How to Avoid the Biggest Mistakes People Make with Their Income Investments

Article submitted by Stephen J. Cagnassola and Donald Moine, Ph.D.
For more information, they can be reached at 973-349-1245.

What Do Investors Really Want?
After the stock market crash of 2000 to 2002, very few investors are looking for a hot stock or a hot mutual fund. While the stock market rally of 2003 and late 2004 were encouraging, many investors are wary of putting too much of their net worth back into stocks or mutual funds.

Instead, what millions of investors want is a steady, reliable monthly income that they can always count on regardless of what happens in the stock market. Stocks and mutual funds still have a place in most portfolios. However, many investors, especially seniors and retirees, are much more interested in receiving dependable income from their portfolios rather than trying to hit a home run with speculative investments.

A Look at the Future
A number of experts are predicting that the stock market may only rise between 4% and 6% per year over the next decade. The bottom line is that stocks cannot grow faster than the economy as a whole. Even the most optimistic economists doubt that the economy can grow more than 6% per year on a sustained basis. This places an upper limit on the appreciation potential of stocks and mutual funds.

During some years, the stock market may jump ahead of these projections just as it is also likely to suffer from significant losses during other years. Even if the market does rise by 6% or more per year, the ride will be volatile and that 6% yield will be taxable whenever gains are taken out or dividends are received. Many investors will be fortunate to earn 4% per year after taxes. When you deduct out mutual fund fees and stock commissions, some investors will be fortunate to earn 2% or 3% per year over the coming decade.

Alternatives to the Stock Market
While most investors should have some portion of their investments in the stock market, millions of Americans are searching for lower risk and steadier returns. What are your alternatives?

Savers now have several trillion dollars wrapped up in certificates of deposit (CDs) and money market accounts. Money market accounts and checking accounts are most appropriate for meeting short-term cash flow needs. However, given that these accounts yield only about 1% per year, they should never be viewed as investments.

After factoring in inflation and taxes, funds held in money market and checking accounts lose value each year. In our financial advisory work, we are known as income specialists because our expertise is in helping clients increase the income they receive from their investments. In this article, we will examine some of the most common mistakes people make in trying to increase their investment income. This knowledge could help you avoid mistakes that have forced many senior citizens to have to go back to work during their "retirement years."

We have sometimes seen people make the mistake of holding hundreds of thousands of dollars in money market accounts earning less than 1% per year. Why is this a mistake? As you will learn, there are ways of earning more than 4% per year tax free in other relatively liquid investments. To maximize your monthly investment income, you should only keep between 3 months and 6 months of living expenses in a money market or checking account.

The rest of those funds should be in safe investments that will at least keep you even with inflation . This means that you have to earn about 3% per year after taxes just to maintain your buying power. You also want a liquid investment so that you can easily transfer money into your checking account or money market account whenever it is needed.