Understanding "Income Purpose" Investing

After 45 years of investing, I’ve come to the conclusion that the equity (or growth purpose) market is a far easier medium for investors to understand than the far safer, and generally less volatile, income purpose securities market. As counter-intuitive as this sounds, experience supports the premise.

“Understanding” boils down to the development of reasonable expectations: just how do you expect the market value of your income purpose securities to react to varying market, interest rate, economic, political, atmospheric, and “other” conditions”… and, does it really matter?

Few investors grow to love volatility as I do, but most expect it in the market value of their equity positions. When dealing with “income purpose” securities, however, neither they, their guru/advisors, nor market commentators are comfortable with any downward movement whatsoever.

Not to make excuses for them, but most professional and media folk think in terms of the individual bonds and other debt securities that Wall Street markets to brokerage firms and other large investment entities. Bond traders hate to discount their inventory due to higher interest rates… it’s bad for year-end bonuses. But their bond market disaster is the individual investor’s opportunity to buy the same amount of income at a lower price.

Most investors are also more receptive to loss taking advice on income securities than they are with respect to equities… always the affect of a “market value” rather than an “income production” focus… and a well kept Wall Street secret.

The list below describes some important characteristics and concepts involved with investing in income purpose securities. Familiarization with these will aid in the development of valid “performance” expectations. Doing so will also help develop an appreciation of this important (and somehow not too often mentioned) relationship: changing market values (in either direction) rarely have any impact on the income being generated by the security.