The financial industry is awash with recommendations on how to build and protect wealth. Some wealth-building strategies exclusively target income-producing assets, like dividend-paying stocks and corporate bonds. Others lean heavily on financial products like mutual funds and annuities. However, not all approaches are created equal. Many people frequently invest in strategies and vehicles they don’t fully understand because they’ve received advice that may not be in their best interest.
At Fisher Investments, we believe in transparency and investor education. Understanding your investment options and why they may—or may not—be appropriate for your situation is key to making sound financial decisions and, ultimately, building wealth. We want you to understand what you are investing in and how your investment strategy can help you achieve your long-term goals.
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Should Your Asset Allocation Change Over Time?
Once you have a firm grasp on different asset types, you can better understand how to employ those investments in your strategy. We believe the number-one driver of an investor’s long-term success is having the appropriate asset allocation—the mix of stocks, bonds, cash and other securities in an overall investment strategy.
A common view in our industry is that asset allocation should change as you age. Proponents of this view believe you should increasingly shift your investments to “safer” assets such as bonds the older you get.
We believe this approach could increase the risk of running out of money in your later years. Investors commonly underestimate their needs later in life, including how long they might need their assets to last. If your goals require investment growth, then you likely want to have a healthy portion of your investments in stocks because they have historically had superior long-term growth over other asset classes.
At Fisher Investments, we believe your asset allocation shouldn’t change often. We think your asset allocation should likely only change if your goals or circumstances shift materially. For example, if you decide to retire earlier than previously expected, or need to take larger annual withdrawals than you thought, you’ll want to reassess if your asset allocation continues to suit your needs. If not, adjust accordingly.
Learn more about asset allocation and the importance it has on your financial future below.
How Can Your Investments Generate Income?
Many investors target income-producing assets, such as bonds and high-dividend-paying stocks, as a core part of their investing strategy—particularly when approaching or already in retirement. While income is certainly an important consideration, we think focusing solely on income when making financial decisions can be a mistake.
Dividends and interest are two different things. Dividends are a return of capital, whereas interest income is a return on capital—an important distinction.
Dividends are voluntary payments to shareholders, while interest is the cost an entity incurs when borrowing money. Companies can cut or suspend dividends when they need to. This means that investors relying solely on dividends to pay the bills can be left empty-handed if those companies see periods of distress.
Additionally, focusing on dividends alone can leave your portfolio overconcentrated in certain areas of the market. For example, high-dividend-paying companies are usually mature businesses that don’t reinvest as much of their profits in future growth opportunities. Depending on where you are in a market cycle, these types of companies may have lower return potential.
At Fisher Investments, we believe looking at total return is what matters most. This means looking at your dividend return and the growth of the underlying asset (i.e., price return). By taking a more comprehensive approach, you can potentially increase your overall returns.
Investment income is an important part of most retirees’ plans. We believe you don’t have to sacrifice income to have a flexible investment strategy. We recommend using an approach we call “homegrown dividends.” This involves periodically selling stocks to generate cash flow, which can complement any dividend or interest income your strategy may produce.Delve into Investment Income