Building wealth is different for everyone and comes with some nuances when choosing the right direction and investment strategy for each individual. Two key return components to consider are investing for income versus capital growth and what the right focus is for your portfolio. A good understanding of the strategies to follow can help you align your investments with your financial goals and individual situation.
An Income Focus
Investing for income focuses on reliable cashflow from investments to generate a return. This approach is particularly appealing to retirees, entities and other demographics who need regular income to and aren’t subject to tax at higher marginal tax rates. Some Income-oriented investments include:
- Shares focussed on returning income to shareholder: Companies that pay regular dividends provide investors with a share of profits, usually on a quarterly basis. These dividends can serve as a reliable source of income while also allowing for potential capital appreciation.
- Bonds: Bonds are fixed-income securities that pay interest over time. Government and corporate bonds can provide predictable income streams, making them a popular choice for conservative investors.
- Property: The right property in the right market environment can generate a steady stream of rental income whilst also providing for some capital growth.
- High-Yield Savings Accounts: While always considered an investment, this option offers interest income with lower risk, suitable for conservative investors looking to preserve capital.
However, investors should be wary of an income yield that sounds too good to be true, as they may carry greater risk than expected.
Investing with Capital Growth in Mind
Investing for capital growth looks to increase the underlying value of assets, with income generation secondary in nature. This strategy is often suited to younger investors or those with greater capacity or timeframes for investment. Some key asset classes include:
- Share in companies with a growth focus: These are shares in companies expected to grow at an above-average rate compared to their industry peers. While they may not pay dividends in large amounts, their potential for substantial price appreciation makes them attractive for growth-oriented investors. You can also access shares or a basket of shares via an exchange-traded fund for greater diversification across an entire index or market.
- Real Estate: While some investors focus on income-generating properties, others may invest in real estate with the goal of capital appreciation.
- Venture Capital or Private Equity: These investments focus on companies who require private funding to grow and are often in early stage. While they often carry larger risks, successful ventures can result in lucrative returns.
Choosing the Right Approach
Determining whether to focus on income or capital growth ultimately depends on your individual goals, risk tolerance, and investment timeline. Please reach out to an experienced financial planner within the Boutique Advisers team if you need help tailoring a suitable investment approach.
Sean Hocking works with successful individuals and families across Perth and Australia-wide to provide peace of mind and clarity around their financial future. Having a roadmap in place, which clearly articulates what’s important to them in the years to follow, gives his clients the confidence to make clear and informed decisions throughout their financial life journey.