7 Top Asset Classes That Provide Reliable Investment Income

 In Bond Investing, Retirement

investment income

Investment income is the name of the game when it comes to where you put your money.

However, with so many options, where do you begin?

Below are the seven top asset classes you can choose from. Please read each carefully because, even though they’re your best options, that doesn’t necessarily mean they’ll make sense.

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Stocks

We’ll first begin with stocks, which are the investment assets the vast majority of you are probably most familiar with.

When you invest in stocks, you buy shares. These are aptly named as you’re buying part of a company. That company is sharing part of itself with you and doing the same with other investors.

When the company does well, the company is worth more. Therefore, when the company does well, your shares in it are worth more, too. If you were to sell your shares after the company begins doing well, you’d make a profit.

However, this works both ways. If you buy shares in a company and it begins doing worse, then your shares will be worthless. You can plan to hang onto them until things turn around or you can sell them at a loss.

No conversation about your investment income would be complete without bringing up stocks. They’re an old standby and practically synonymous with the very term “investing.”

The problem is that most people don’t understand how to use them. As the old saying goes, there’s a tool for every job. That doesn’t mean every tool can do every single job, though, and this applies to stocks.

For example, I’ve talked before about how stocks shouldn’t be your entire nest egg. This is just way too much risk to take on during your retirement years. Similarly, as you get older and closer to your retirement age, I advise ditching stocks, so you don’t expose yourself to unnecessary risks.

I’m not saying you should never invest in stocks. They wouldn’t be on this list of top asset classes if they didn’t carry some advantages. Stocks are great for dynamic investing early on in life when you have time to make up any losses.

REITs

When it comes to your investment income, you may have thought about putting your money into real estate. After all, as you’ve probably heard, “they’re not making any more land.”

That expression covers the fact that land is generally a commodity that will only benefit from increasing demand as supply goes down.

REITs are Real Estate Investment Trusts. These organizations own or finance real estate investments that produce ongoing returns. Like many investment assets on this list, they’re patterned after mutual funds. You’re not investing in a single piece of real estate; you’re investing in a number of them.

This comes with advantages and disadvantages.

On the good side of things, you don’t have to worry as much about putting money behind a piece of real estate that doesn’t perform. Everyone has heard horror stories about people who invest in real estate only to find out it’s a terrible piece of land that will never be anything more than an eyesore. In that case – poof! – there goes your investment income.

Of course, that also means you probably aren’t going to see the dynamic types of returns we highlighted with stocks. While that may seem worth it, many experts would point out that the risk-reward ratio makes REITs far less attractive than just taking the time to find a superb piece of real estate to invest in.

Bonds

Finally, let’s talk about bonds, which are the best possible asset class for boosting your investment income.

Bonds are certificates that represent real money an investor loaned to either a government or corporation. These borrowing entities love bonds because they’re an extremely quick way to raise money.

The advantage with bonds is that they’re like promissory notes that the corporation or government must make good on. So, for example, unless a government completely disappears, they’ll pay the bond issuer back.

That’s different from stocks. A company can lose practically all its money without shareholders being paid back anything.

Now, before you go investing in bonds, it’s important that you understand the marketplace. Otherwise, you may expect the benefits of a bond and end up with something very different.

Bond ETFs are a good example of this. Most experts don’t even consider them bonds, despite their name. They would probably better describe ETFs as mutual fund versions of bonds.

While you may think fondly of mutual funds, the problem is that when you apply these principles to bonds, the very asset loses its power. That’s because ETFs are traded several times throughout the day. In this way, they’re more like market trackers. For some professionals, that may make them a useful tool, but they’re far from helpful for most investors.

In short, they are not the investment income tools you want.

Now, let’s talk about these individual bonds and what they can mean for your investment income.

Again, while there is no sure-thing in the world of investment income, bonds are as close as it gets. You’re betting against the solvency of entire governments and corporations. There’s a reason why people keep coming back to this investment asset.

It’s because they provide reasonable but dependable returns. This is why they’re especially good for your investment income when you’re out of your 20s and no longer want to navigate the risk of investing in stocks.

Furthermore, there are bond ladders. This is when you invest in a number of bonds that mature over succeeding months. So when one bond matures, you can cash out and reinvest or decide to take the money if you need it. Then, the next month, another bond matures and you have the same option. You can keep continuously reinvesting or, at any time, take your enormous lump sum and live off it.

Again, though, these aren’t like stocks. You don’t have to cash out simply because you’re worried your investment income has hit its height. With stocks, there’s always the risk that the company will finally come down. This is highly unlikely when you make smart decisions with bonds.
Bond Investing Fundamentals

Preferred Stocks

Preferred stocks are considered “hybrid instruments.” Investopedia explains preferred stocks as:

“A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.

“Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The details of each preferred stock depend on the issue.”

In many ways, preferred stocks work like bonds. These are shares that are issued by a company that wants to raise capital for any number of reasons.

However, it’s not equity that gives you any real type of ownership in a company. It definitely isn’t a form of debt, either – a common misconception. In fact, as far as the law is concerned, preferred stock actually exists below bonds.

One of the biggest benefits is actually one of the scariest. Should a company go into arrears, as a preferred holder of stock you may have rights to demand payment. That’s not exactly the reassurance you want when looking to fortify your investment income, though.

It deserves repeating one more time, too: should that happen, your investment income would still be subordinate to people who bought bonds.

Trust Preferred Securities

Another popular asset for the sake of an investment income is known as trust preferred securities. They’re issued by companies primarily because it gives them favorable accounting treatment and a good deal of flexibility. Their desire in this regard can become your benefit.

Specifically, trust preferred securities are treated like debt obligations where taxes are concerned by the IRS. At the same time, they get to keep the appearance of equities in the organization’s accounting statements.

That’s quite the arrangement, but what does that mean for your investment income?

As a hybrid security, trust preferred securities act like preferred stocks, which we just covered, and subordinated debt. In short, you are looking at a long-term (at least 30 years) with the option for early redemption if the issuer so decides.

Royalty Trusts

Royalty Trusts are interesting because, while they’re publicly traded, they can’t grow. Instead, they’re only authorized to hold a number of assets to be managed and distributed by a bank or some other kind of trustee.

These trustees often hold the rights to things like oil or gas wells, which can mean huge returns but also involve quite the gamble. They are exciting investments and may be it is worth to own them at a younger age, but you probably want to steer clear of them as you get older.

P2P Lending

It’s worth bringing up P2P lending here although it doesn’t necessarily count as an asset class that should be trusted with your investment income. That’s not to say it can’t be effective, but we hesitate to give it this classification because it hasn’t been tested by any major financial stress yet, which is important.

Peer-to-peer lending is a form of debt financing that lets individuals lend and borrow money without the help of official financial institutions working as middlemen.

The upshot is that you can borrow money without paying as much overhead as you would with a bank. The downside is that you could also be entrusting your investment income to a completely unregulated party that may eventually fall apart and leave you high and dry.

Saving Accounts

We include this old standby because it’s still a natural asset for people looking to build a solid investment income. However, as you probably know, it’s a fairly weak one.

Your savings account will never grow – at least not enough to make it worth keeping serious amounts of money in it. You should use your savings account for a six-month repository of funds in case something goes wrong.

However, when it comes to an investment income that can actually help you during retirement, most saving accounts can’t do much. They have their place, but please don’t expect too much from them

In conclusion

Investments in government and investment-grade corporate bonds are two of the most reliable ways to get investment income and protect invested principal because of maturity, even though bond investing is not FDIC insured.

Therefore, while diversification of your portfolio is important and all of the above asset classes will serve you well, government and corporate bonds are the closest to sure things that you’re going to find.

early retirement

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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