Why Investments for Income Are an Essential Portfolio Optimisation Tool

As any person of logic will tell you, investment assets acquired specifically for their income generating potential should form at least part of a diversified portfolio of investments, alongside some risk investments, growth investments, and a range of different types of assets that share little or no correlation with each other. This diversified approach to investing allows Investors to benefit from most economic circumstances, with at least one asset class generating a return throughout any economic cycle. But income investment should always be present, and in this article we introduce some of the key reasons why.

First, let’s look at the two main categories of investment asset; financial assets and real assets. Financial assets are quite simply financial instruments such as stocks, bonds or cash deposits, all of which you can buy from a financial advisor. These types of investments derive returns that are driven by the performance of underlying assets which are invariably companies. So the true performance of financial assets shares a total positive correlation with the performance of the wider economy and with financial markets in general. Real assets are physical, tangible items acquired for their investment potential such as gold bullion or real estate, some of which are growth investments, where others are acquired for income. Investors should hold both financial assets and real assets in a diversified portfolio, as many studies have shown that holding up to 15 to 20 per cent of a portfolio in real assets substantially reduces risk and optimises overall performance.

Whether choosing to invest solely in financial markets, or whether choosing a more diversified approach and acquiring a range of assets including tangible items and money-market investments, the primary reasons for holding income investments is thus; income can be reinvested, creating a compound returns and drastically improving overall performance.

In 2011, Barclays Bank carried out a study entitled, The 2011 Barclays Equity Gilt Study, which showed that that £100 invested at the end of World War II would have been worth just £5,721 in nominal terms (not adjusted for inflation) at the end of 2008; yet if the gross dividends had been reinvested, that original investment would have been worth a staggering £92,460. This simple analysis clearly demonstrates the powerful effect investments for income have on the overall performance of a portoflio, particularly the effect of reinvesting income over a sustained period of time on the overall performance of a diversified investment portfolio.

So to leverage this compounding factor, investors must then seek out the investment likely to generate the highest level of income, whilst also balancing against the level of risk involved in acquiring that income stream.

As low interest rates and volatile equity markets continue to define the performance of a majority of financial assets, m any investors are looking to real assets in order to capture valuable income. One such income generator is real estate, and there are some outstanding opportunities in a range of markets capable of generating income yields of up to 15 per cent, whilst having the added benefit of securing the investment against the capital value of underlying property assets which, in the long-term, are unlikely to depreciate.

Of course, there are a number of inherent risks to investing in real estate, however this assets class, when approached carefully and with sufficient due diligence, is seen as one of the safest long terms investments by both Investors and financial advisors, and the majority of risk can be mitigated to an extent through proper research, advice and locating a suitable partner capable of delivering high yield real estate investments in the target market.

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