investments) tend to automatically adjust for inflation. In case a company maintains its same ‘real’ value, its dollar value will necessarily be greater if your dollar’s value decreases.
Income-investments tend to offer less reward but at less risk then equity-investments. To grow wealth – i.e. growing value – you may need equity investments. Equity markets usually have increased within the future. However, you must be in a position to sustain yourself through market downturns.
Income-investments have a tendency to preserve wealth when markets turn down. Nonetheless they do so on the tariff of growth. Because of that, retirees should shift into a higher fraction – perhaps 60% at the very least, with their portfolio to income-investments during retirement.