"It Depends"

 Whenever I'm asked a question my immediate response is “It depends”. The reason that’s my first answer is because I’m rarely asked the entire question the first time. If I had said “yes” or “no”, the next question would more than likely be “OK, but what if...?”. The question I asked myself when I was younger was “Should I invest for Growth or Income?”. I’ve realized after all these years of investing that the answer to that question is “It depends”.

 When I was a young man I had no money, a mediocre job, and not a lot of earning power. The little money I brought in barely covered the cost of living my meager lifestyle. I struggled to save any money at all. But I did have one thing thanks to my youth -- I had time. Lots and lots of time. And I understood compounding. So when I looked around at stocks I wanted Growth.

 Now that I’m quite a bit older time is starting to run out. I’m no longer interested in that long term growth because long term to me is probably 20 years at the outside and more likely 10 years if you believe the actuarial tables! Today I want Income from my investments, not growth. It’s that income that I’ll need for retirement. It’s that income that I’ll need to pay the doctors and the pharmacists.

 Another consideration was and is taxes. Income producing investments produce income on a monthly or quarterly basis which ends up being taxed in the year that the income is paid out. Growth producing investments can avoid creating a tax burden until they are sold, sometimes years into the future. There’s little or no income to be taxed but there will eventually be a large capital gains tax to be paid.

 So as you can see, the answer to the question above is “It depends”. Growth when you’re young and Income when you’re old. The next question is “How much of each?” and “When at what age?”. The rule of thumb I’ve always followed it based on age. If you think about that for a moment it only makes sense. I believe your age should equate to a percentage. Your age should equate to the percentage of your investments that should be in income producing investments and the rest should be in growth producing investments. I have no justification for doing this other than it’s just a rule of thumb for me. So, when I was 30 years old I attempted to have 30% of my investments in Income and 70% in Growth. When I hit 40 years old I attempted to have 40% of my investments in Income and 60% in Growth. As you can see, as I get older my investments shift from primarily growth to primarily income. For me this all makes sense but I don’t know what I’ll do if I live to be older than 100.

 I’m not sure what anyone else does or how they determine the percentage of Growth and Income but this seems to work for me. If the logic works differently for others, then more power to them and I wish them well.

 My only caveat to this entire topic is that regardless of whether I am buying growth or income my highest priority is on Total Return. As I’ve mentioned numerous times in these articles, first and foremost I am only interested in companies that I believe will have a total return of 8% or more. Unless I can expect an 8% total return from an investment I’m considering, I’m not interested regardless if it’s a growth stock or an income stock.

 (Note: I remind you to familiarize yourself with my disclaimer if you haven’t already read it. Please do your own homework before making any investment decision and please take responsibility for your decisions.)