'Portfolio Income' is explained in detail and with examples in the Accounting edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Portfolio income proves to be money that is actually brought in from a group of investments. The portfolio commonly includes all of the various types of investments that an investor owns. These include bonds, stocks, mutual funds, and certificates of deposit. These various financial instruments earn a variety of different types of passive income, such as dividends, interest income, and capital gain distributions. Such portfolio income returns are generated by the holdings of the various investment products in the portfolio.
Portfolio income varies with the types of investments that an investor picks. You as an investor will commonly look at two different factors when assembling a portfolio for portfolio income. These turn out to be the money that the investment itself will produce, which is also known as an investment’s return, and the investment’s risk level that it contains.
As an example, stocks are frequently deemed to be investments with considerable risk, yet the other side of the risk return equation is that they provide income from a company’s dividends, or distribution earnings returned to the shareholders, as well as an increase in the stock price as the stock value gains with time. Certificates of deposit and bonds create interest income that is paid out on the investment that you hold. Still different kinds of investments produce other types of income, although this depends on the characteristics of the investment in question.
To maximize the portfolio income while reducing the amount of risk involved, individuals commonly choose to invest in numerous different kinds of investments. This is known as diversifying your portfolio and portfolio income. This way, you can combine both safer investments that provide lower real returns with riskier investments that offer greater investment returns. Your total collection of investments is the portfolio that makes your portfolio income for you.
This portfolio income is also classified as passive income, or income that does not require you to perform any work in order to make the money. The upfront investment actually creates the income without you having to be actively involved in the money making process. This stands in contrast to incomes that are earned through active involvement, or active income that you must expend both energy and time to create.
The ultimate goal for you with your portfolio income will probably be to build up enough of it that you are capable of living off of only the income that the portfolio generates. Once this point is reached, you would be able to not receive a payroll check any longer. Instead, you would support yourself in retirement from the dividends, interest, and capital gains created by the investments in the form of portfolio income. The best and safest way to do this is to only draw on the portfolio income itself, without drawing down the original principal.
By not touching the investment principal, you allow your portfolio and resulting portfolio income to build up over time. If you do not take out the portfolio income, then the total value of the portfolio will grow faster with time, allowing you to compound your investments for retirement. It is critical to have enough money saved for retirement that you do not need to take out this principal to support yourself. Sufficient portfolio income should be generated to cover the monthly retirement expenses. In this way, you will not be reducing your principal and risking the very real danger of your portfolio running out of money while you are still alive to need it.
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