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WE ALL have different reasons for investing, some of us are trying to save to put children through school or university, others are building a lump sum for the future which might be used to pay off a mortgage or fund a dream purchase.
However, for many investing is a way to create an income, whether for now or in the future. In the past, people would often buy an annuity to provide them with an income for life, but the current historically low interest rates make this far less attractive, and investors have to be more creative in their income sources.
Everything from stocks and shares, bonds, income funds, and property can provide you with an income, and you should consider all of the options carefully before you make a decision on which is the right one for you.
So to make life easier, I will take them in turn and look at the pros and cons of each:
Stocks and shares
Investing directly in stocks and shares is not for the faint-hearted, as you are completely exposed to the ups and downs of the markets, and if you are not able to spread your investments sufficiently you could find your portfolio is taking risks that make you uncomfortable.
The income you receive from stocks and shares is paid in dividends, and these are generally paid twice a year. The amount you will receive depends on the performance of the company, but there is no guarantee you will receive any dividends at all if the company performs badly.
To get the most from your investment, look for strong companies that have a high dividend and a relatively low share price to maximise your returns.
Bonds and gilts
Corporate bonds are essentially IOUs issued by companies in return for an interest payment to investors of a fixed amount over a defined period. The government equivalent are called gilts.
At the end of the term, if all is well, you will get your original investment back – the exception is when the company or government goes bust and ‘defaults’ on your debt. It does happen, just think of the position many eurozone countries are close to now.
This is rare, but it does mean this type of investing, although lower risk than shares because the bond or gilt issuer is obliged to pay you the agreed interest rate for the agreed time, is not without risk.
Investing directly in corporate bonds can require sums so high that it prevents many investors from getting close to this type of asset. So bond funds pool the funds of a number of investors, which gives the opportunity to buy a basket of bonds. This is then run by a fund manager, who will make changes to the investments as and when necessary to keep the income flowing for investors.
It reduces the risk to you of a single company or government defaulting. If there is a problem with one, the others will usually carry on paying out. The fund managers will usually tell you how much return you will get in income each year, and they will be measured on how effective their strategy is by reaching this target.
The fund managers will usually set out an amount of income they expect to generate for you over the year, and will use a combination of both bonds and stocks and shares to reach their targets. Again, the investors’ money is pooled together to enable a fund manager to buy a far wider range of investments, and disseminate the risk that you are taking with your money.
Be aware that in some cases when the funds are not performing well, some managers will return your capital to you as ‘income’. It is not much use to have someone give you your original investment back when what you want is to generate returns, so using a good financial adviser can help you not fall into this trap.
Investing in property has always been popular, and it is easy to see why. There are few investments that allow you to borrow money to make money, but property is the exception.
Rental income is used by many expats to help boost their spending power, and you can get some good returns. The downside is that if you do not live near the property, you will have to pay someone to manage it for you, and you will also have to foot the repair bills.
That said, property still remains popular, and there are currently some bargain properties to be had in the likes of Spain, Ireland, Italy and Portugal thanks to the credit crunch. Rental incomes have also risen because fewer people are able to afford to buy a property, which makes rental property rarer, pushing the price up. Like so many things in the financial world, it is about supply and demand.
Of course, you have the option of investing in property funds too, which will provide income and allow your investment to be more liquid, in case you need to get at the money in a hurry.
Although any one of these methods would work for you to generate income, there is no need to stick to one. A combination of methods within a balanced portfolio will often be the most sensible course of action. So speak to your financial adviser to find out how to generate the extra income you need to enjoy your life.
First published in Expatriate Lifestyle
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