A Universe of Two: Fundamental

Unless you come from a business or finance background, investments can sometimes be confusing. Trust me. There are times even I get confounded by market fluctuations. The key is knowing how to react and keep things in perspective. Understanding some basic, fundamental concepts can help.

The choice of stocks alone is enough to scramble the brain. There are thousands to choose from – stocks of large companies, small companies, domestic companies, and international companies. It doesn’t become any less convoluted when we move onto bonds – treasury bonds, corporate bonds, state and local government bonds. It can all be overwhelming.

How do we cut through the clutter and confusion? I’ve found that when you boil all of these choices down to their basic essence, you are left with two choices, or a Universe of Two: growth investments or income investments.

Growth-oriented investments are investments that are expected to grow in value over time. Some examples of growth investments include stocks, real estate, and commodities. 

Income-oriented investments are things that primarily produce a regular income stream.  Examples include treasury bonds, certificates of deposit, corporate bonds, and municipal bonds. 

If we lived in an ideal world, the performance curve on growth oriented investments would be a straight line moving out and up at a 45-degree angle.  In this imaginary perfect world, an obvious investment choice would be growth-oriented investments because of their steady upward trajectory.  Income-oriented investments would be a much flatter progression, steadily cranking out a regular income stream.  Of course, if successful investing were that easy and simple, financial professionals like me would be looking for a job.

Fortunately (for me), we do not live in that perfect world.  Our “Universe of Two” is much more like the real universe – somewhat unpredictable and tumultuous.  In the real world, growth investments are subjected to market forces that create a trajectory of high peaks and low valleys. These up and down movements are often compared to a rollercoaster, exciting on the way up and a little upsetting on the way down.  Income investments have a relatively more stable trajectory than growth investments, but still have their own up and down pattern as well.  For some people, these up and down movements can be stressful and create feelings of fear or even terror of what the ups-and-downs mean for your money.  That can lead to possibly making bad, fear-based decisions that end up being detrimental to long term financial health.

So, what’s the solution? Find a happy medium that fits your situation, your needs and goals, and your temperament.  I am an advocate of maintaining a balanced portfolio. The combination of investments might look different for everyone, but the goal is to find a balance that has the potential to provide enough growth over time to help reach your goals, stay ahead of inflation, and build for your future.  This balanced portfolio would include some income oriented investments to provide enough steady income to meet your needs and provide stability to the overall portfolio, especially in times of bear market valleys that your growth investments may suffer from time to time.

A portfolio that is properly balanced with both growth and income-oriented investments has the potential to help create a reliable foundation for your retirement and other long-term financial goals. It is important to understand that the ups and downs of investment performance are normal, natural occurrences and not by themselves something to be overly concerned about.  This understanding of the normal patterns of investing can help to avoid making rash decisions that may prove costly in the long term. 

Choosing from a universe of two may be less daunting than the thousands of investment choices available in today’s marketplace.  Building a balanced portfolio can help mitigate some of the challenges that may be faced over time.  Finding the right balance that fits your individual situation is very important. Choosing the right kinds of securities to build out your portfolio is also very important.  For many people, seeking help from a competent, caring financial professional can be invaluable. 

If you would like to get a check on where you stand right now and determine if you are making smart choices about your money, especially in preparing for your retirement, you may want to take my free Retirement Quiz to help you achieve some financial clarity.

The opinions expressed in this commentary are those of the author and not necessarily the views of United Capital Financial Advisers, LLC.  Certain statements contained within are forward-looking statements, including, but not limited to, predictions or indications of future events, trends, plans or objectives.  Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.  This material is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment.  United Capital does not warrant the accuracy or completeness of the information. The commentary is intended for information purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice.  Past performance doesn’t guarantee future results.