Focus on Cash Flow One of the most difficult transitions for an investor to complete is the change in focus from accumulation to cash flow. All of our lives we are trained to evaluate the performance of our investments by the simplistic principle of “how much did it go up or down.” If our investments gained in value, we assume we are doing well. If they declined, then obviously we didn´t do so well. This is a short sighted evaluative tool to use while accumulating. It is almost irrelevant in retirement. The most important rule for a retired investor is “don´t spend the principal.” In other words, use your principal and live on the cash flow which the principal is able to generate. With this in mind the value of your principal becomes less relevant than the cash flow it provides. This requires us to think differently about how to invest and what to invest in. If we are trying to improve our lifestyle, we should do so by increasing our cash flow. How do we do this? There are many investments which provide a relatively high, safe and predictable income. There are investments which provide a high income but are not safe. There are investments that are safe but do not provide a high rate of return. Pursuing either of the latter two investment types will result in negative cash flow performance. My point is that if your money is invested at 3% or 4% when 6% to 7% is available you are losing out on $3,000 to $4,000 per year per $100,000 invested. That pays for a lot of Pacifico. The other type is more easily recognized

in that if you are greedy and invest for 10% and lose your principal, you lose your principal! Remember, never touch the principal. So where can a 7% cash flow be found? In my November article, I discussed Real Estate Investment Trusts (REITs). This is my favorite investment for cash flow because it is relatively high, tends to increase over time, and also offers the realistic opportunity for capital appreciation. Another area which offers comparatively high cash flow is preferred stocks. Preferred stocks are not bonds but act a bit like bonds. With a preferred stock money is transferred to a corporation and the corporation pays the investor regular, usually quarterly, dividends. There is no promise to repay the money. Rather, the preferred stock trades in the market and will increase or decrease in value depending on market conditions. The dividends will remain constant, however, and that is what is important for an investor focusing on cash flow. Corporate bonds and closed end bond funds can also provide relatively high, safe and stable income. None of these investment types are the sole answer. But remember, CDs, money market funds or government bonds are not the only answer either. A diversified portfolio of investments paying a relatively high income will maximize your cash flow. Last month I promised to provide REIT websites which provide additional information in regard to REIT investing. Here are two which provide specific product, historical and analytical information: www.cohenandsteers.com & www.homes.wsj.com/reits/