Many on Wall Street like to use these terms synonymously, and advisors with stock market-based business models will tell you that investing for growth is the only way to get a reasonable return on your investments. This is simply not true.
It’s important to understand that Growth comes from capital appreciation and usually involves stock market investing—meaning it can be volatile. Income, on the other hand, comes from interest and dividends, and can be much more constant and reliable.
TOTAL RETURN = Income + Growth
Now, if you’re in your 20s or 30s investing for growth in the stock market might make sense. However, if you’re at or near retirement, it could lead to trouble.
Here’s what I mean. Let’s say you are recently retired and that growth you’re counting on suddenly turns into a loss, or even worse, a few years of losses.
Would you have to make changes to your lifestyle and learn to make do with less? Would you have to go back to work?
Although stocks were once considered too risky for many pension funds, it never ceases to amaze me how many financial advisors continue to recommend risky stock market investments for the portfolios of those who are close to retirement age.
It’s especially concerning considering that, since the turn of the century, fixed-income investors have achieved average returns similar to those of buy-and-hold stock market investors.
In fact, in May of 2019 CNBC’s Sr. Markets Commentator, Mike Santoli, compared the total return of the S&P 500 with that of the iShares IBOXX Investment Grade Corporate Bond ETF (LQD) over the previous 12 month period to reveal that the bond fund had actually outperformed the S&P 500 during that time—with a much smoother ride for fixed-income investors.
In a way, fixed-income investors were able to put their portfolios on “cruise control” and not worry if stock market volatility would wipe away half of their retirement savings like it did for so many investors in the market crashes that started in 2000 and 2007.
The bottom line is that the markets have had a good run lately, and although they could climb slightly higher, there’s also a good probability that we could see another major stock market correction in the near future—and this time it could be in the neighborhood of 60-70%.
What all this means, for anyone who is retired or nearing retirement, is that now might not be the best time to gamble your retirement future in an uncertain stock market.
Instead, check out the website to find an Income Specialist in your area who can help you reduce your exposure to stock market risk, so you can use your retirement savings to establish ongoing streams of income for retirement.