Income or growth?

Before making any investment decision, it is important to first determine the objective of the investment and how it is aligned to your investment goals. By defining your goal, one can determine if the appropriate investment will need to provide growth, income, or a combination of both.

When investing for income, the investor expects to receive periodic payments from the investment. This is usually to replace salary income, or to cover any periodic expenses that the investor may incur. It is important to understand that for income generating investments, there are many types with varying structures. There are “plain vanilla” investments which are simple in structure and easy to understand. These typically have a fixed interest payment amount, fixed interest payment dates and a fixed maturity date. There are also more complex investments that are more difficult to understand. The more complex investments may have structures which can affect the interest earned (e.g., variable rate bonds), affect how missed interest payments are handled and may even allow the issuer to repay the investment earlier than the advertised maturity date. If there are factors that may affect the income or maturity, then achieving your goals in a timely manner may be negatively affected. Understand the details of the investment, how your income could be affected and how this change in income could aid or hinder you in achieving your goals. 

For the investor seeking growth from their investments, an important decision is the investment horizon or timeline. One must decide if they are looking to grow the funds in the short, medium, or long term. The shorter time horizon is usually riskier for this type of investment as short-term market fluctuations may affect the investment value at the point of exit. Looking to the medium or long term will usually provide for growth with less risk as the market will have time to recover from any temporary downturns. The investor can also benefit from any upturns and take profits at strategic times. When looking for medium to long term growth, stocks and managed funds are good additions to your portfolio. This is not to say that these assets won’t make you money in the short term, but the risks are higher short term.

Investors may often come across the disclaimer “Past performance is not an indication of future results”. This is not to say that past performance should not be considered when making the investment decision. However, understand the type of investment, the underlying assets of managed funds, the investment managers and the strategies used, to determine if the performance may be replicated going forward. Determine if you need income, growth or both to achieve your financial goals.

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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