"People define risks in many ways, and there are too many risks in investing for me to be able to overcome them all and insure that none come my way. Most people define price volatility as a major risk, and young people, you’re going to learn that’s one risk you are going to have to ignore. You can not control price volatility. You can not maintain the capital gains you may show in a bull market when the market turns and corrects unless you go to all cash, and by the time you realize that might be a good idea, much of the gains will have been taken away.
If you want to benefit from the long-term gains that stocks do provide, putting up with price volatility is the toll you have to pay. … Get your mind right!
There are only two risks that I had to overcome based on my personality and risk tolerance level. One is that, as a long term investor, I don’t want any of my companies to go bankrupt. I’ve held a handful of those over the years and that wasn’t any fun. The other major risk to me is not having enough income to live off of in retirement, and it is that number one risk to me that started off the article above.
How much do you need? … When do you need it? … How sure are you that it will be there?Those 3 questions pretty much are centered around what I consider to be the most important risks to take on.
By focusing on companies with high financial strength ratings, I minimize the possibility of companies going bankrupt. My initial purchase of a company usually requires a BBB+ or better rating according to S&P and with this rating as a baseline, it does allow room for a company I own to drop 2 ratings and still be investment grade. As a long-term investor, who wants to buy, hold and build positions over the long term, I know that some of the companies we own are going to face headwinds at some point and it may cause their ratings to drop. The higher the rating, the longer the period for me to be patient in the event I don’t want to give up on a company too soon.
As to how much do I need, and when do I need it, it’s the income flows of every portfolio that I monitor and not the portfolio value. I do not report how much a portfolio is up or down quarter over quarter or year over year. It’s the income results that reported, as it’s the income that has priority in answering the 3 most important questions about investing. How much did the income grow this year? That’s our number one concern.
How much do you need? … When do you need it? … How sure are you that it will be there?I gave a couple of examples above on why I thought IBM and TGT were good investments for our portfolio. … How much do you need? … These companies have been terrific income producers for us, both yielding above 4%. I don’t have minimum yield requirements in selecting companies for most of our portfolios, if I did V and MA certainly wouldn’t be in the portfolios. But when I can get a 4% yield on an A rated company with a long history of raising the dividend, I’m all over it. That’s a good investment in managing the risks of greatest concern to me. Income and safety. I don’t have to be concerned with IBM or TGT going bankrupt, not even close at this time. And the dividend is solid for both, they both have announced raises, and they both are generating more than 2 times the income the S&P 500 Index would. This is why I consider them good investments for reaching our long-term objective of having enough when the time comes. We can’t spend percentage, we spend dollars, and both of these companies are generating generous amounts of dollars in the form of dividend yields which then gets reinvested elsewhere to generate more income dollars.
Everything you own can’t be your top total return producer. You don’t know which of your companies are going to produce the greater total return over the next year or two. There isn’t much that most of you can do in building those positions if price does indeed start to take off because most of you won’t pay the higher price to keep adding.
I can manage for income a lot easier than I can manage to obtain … and maintain … portfolio value. The bull market provides us with a false sense of security where we think we can continue to duplicate the success of the previous 6-7 years. As we move forward, annualized rate of return is going to be more difficult to achieve, but I can continue to get high single digit income growth, even low double digit income growth in declining markets, and I can maintain that growth through all market conditions.How much has your income grown year over year? That’s the risk that concerns me most.Food for thought folks!"