Many schools of thought say, don’t invest in fixed income investments (like preferred stocks which pay 6 or 7% but have no appreciation potential). The conventional wisdom says, instead you should invest in growth stocks (like an S&P 500 index fund or Google or other growth stocks).
Now, I do understand that every portfolio does need some growth stocks for a hedge against inflation and for a future nest egg.
But one parallel I’d like to draw to shed light on this topic is the story of owning a business. Let’s say you own a T-shirt store on Main Street. You use this store to pay your bills, so your family can survive.
Let’s say your store is doing well, and it is making enough money to pay your bills. Do you know what your store is even worth? Is it gaining or losing value? Do you care? Most business owners don’t actually know what their businesses are worth. In fact, the values of their businesses are fluctuating all the time, depending on economic conditions, and other factors. I am a business owner and I meet with other business owners regularly. We almost never talk about how much our businesses are worth. We always talk about how our businesses can make more money.
Yet, with stocks, we do it the other way around. We almost never talk about how much usable income our stock portfolio is bringing in, but instead, we always talk about whether our stocks are “growing” (whether their values are higher). Like I said, there’s nothing wrong with buying stocks for growth. The problem is, you never know which stocks are going to grow, and which aren’t. And you never know when the market as a whole is going to have a 10 year slump.
Again, the T-shirt store owner doesn’t care if his store maybe is worth a bit less this year than last year, as long as he is growing his sales and paying his bills. Likewise, I choose to see my stock portfolio in the same light. Sure, I want values to creep up, but I’m more interested in the income – because it pays my bills now, or if I don’t need the money, I can reinvest it in similar or different investment vehicles.
How you look at this topic is determined largely by if you are a “now” person or a “later” person. Do you want to live an awesome life now, or wait until the years or decades pass for your portfolio to appreciate and “grow”? Personally, I’d rather live life now. Tomorrow isn’t guaranteed. So I treat most of my investing like a business – I’m less concerned about what my businesses (stocks) are worth, and more concerned about how many T-shirts (dividends) I can swing to pay my family’s bills, today.
There’s a lot more to talk about on this topic, a lot of other pros and cons to both income and growth investing. Ultimately, doing a little of both types of investing can be prudent. For me, I first endeavored to set up my income stream, and secondly endeavor to set up a growth portfolio. This is the strategy that made the most sense to me.