Investment question(not really tax)

[Jesse]

An investment questionnaire we received asks of investment objectives and I'm not a financial wizard so dumb question of the day:

What would be the difference between:
-Appreciation with emphasis on safety or
-Income with emphasis on safety

[appelman]

Pretty much what it says.

One is investing with an aim to appreciation, but conservatively, to limit downside risk. The other would be investing to maximize income while minimizing risk to principal, but without much regard to appreciation.

[Roberts]

One is investing with an aim to appreciation, but conservatively, to limit downside risk. The other would be investing to maximize income while minimizing risk to principal, but without much regard to appreciation.

This is it.

The greater the potential for return, the greater the risk you are taking.

[BOB W]

Income is for today and appreciation is for tomorrow. Not the best way to say it but you get the idea. Appreciation is long term.

[JohnH]

That's where the term comes from.
If your fund manages to make money for you in the long term, you should really appreciate it.

[Jesse]

So would appreciation be more of a stock or mutual fund portfolio and income be bonds or savings type instruments.

Thank you all!!

[Gary2]

So would appreciation be more of a stock or mutual fund portfolio and income be bonds or savings type instruments.

A mutual fund is an investment entity that could invest in a variety of things. There are mutual funds with appreciation as the goal, and other mutual funds with income as the goal. So you wouldn't say that they only belong in an appreciation portfolio and not an income portfolio.

Since it doesn't take as much expertise to buy bonds directly as it does to buy stocks, some people advise against bond mutual funds because they don't think they're worth the management fees. That may contribute to the notion that mutual funds are primarily for appreciation, along with there being more growth funds than income funds.

Also, "income" doesn't necessarily mean bonds. Stable stocks that historically pay regular dividends can also be considered income investments. I don't know that there are many stocks that fall into this category anymore, but before industry deregulation, utility stocks were often considered income stocks.

[Jesse]

Thank you for taking the time to break that down for me.

[JoshinNC]

I would argue the opposite, Gary

A mutual fund is an investment entity that could invest in a variety of things. There are mutual funds with appreciation as the goal, and other mutual funds with income as the goal. So you wouldn't say that they only belong in an appreciation portfolio and not an income portfolio.

Since it doesn't take as much expertise to buy bonds directly as it does to buy stocks, some people advise against bond mutual funds because they don't think they're worth the management fees. That may contribute to the notion that mutual funds are primarily for appreciation, along with there being more growth funds than income funds.

Also, "income" doesn't necessarily mean bonds. Stable stocks that historically pay regular dividends can also be considered income investments. I don't know that there are many stocks that fall into this category anymore, but before industry deregulation, utility stocks were often considered income stocks.

Common stocks do not differ within the same entity (every common share of IBM confers identical ownership and income rights to the holder). The same entity, however, could theoretically have 100 different bonds at the same time ( for example: a 6% coupon, 30 yr maturity, a 5%, 28 yr maturity, a 10% coupon, 15 yr maturity, a 13% coupon, 5 yr maturity). If I gave you the bonds listed previously and told you the IBM common stock was trading at $30 p/share with a $.30 annual dividend, could you identify the yield for me on each investment? Which is better to own, the common stock or one of the bonds? Which bond is "best"?

It does take some expertise to buy bonds. Not trying to be a pill, just didn't want bad info out there.

[sea-tax]

.......
Since it doesn't take as much expertise to buy bonds directly as it does to buy stocks,..... .

Gary I humbly disagree with this statement. Investing in Bonds as well as Equities can be a very tricky exercise and I would use the upmost caution when doing either.

In both situations the investor has many variables to consider and comprehend prior to placing a trade. I have seen people fail at both just ask anyone who has purchased a corporate bond for a bankrupt company.

Not trying to start any arguement just wanted to let the less informed know that being a purchaser of bonds doesn't guarantee success.

Otherwise Jesse I think everyone summed it up pretty well.

[sea-tax]

Josh
You beat me to the punch....! great example

[OtisMozzetti]

What would be the difference between:
-Appreciation with emphasis on safety or
-Income with emphasis on safety

An objective of "appreciation" means that the investment strives to hold assets that rise in market value, i.e. which can produce capital gains if the investment achieves its goals. Those assets typically would consist of stocks, of mutual funds which mostly hold stocks, or maybe at least in the past of real estate.

An objective of "income" means that the investment strives to hold assets, such as dividend-intensive stocks or bonds, that pay dividends or interest. I suppose that an investment in real estate, such as rental properties, could often have income as a major part of its objective.

In each case, the "emphasis on safety" means that the assets chosen are to be those which are believed to have a low probability of dropping in market value.

[RitaB]

Right you are

That's where the term comes from.
If your fund manages to make money for you in the long term, you should really appreciate it.

AND, the tax rate on income (interest, dividends, and short term capital gains) is higher than the long term capital gains rate. For now anyway. And, I have seen plenty of people who are not rich benefit from this.

[Nashville]

Bring Me Up to Date

AND, the tax rate on income (interest, dividends, and short term capital gains) is higher than the long term capital gains rate.

I thought the ordinary dividends on stock were extended at the 15% ceiling just like LTCGs. Did this happen or did it not??

[RitaB]

I think

I think that only qualified dividends get the favorable rate, just like 2009. I didn't make that distinction at all, my bad. I have not, however, read anything official. Just like the folks in Washington.