“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” — Chinese general Sun Tzu
The battle to secure our financial future is among the most important in life. It’s long and demanding, but the fruits of victory are oh so sweet — a sense of security today, and the promise of a comfortable, rewarding post-work life.
Winning the money war requires more than tactics like living below your means and socking away money on a regular basis. It requires a strategy — a long-term plan to maximize the results of your efforts. There are dozens of core investment strategies, all of which have their merits and advocates. Some investors believe in pure growth; others look for value or focus on options.
My core philosophy is called income investing. I’m a huge believer in this approach, which I have used to help many families reach their income and spending needs in retirement. Income investing is also a focus of my latest book, “You Can Retire Sooner Than You Think.” Step into the briefing room and I’ll explain how income investing could lead you to financial victory.
Income investing focuses on generating cash flow from your investment holdings — from stock dividends, bond interest, et cetera. This money is reinvested to accelerate the growth of your portfolio until you retire, when it can be redirected to provide you with a “paycheck” to fund your spending needs.
This approach differs from pure growth investing, which is based on buying shares of companies that are focusing all their resources, including profits, on expansion and domination. Think Alphabet (parent company of Google) and Amazon. You reap your profits when you sell these stocks after they have (hopefully) appreciated for 10, 20, 30 years. Income investing comes at things from a different angle. To some extent, it allows for more diversification, generates predictable income over the years, and still allows you to wet your beak in the growth sector.
There are many ways to implement an income investing strategy, some of which can seem dauntingly complex. But I’ve come up with a system that I believe is easy to understand and execute. I call it the “Bucket System,” as all the money you invest will fall into one of four asset groups or “buckets” that work together synergistically to advance toward your goals.
Cash Bucket: This is your emergency fund; the money that lets you sleep well at night. You should have about six months of living expenses stashed in money markets, CDs or savings. This one is all about safety. Right now, your yield on this bucket will hover just above zero. (The average money market rate is currently 0.11 percent, which means in order to generate $1,000 per month in interest, you would have to have nearly $11 million.)
Income Bucket: Contributions to this bucket are invested in various types of bonds — Treasury, municipal, corporate, high-yield, international and floating rate. Bonds can range from very safe (Treasury) to very risky (high yield) with yields that vary accordingly. For this reason, you want to maintain a blend of bond types to maximize return while protecting your principal. Depending on that blend, the annual yield for this bucket should be in the 1-6 percent range.
Growth Bucket: This is where you can potentially capture the "capital appreciation" benefits of owning stock in fast-growing companies, like Amazon, which provide no current dividend income. But as an income investor, you want the majority of the stocks in the growth bucket to also pay a dividend. This type of stock is often found in one of four categories — consumer staples, utilities, health care and telecommunications. Some established tech companies (Microsoft) and energy outfits (Exxon Mobile) also provide both income and the potential for growth. These stocks often have annual yields in the 2-4 1/2 percent range.
Alternative Bucket: This bucket contains any asset that isn't a traditional stock or bond. Examples include real estate investment trusts (REITs), preferred stocks, master limited partnerships (MLPs), and closed end funds. This bucket provides higher current income than stocks and bonds but comes with higher levels of risk. I consider this your overall portfolio yield-enhancer as yields from these alternative investments can range from 3-8 percent annually.
As a reminder, when I refer to “annual yield” for each bucket, I’m talking about the amount of cash flow that you will receive from the group of assets in that bucket. Your total return will be greatly impacted by price fluctuations of the underlying assets in each bucket.
Easy enough, right?
Of course, once you have your buckets in place, you need to keep regular tabs on their performance, making adjustments as needed in response to changes in your life or financial goals. As that great war-planner Winston Churchill observed, “However beautiful the strategy, you should occasionally look at the results.”
About the Author
