Income Portfolio: is it feasible?

Max_Antax

Hello folks,

I would like some preliminary advice on an idea that I have.

Say that I have £1million (*) to invest on financial products (shares, bonds, etc.). Would it be possible to build a portfolio generating an average return of – say – around 5% rising in line with inflation? And a capital increase broadly in line with inflation over the long term?

Would such a portfolio be sustainable? How risky it would be? How easy would it be to build it and monitor it? Do you need to be a pro to pull this off, or a DIY investor with some common sense, reasonably well educated and a good head for figures can make it?

I’m toying with the idea of liquidating some assets, invest in stock / shares and live off the income but I’ve never owned a share in my life and don’t have direct experience of the stock market. I’ve never owned a share in my life: I’ve read a few books on the subject from respectable authors (no get-rich-overnight nonsense for me please!) and the plan seems broadly feasible

Would like to hear from people with some real life experiences.

Many thanks,

Max
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(*) No, I haven’t robbed a bank: I’ve been investing in property since 2001 but I’m getting fed up with tenants, letting agencies, plumbers, electricians and the lot.[/FONT]

dunstonh

Would it be possible to build a portfolio generating an average return of – say – around 5% rising in line with inflation?

Realistically, no. It could happen if you invest sufficiently high enough up the risk scale but it would not be reliable. it will be the sort of volatility that could see far more than you need one year and big negatives the next or a nothing year. You would need to accept high volatility and be prepared to have periods of reduced income.

How easy would it be to build it and monitor it?

Depends on your knowledge of investment strategies and what methods you use and how much time you put into research and ongoing rebalancing.

Do you need to be a pro to pull this off, or a DIY investor with some common sense, reasonably well educated and a good head for figures can make it?

Like any job, if you have the knowledge and experience then DIY can be a good thing to do. If not then you could end up making costly mistakes. If it is £1mill then you have not just the investments but tax wrappers to consider as well.

bigadaj

Certainly possible, ideas of sustainable yield vary but 4% with capital increase is thought reasonable by many.

There are plenty of publications which give ideas on this, often quoted around this forum and time hales smarter investing is one example which gives a good explanation and examples with a passive bias.

One thing to guard against is the volatility of any equity rich portfolio, so whilst you might get a long term increase of 3-4% plus inflation this will be up by 15% one year and down by 10% the next, or more extreme. Many people manage this by having a large cash or similar pot to draw from. Meaning that drawing from equities isn't necessary all the time or every year, as drawing down continually with a couple of bad years at the beginning can progressively reduce rather than increase the portfolio.

Thrugelmir

Max_Antax wrote: »

Say that I have £1million (*) to invest on financial products (shares, bonds, etc.). Would it be possible to build a portfolio generating an average return of – say – around 5% rising in line with inflation? And a capital increase broadly in line with inflation over the long term?

Unfortunately utopia of this kind doesn't exist. The higher the return the higher the risk. You may be better off building a business or investing directly into an established one that has investment opportunities.

Max_Antax

Thank you for all your answers.

Talking of stock market volatility: over three answers one is yes, another maybe and the third no way! :-)

I take your points though: my overall strategy would be to keep two properties, have cash reserves to cover for 1 / 2 years of living expenses with then the bulk of my assets in shares / bonds.

I would make a habit of monitoring my investment though: possibly even every day and make adjustments as necessary.

I suppose the best thing is to invest – say – £10k put a limit to my losses (say -20%) and see how it goes and whether I have the knack for it. If I go to -20%, then it’s not for me!

Linton

You can get a reasonably safe income of around 5% from a broad range of dividend paying shares and dividend/interest paying funds. However this would leave very little for topping up the capital values to help with inflation matching and to deal with the inevitable companies that drop badly and then stop paying dividends leaving you with little choice but to sell at a loss. That is why I have suggested in another thread running a growth portfolio alongside your income one.

You are going to get > 20% capital fluctuations simply by being in the share market, though the dividends/interest will be less volatile. You must learn to accept this with nothing more than a shrug. Your comments on stop loss and monitoring everyday making adjustments as necessary worry me. I suggest you do neither as you run the risk of doing the wrong thing and you incur costs. Also it's dangerous to trade dividend shares as each time you sell and then buy you run the risk of losing a dividend. Monitor daily if you want but only do something once a year or so and even then only do what is really necessary.

What is important is that you choose as wide a range of income generators as you can - various geographies, industry sectors, dividends and bond interest, perhaps property as well. You will also need to do you own research into both shares and funds. Income is one area where passive investing relying on index trackers, has been pretty unsuccessful. The problem is that it needs a person to tell whether a dividend is high because the company is successfully and sustainably generating cash or the share is showing a high yield because the price has fallen with the expectation that the dividend will soon follow. That person can be you or it can be a fund manager who you pay to do the job.

dunstonh

Talking of stock market volatility: over three answers one is yes, another maybe and the third no way! :-)

The issue is risk. investing is not one risk profile. Its a sliding scale. Income investors tend to be more cautious as they need the income. A cautious investor has virtually no chance of hitting your figures. A very high risk investor could do but it could also go very wrong.

I would make a habit of monitoring my investment though: possibly even every day and make adjustments as necessary.

You should not do that. a) there is no need to b) you are more likely to make mistakes

I suppose the best thing is to invest – say – £10k put a limit to my losses (say -20%) and see how it goes and whether I have the knack for it. If I go to -20%, then it’s not for me!

A 20% loss would put you are medium risk. No chance your objectives could be met at medium risk. When I say no chance, that is not strictly true as anything is possible. However, the odds of it happening make it virtually no chance.

horace972897

If you own the house you live in and don't want to move anytime soon do you need 50K per year income? May be better to start with what you need to cover all of your yearly expenses (including portions for big purchases - cars etc) and work from there.

If you only need 25K to cover it you only need to return 2.5% above inflation etc etc

Max_Antax

Hello guys,

Thank you very much for your answers.

After going through your feedback, one question really springs to mind: why investing in the stock market at all?

I understand the concept of risk, but investing in property (at least in London) is totally different: you have reasonable prospects in terms of capital growth and income, so you can work out a business plan. It has its drawbacks: it is labour intensive, requires large capitals and is illiquid, but returns are solid.

With the stock market it seems to me that, even after you have exercised due diligence, the best you can do is cross your fingers and hope for the best.

AlanP_2

If you are managing a number of properties you are effectively running a small business as opposed to investing at arms length in other businesses.

Both options have have pros and cons. residential property in many areas and London in particular has been an "unusual" market as it has gone up and up with no signs of a major drop.

That is what people thought before every previous "crash" as well .

Investing is more of a longer-term "Grow Rich Slowly" approach that typically produces a reasonable return above inflation but with volatile ups and downs along the way.

To my mind you are comparing Apples with Oranges to a certain extent.

If you see property as continued growth area and can put up with some of the hassle you mentioned then why not just add an investment portfolio alongside it in whatever proportion you feel comfortable with 25 /75, 50/50, 75/25 or whatever.

Depending on your age, tax situation and current pension arrangements doing the investment inside a pension might help to "manage" your tax liability whilst building a broad range of invested assets.

Suffolk_lass

Like you, Max_Antax, I am not an expert in stocks and shares. I have recently attended a course where an independent financial adviser (IFA) came and talked to us about the different stages of investing. For me, my dependants have flown the nest and my DH and I are in our last ten years of working, so my interest is in income and return, rather than compound interest growth. We talked about risk appetite and the way an IFA might recommend a spread of investments, with five categories of risk from adventurous to cautious. The example showed different % of your total in the different categories of funds - so maybe 7% in each of 5 adventurous funds and only 1-2% in each of 5 cautious finds (and the rest in-between).

The thing that surprised me was the growth shown over five years (and this would depend on your income or growth agenda) but really only about 20% difference (or 4% pa) between the two extremes. By investing in funds you are relying on experts to manage the collective, as opposed to your other option of self-investment. With my poor understanding of the nuances of it I will be using a professional advisor and I will be looking to spread my investments across a range of options, including cash, bonds and gold, as well as funds.

After reading on here and in the National Press for a few months I recognise there are always confusing and contradictory views so you need to be clear what you are after and for how long you will be in that position. I wish you success, whatever you decide to do
SL