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The stock market seems volatile. How can I invest to get some income without as much risk as the stock market alone?
 

SITUATION: It can be difficult to find investments that provide relatively stable income with an opportunity for growth. Insurance companies are capitalizing on this by selling products that propose you can grow your assets risk free. While these may avoid stock market risk, they do not avoid insurance contract risk. There are ways to select investments to accomplish your goal without giving the rights to your money to an insurance company.

Investments can help accomplish three goals:

  1. Capital preservation
    • Starting with the most basic analysis will allow you to find investments that line up with your goals and objectives.  Banks, money markets, and other similar investments offer capital preservation; however, near zero interest rates do not provide income.  These investments are most suitable to meet expenses expected within a short term.  Many people want to invest in capital preservation for income.  Capital preservation investments pay interests rates so low that principle is consumed to meet spending needs.  Spending your principle is a guarantee to see your account value fall.
  2. Income
    • Bonds, loans, real estate and dividend producing stocks can all be investments that generate income.  Each have factors that determine the amount of volatility the investor will realize in these investments.  These income investments tend to be more stable than a portfolio oriented to growth.
  3. Growth
    • U.S. stocks, foreign stocks, merging market stocks are all stocks with a growth objective.  In addition, some real estate leveraged portfolios hedge funds and alternatives can add growth to a portfolio.  These investments generate little if any income and generally have a higher degree of volatility than income investments.

FFP has a very basic premise. Use capital preservation investments when investing for capital preservation; use income investments when investing for income; use growth investments when investing for growth. Yet we see portfolios that are created by others that use capital preservation for income, using growth for income, and income devices for capital preservation. Is it any wonder why investors are so frustrated and confused?

 


I hear a lot about my risk tolerance. How is risk tolerance determined?

 

SITUATION: Investment profile questioners make it seem easy to determine an investor’s tolerance for risk. The questions ask how an investor might react to various degrees of market swing, how far in the future they are going to access the money, how an investor financial reacted in 2008, age, as well as other determining factors.

Studies have shown that people answer these questions differently based on how the market has recently moved and how the market has recently performed. Based on these studies, we believe these are emotion tests, not risk tests. Yet, we expect this test to provide us with a magic portfolio designed specifically for our needs.

Your portfolio should be designed to accomplish your short term and long term goals. For many people, this means they want relative short term stability and long term growth. Any required Income distributions should be generated from income devices. Funds for short-term purchases should be held in capital preservation assets. The balance of a portfolio can be invested for growth as this portion should not be liquidated for income or for short term purchases.


Retirement is not that many years away. What type of investment can I purchase that will get me income yet provide me with an opportunity to grow my assets?

 

SITUATION: Fear based marketing and unfulfillable promise has led many retirees to purchase annuities with their retirement assets. The new DOL rules may call this activity into question as a viable option due to the insurance company and agents self-dealing nature of these contracts.

FFP Wealth Management recommends investors prepare their retirement portfolios three to five years prior to retirement. This means a careful plan must be prepared to determine how much income, expenses, and taxes will be needed post-retirement so the amount of income investments in the portfolio can be determined. Once the total income needed is determined, the amount of pensions and social security can be subtracted from this amount. Any shortfall must be filled with distributions from your portfolio.

Select income investments that generate the amount of income you need without requiring the sale of any investments. This type of income is called dividends. Any funds not committed to income investments can be invested in a diversified growth portfolio. The balance between growth and income can be adjusted throughout your retirement. This option can be more flexible when compared to selecting an insurance product with limited choices and surrender fees should your circumstances change and you need to sell the product.

 

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Check the background of this financial professional on FINRA's BrokerCheck