Can Bonds Increase Income from Your Investment Portfolio?
By Douglas Goldstein, CFP® - helping olim handle U.S., IRA, investment, and brokerage accounts from Israel
A retired widow met with me last week to discuss how to increase income from her investment portfolio. I reviewed her account and made some suggestions for restructuring her investments to get predictable income. We spoke a lot about bonds. Here’s why:
Bonds pay a set amount on a fixed schedule, so if you are looking for predictable income, bonds may work for you. A bond’s interest rate is often commensurate with the level of risk; if you buy a “high-yield bond” (or “junk bond”) you get a higher interest rate than if you buy a high-quality bond. A well-designed portfolio incorporates different types of bonds in order to diversify risk and maximize returns, and it reflects the risk tolerance of the client.
Build a bond ladder
Another way to diversify risk while creating a predictable income stream is to use a technique called “bond laddering.” This means you buy a series of bonds with successive maturities, such as one, two, three, four, and five years. When the first bond matures at the end of the first year, you reinvest the principal in a new five-year bond at the prevailing interest rate. The following year, when the next issues matures, you do the same thing. This way, you have ongoing and dependable returns. You can customize the rungs of your ladder (i.e., the amounts of money you wish to invest), the height (meaning the longer and shorter term investments), and materials (types of bonds, like corporate or government bonds) to suit your own personal needs and risk tolerance. Bonds do have risks, so be sure to speak to your financial advisor, or get in touch with my office, to determine which specific bonds may be right for you.
Two videos on bond ladders
Watch two short videos about creating a bond ladder at: www.Profile-Financial.com/bond-ladder. If you have investments in the United States or are interested in receiving dependable income from your portfolio, call my office (02-624-2788).
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates.
What should you do if you receive a lump sum, such as an inheritance, legal settlement, or pension payment? Should it be invested for growth or for income?
Invest for growth
A “growth investment” tries to increase the amount of money you have. Growth investments often entail some level of risk, so if you plan on using the money in the short term, you should consider a more conservative investment. If you hope to grow the lump sum to be able to meet a long-term goal, then consider the amount of risk you can take. What would happen if you lost part or all of the principal?
Growth investments have the plus of potentially increasing the real value of your money over time, since growth investments – like the stock market – could outpace inflation. If you don’t need the extra funds to live now and can tolerate market volatility (which means you could lose money), growth investments may be the appropriate place for your lump sum.
Invest for income
An “income investment” usually has a lower risk level and pays regular interest or dividends. Examples are fixed-income securities, such as bonds, bank deposits, and even real estate (or if you want to own property but don’t want the hassle, you could consider REITs – Real Estate Investment Trusts). If you want to increase your current cash flow, income-producing investments may be appropriate for you.
How to make a decision
If you receive a lump sum, when deciding to invest for growth or income, start by asking yourself:
Some people invest part for income and part for growth. To find out what you need to know, join the upcoming webinar, “How to Invest an Inheritance,” by registering at www.Profile-Financial.com/webinar.
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates.
The Best Way to Update Investments in an Inherited IRA
By Douglas Goldstein, CFP®, - helping olim handle U.S., IRA, investment, and brokerage accounts from Israel
If you inherit an IRA (Individual Retirement Account), you must be aware of the regulations concerning transferring the account to you, the “beneficiary.” Apart from the technical requirements for processing the account, which a financial advisor should be able to handle, some people also feel a moral responsibility.
When a client recently called me about an inherited IRA, he said, “I would like to sell some of the stocks in the account. Am I legally allowed? And if I do, am I being disloyal to my father’s memory by getting rid of what he bought?”
Personal finance is personal
This client is far from unusual in the loyalty he feels to his benefactor. Many beneficiaries feel as if they are betraying the person who left them the account if they change anything in it. But that is far from being the case.
When choosing investments, you need to have your own goals in mind, rather than those of the deceased, which may have been quite different. I told my client, “I’m sure your father wanted the best for you, which is why he made you beneficiary. Improving the IRA’s portfolio by acquiring investments that are more appropriate for your situation isn’t being disloyal. It’s actually the best way to make the most of the inheritance.”
How should you optimize the investments inside an IRA?
If you sell investments inside an inherited IRA, you don’t pay U.S. tax on capital gains until you withdraw the money. Be aware that generally you shouldn’t hold an annuity or other tax-advantaged investments like municipal bonds in an IRA. Furthermore, if you’ve made aliya, if you transfer the funds out of an IRA to an Israeli investment account, the funds immediately become taxable and would lose their U.S. tax benefits.
Not sure how to properly protect an IRA that you inherited? Go to Profile-Financial.com/inheritedira.
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates.