Co-authored with Treading Softly.
When I was a student, I had a professor who was always wanting us to write papers with a focus on what he called the “human condition.” The human condition was the terminology that he used to describe experiences that all humans universally share, regardless of culture or perspective. This is the idea of being sad when someone dies, or being hungry when you have not eaten recently, or the sense of loneliness when you’re not part of a group and you wish you were. Every paper that we were required to write had to, at some point, be related to or touch upon some level of this universal human condition or experience.
I have found that the best books or articles to read touch on this human condition, whether they explicitly state that they’re doing so or implicitly. The most engaging articles I see on Seeking Alpha, or the most interesting books that I pick up from the bookstore, all find a way to use this universal human condition to be relatable to as many people as possible.
We often have the viewpoint of hoping for the best and planning for the worst. Realistically, very few actually plan for the worst possible scenario, but one that’s more likely in their opinion, even if it’s not the absolute worst. Those who consistently focus on the absolute worst scenarios that are the least likely to occur are often viewed as outlandish or crazy because their viewpoint is very unlikely to occur and, therefore, typically dismissed out of hand.
Yet secretly, especially as investors or workers reach retirement age, their greatest fear is running out of money before they pass away or before their spouse dies. For some, that’s an entirely unrealistic concern. For many, depending on what the market does and how they spend their money in retirement, that concern is wholly founded, even if unlikely. The big issue is when that concern keeps you up at night or governs your decision-making.
As a writer, one of the worst possible scenarios recently occurred in my life. Just over a month ago, I was involved in a terrible accident in which I broke all the bones in my wrist and multiple bones in my hand, necessitating the use of a cast and having to go through future months of intense physical therapy to try and regain function of that hand. When you spend almost every week writing multiple articles after extensive research and investigation, the ability of not being able to use a hand to type is a massive deficit.
I can clearly remember leaving the hospital, having absolutely no clue what occurred in the market or with my investment portfolio for the entire week that I was out of commission. The big question was, did my portfolio perform as I expected it to and continue to do what it was designed to do when the worst occurred? While having no ability to interact with it whatsoever.
Thankfully, the answer was, it did exactly what I designed it to do, exactly what it was purposed for. But why is that? Today, that’s what I want to take a look at together as we dive into some of the basic principles of investment philosophy and portfolio construction. My personal portfolio follows High Dividend Opportunities’ unique Income method.
Let’s dive in!
Simplicity Is Key
I remember the first time I looked up how to repair something on my classic Jeep. The instruction that was repeated over and over again was to follow the “KISS” principle. This doesn’t mean you should be kissing your vehicle every time you make a repair to it, although you might want to kiss the dollars goodbye as they leave. The acronym KISS stands for “keep it simple, stupid.”
The same principle should apply to your portfolio management. The less complex you make your portfolio management, the easier it will be to repeat and sustain. While I love good options strategies or hedging strategies, or complex derivative trading. None of those are long-term sustainable, especially if you should end up being injured and having to have someone else step in and pick up where you left off.
Consider the worst for a moment: You pass away, and your spouse is now the one responsible for managing your portfolio for their income. While it may have been simple for you to continue that options trading or hedging strategy, for them, stepping into what you’ve created and attempting to continue where you left off would have been a mountain of a challenge.
This is why I love an income investment portfolio. You don’t have to do a thing. In essence, you’ve created a portfolio that operates on its own. The income comes in with nothing extra you need to do. It arrives in your bank account, and you can spend it as you need.
There will be moments when they will need to step in and adjust holdings or trim and build up different allocations to different investments. But they would be few and far between compared to someone having to trade monthly options or trying to figure out what you’ve done with different derivatives.
We often get asked if we trade options within our HDO Model Portfolio, and our main answer is no. We don’t have an options portfolio available because we are long-term investors and not traders. Trading takes the investor’s time commitment to a different level. We prefer maximizing our recurring dividend income. However, many of our members do trade options based on our holdings, and we have a dedicated chat room for them to discuss, should they choose to do so.
Our goal is to create a baseline portfolio management strategy, which you can modify or adapt from. We want to keep the base as vanilla and straightforward as possible to be adjustable to everyone’s lifestyle.
It’s Time To Become Agnostic
Along the same lines as having a portfolio that is simplistic, I also strongly recommend building a portfolio that is agnostic. What this means is that your portfolio does not need to be constantly adjusted for various economic situations. You want a portfolio that benefits equally as much as it has drawbacks for inflation or changing interest rates.
Our goal as income investors should be to have income that is reliable and repeating. We are looking for capital gains over time, but it is not our primary objective. This means that, while we could potentially receive better capital gains by chasing various winds as they glow across the market, this introduces another potential failure point into your portfolio – if you make a wrong call, you lose. That risk is greater than the chances of you making the right call and winning.
The way to achieve this is to have a large level of diversification within your portfolio. We recommend holding no less than 42 individual and unique investments. We refer to this as The Rule of 42. This doesn’t mean that you should have 42 investments in just the shipping sector, for example. It means that you should have 42 different investments that span the range and depth of the market.
At times that means using Closed-End Funds (“CEFs”) to unlock income from sectors that typically do not pay high yields, as well as holding various preferred securities and/or bonds that provide high levels of interest in buying them at times when they’re out of favor in the market.
The goal is that, regardless of whether there’s a black swan in just one sector of the market or multiple, your portfolio will also have various other sectors that are outperforming and doing strongly, creating a balancing act between the two. The market rarely behaves like a seesaw, where one side is down, and the other side is up. It works more like a tilting table where various sectors are hurt to different degrees while other sectors benefit to varying degrees. You want your portfolio to be evenly balanced amongst various sectors. As a result, as the table tilts and moves, your portfolio remains stable, generating high income regardless of the economic situation.
Conclusion
I have spent years building, fine-tuning, adjusting, and creating a magnificent income portfolio for myself. It is a purpose-driven machine designed with a specific outcome and goal in mind. It’s not often that you get to stress test your portfolio or your portfolio management philosophy. Trust me, it’s not something that I was expecting to have to do either or have the opportunity to do. Nonetheless, at the end of the day, my portfolio performed exactly as I designed and expected it to do.
I’m thankful to be on the mend and that I wasn’t down for much longer than I anticipated. As I recover, I really appreciate the support of Seeking Alpha as well as the High Dividend Opportunities members and teammates. My portfolio is built on the key premise of being simple and agnostic.
As you approach retirement and expect life to become simpler and more straightforward. Your portfolio management style will need to match that. It can be tempting when you have more free time to want to fiddle and adjust your portfolio more often. That is a temptation that you should battle against, not embrace. The reason is that when you have to pass-on the management of your portfolio to another, you want them to be able to pick up where you left off quickly and easily maintain that portfolio without issues.
I want everyone’s retirement to be as enjoyable as possible. I’ll admit that for most, having to dance with their finances is one of the least enjoyable moments of their month or year. So making your portfolio simple and agnostic will allow you to have to deal with it less but enjoy it more as cash comes pouring into your account.
That’s the beauty of our Income Method. That’s the beauty of income investing.
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