Expires in 10 months
10 July 2021
Investing for Income: A Different Way of Thinking
For 20 years, I have invested in traditional assets. During that time, I tested various stock strategies; I traded options, bitcoins, growth stocks, value stocks, closed-end funds, master limited partnerships (MLPs), utilities, real estate investment trusts (REITs), and dividend-paying stocks. But every time I thought I was on to something promising, my ego was humbled shortly afterward. I came to the realization that the stock market was a great tool for asset appreciation, but unfortunately, the benefit of its almost universal liquidity comes with unlimited volatility which, in turn, creates income uncertainty.
What Is the Best Investment for Monthly Income?
The traditional advice you hear is that REITs and MLPs are good instruments for monthly income because they usually pay monthly and are supposed to be less volatile than the stock market. But what is supposed to happen and what actually happens are often two very different things.
For example, when I invested in higher yielding instruments like MLPs or REITS, a quick market downturn would erase years of the yield I earned in a matter of days. To see this example in action, take a look at what happens to oil and gas MLPs. While MLPs are billed as midstream companies that are “toll collectors” that are supposed to have very little commodity price exposure to oil and gas since the companies themselves don’t explore and sell the commodity, all you have to do to see that this is not the case is pull up performance records of the largest MLPs during the 2020 oil crash to see the correlation between their stock price and the price of the commodity
Price Movement of an MLP REIT and the Price of Oil From 02/2020–04/2020
Image credit: Yahoo! Finance
Similar scenarios kept repeating so often that I noticed a pattern emerge:
Liquidity leads to volatility and volatility destroys yields
Even a well-diversified portfolio of MLPs, REITs, utilities, and blue-chip payers can’t escape this pattern.
A New Approach
I knew after all of my failed attempts at creating cash flow from the stock market that I needed to retrain my mindset. I needed to stop trying to fit a square in a round hole—which is what I was doing every time I tried a new yield strategy using volatile equities. Instead, I came up with a new investment philosophy that changed how I now look at my portfolio .
A huge “Eureka moment” occurred when I stopped looking for the perfect strategy. Instead, I looked at my portfolio as it stood and asked myself: Is it too risky? Does it need to be more diversified? Does it provide enough appreciation? Is it too complicated? Does it provide enough cash flow? With those answers in hand, I created this chart that I use daily to decide what to invest in. It’s important to note that I never hit the reset button just because I developed an affinity for mobile home parks or ATM funds. It was more of a self-realization that only parts of my portfolio were in their ideal location serving their highest purpose, while other parts of the pie needed to be sliced, added, or removed.
As a result, I drew a line down the middle. On the left side is my appreciation portfolio. I want to be invested in a low-cost total market index fund because it is a simple, extremely time-friendly strategy, and when left alone to compound earnings, it is brutally efficient at creating wealth. However, if I put all of my money into the index fund yielding 1.55%, I would feel continuous pressure to sell. By splitting the pie this way, I can allow the index fund to do what it does best and not fault it for what it wasn’t built for: yield.
The right side of the pie represents my cash flow portfolio. The deficiency of the appreciation portfolio on the left side is the main strength of the right side, where cash flow is king. Just as Retire Early makes no sense for me to focus 100% on equities anymore, it also doesn’t make sense for me to have my whole pie dedicated to alternative assets. The two halves complement each other very nicely. Keep in mind that the right side of the pie is infinitely more time consuming to develop since I need multiple sources of cash flow, and each slice can take years to become competent in. But the time I save by having 50% of my portfolio on autopilot allows me to spend the bulk of my time on networking and researching the best alternative assets.
To illustrate the effectiveness of my chart, let’s say an investor has a million-dollar portfolio. If they put all of their money into a total stock index fund, their current yield would amount to $15,500 in annual income. By going with my model, the annual income increases to $57,750 . In the first scenario, they would likely have to sell a portion of their shares every year to supplement their income if they are retired. In the second scenario, they may never have to sell again depending on their financial needs. By having so many slices on the right side of the pie, they would also limit significant risk if one deal went south. To me, it’s like purchasing an assorted cheesecake platter: Sometimes it’s hard to decide between the chocolate, strawberry, or plain, but at least the variety is there. And if you don’t like a specific deal or asset class, there is a different “piece of cheesecake” that will fill the same role (producing cash flow) as the one you didn’t like. Variety and diversification are the keys to the right side of the pie.
This new philosophy worked so well that in 2021, I launched my own alternative investment fund, SIH Capital Group, with the hopes of becoming a small slice on the right side of other investors’ portfolios. It’s been an extremely rewarding experience that comes with a heavy dose of responsibility that I don’t take lightly. Our fund is designed for an investor looking for additional cash flow while lowering their existing portfolios overall volatility—not for an investor prioritizing total appreciation and looking for additional risk.
Our goal is to show investors that the right side of the portfolio doesn’t have to be a mystery, and that anybody can effectively invest for income. Please reach out to discuss the possibilities if you feel alternative investing may be right for you.
Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though the author has made reasonable efforts to ensure that the contents of this book were correct at press time, the author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article result in any investment or other losses. Your use of the information in this article is at your own risk.