Heather called our office. She and her husband wanted to move their portfolio to “three buckets” of fixed income, so they would no longer have any volatility in their portfolio. They would split up their money into three groups of bonds, each with different maturity dates and different interest rates.
Ladies, this is absolutely the wrong thing to do if you plan to live more than five years. Most women, statistically, will live seven years longer than their mothers lived and twelve years longer than their spouses—so you are the ones who will live out the fixed income nightmare scenario below!
Many times our emotions take over, and doing the easy thing is typically the “wrong” thing as your emotions are now dictating your actions. Take your emotions out of your financial decisions. Emotions and finances don’t mix.
There are only two ways to invest. One is for interest, where you invest in debt investments such as bonds which pay interest. The second way to invest is for growth, where you invest in things that appreciate and you receive your portion of that growth. Yes, growth investments do have volatility. But as you will see below, it’s riskier not having growth. Bonds are fine for short-term needs, but inflation absolutely dilutes the value of the interest.
Inflation decreases the spending power of fixed incomes. Please do this scenario calculation on your current income, whether it’s fixed or not. Inflation has averaged more than four percent during the past thirty-seven years. Assuming inflation is the same in the future, if your fixed income is $50,000 today, next year your fixed income would buy the equivalent of $48,000, or four percent less. The next year, another four percent less, or $46,000; the following year, another four percent less, or $44,000; and twenty years later, your current $50,000 fixed income will give you $10,000 of purchasing power. Yes, it will look like $50,000, but inflation would increase everything else around you, other than your income and your purchasing power.
Ladies, just five years on fixed income will lower your purchasing power by twenty percent. You cannot afford a fixed income. If you plan to maintain your lifestyle and live fully, you MUST have your portfolio in growth investments.
Keep all your investments liquid, in asset class mutual funds, so no matter what happens you could plan on a level four percent distribution from your growth portfolio. As the portfolio grows, your income grows—plus, the money is always available. It’s that simple!
Maria J. Wordhouse Kuitula and Phyllis J. Veltman Wordhouse, Free Market Wealth & Stewardship Coaches, co-authored the book, Stress-Free Investing, available at Amazon.com. Maria is the President of Wordhouse Wealth Coaching and can be reached at 616-460-6518 or at [email protected]. For QUESTION LISTS and INVESTOR EDUCATION VIDEOS, go to www.WordhouseWealthCoaching.com. © Wordhouse Kuitula 2013