4 Steps to Optimizing a Portfolio for Income 

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You can build an investment portfolio in any conceivable shape or size. Some people are just starting out with a few hundred dollars, even less. Others are managing multi-billion-dollar hedge funds.

Some folks are super risk-tolerant – they have no difficulty with grabbing high-risk, high-reward opportunities to add to their collection – while others just want something simple and stable.

There’s no particularly “right” or “wrong” way to optimize a portfolio. All that matters is that it meets your current condition and ultimate goals. If you hope to optimize an investment portfolio for steady income, you can do it – and it’s probably simpler than you think.

Why Optimize for Income?

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Optimizing a portfolio for income isn’t the best move for all investors, but for some, it’s the perfect fit. The concept is simple: rebalance your assets until your portfolio generates consistent income on your behalf.

For some investors, the approach is a necessity. For example, if you’re going to retire soon, you’ll probably have to make sure you have the assets to bring in enough for you to live on.

You might also desire an extra line of income if you’re between jobs or need more long-term cash flow.

Top Priorities

When you optimize investments for income, your top priorities will be:

  • Stability and predictability. Most investors who optimize for income prefer stability and predictability over potentially impressive returns. It’s much better to have assets that generate the same amount of money every month than an asset that might generate funds at some unknown point.
  • Cash flow. Obviously, you’ll optimize for cash flow. It’s possible just to withdraw a fixed amount of cash from your portfolio every month to serve as income, but it’s even better if you have a check mailed to you each month (or new money in your account on that regular basis).
  • Diversification. As with any other portfolio, it’s wise to diversify. If one asset class or industry suffers a harsh economic downturn, and you don’t have diversified holdings, your entire income source could disappear. So it’s a good move to invest in a wide range of assets and fields.
  • Options for the future. It also pays to optimize your portfolio for flexibility. If you have to make changes to your holdings on the fly, you should be readily able to do so. That’s the reason many income-based portfolios focus on liquid and semi-liquid assets.

1. Assessment

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Everything starts with a simple assessment of your current holdings. What is your net worth? Where is that net worth allocated? Are your assets liquid or illiquid? How much income is your portfolio currently generating?

This is also a good opportunity to evaluate your goals and priorities. How much income do you need for your long-term goals? Is this going to be a permanent or temporary portfolio change?

2. Reallocation

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Next, you’ll start to reallocate your assets. This is arguably the most important step since you’re searching for assets that should generate income on your behalf.

These are among your best options:

  • Real estate. This is one of the best choices if you wish to invest for income. If there are plenty of renters in your region, you could pick up a relatively inexpensive property and collect monthly rent that approximates what you pay in ongoing expenses. Depending on the nature of the property, you could make hundreds or thousands of dollars a month this way. If you don’t spot many attractive properties in your area, don’t worry; according to Green Residential, you should be able to invest in rental property anywhere with the guidance of a property management firm.
  • Dividend stocks. You could also invest in dividend-paying stocks. These are stocks whose companies distribute profits on a regular basis, usually quarterly. You’ll earn a percentage of your holdings in the form of cash every few months, and if you’re interested in diversifying your dividend-paying holdings, you can invest in an ETF that focuses on dividend-paying stocks.
  • An income-based business. You can also generate income from a business, assuming it’s optimized for cash flow. This can be difficult to manage, particularly since a business is not a liquid investment, and your income may be inconsistent. But it’s worth considering.
  • Peer lending. Additionally, you could turn to peer lending. Thanks to a variety of online tools, it’s possible to lend some of your capital to other people at a fixed-interest rate. You may even optimize your lending for a specific balance of risk and reward and thus avoid particularly risky borrowers.

3. Income Planning

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Next, you’ll need to do some income planning. Based on what you currently know about your holdings, you may be able to calculate the amount of income you would generate each month. For example, if you’re receiving $1,500 per month in rental income and another $1,500 in stock dividends, that’s $3,000 per month you can depend on.

Many investors, especially those who are nearing retirement, choose to observe the so-called “four percent rule.” This maxim recommends withdrawing no more than four percent of your principal each year.

If you do this, and your portfolio is adequately balanced, you should be able to outlive your savings quite comfortably. For example, let’s say you have $1 million in assets. If, on average, you earn 7 percent interest on those investments each year, you’ll get an average of $70,000 per year.

Taking out $40,000 per year, every year, should be more than manageable – and even in periods of crisis or recession, you won’t have to worry.

4. Adjustment

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The final step is an ongoing one. You have to make continuous, gradual adjustments if you wish to succeed. Markets and economic conditions change regularly, so it’s your duty to observe the changes and take action if necessary.

You’ll also want to reallocate your portfolio if your financial priorities change, or new goals emerge. For example, in an inflationary environment, or if you decide to go back to work, you should take the time to reevaluate your holdings and possibly rearrange them.

Optimizing an investment portfolio for income needn’t be especially complicated, but it’s something that requires your dedicated attention to succeed. A handful of intelligent reallocation moves could be all that’s necessary to provide you with the income you require for retirement.