PRUDENCE & DIVERSIFICATION: KEYS TO SAFE, PROFITABLE INVESTING

Well, it finally happened.  I had to evict a tenant at one of my duplexes due to their violation of their lease terms.  As a result, I now have a vacant unit in the real estate component of my Pay Me Plan.

practice prudent and diversified investingBecause I typically buy my investment properties occupied so I receive cash flow from the moment I take ownership, this is the first time I’ve had a vacancy.  This gives me an opportunity to secure some new, long-term, quality tenants and gauge my property manager’s proficiency at renting a vacant unit.  To be honest, I’m actually pretty excited about the situation.

I know, I know… it probably sounds rather odd that I’m not the least bit concerned about having a vacant rental unit.  Here’s the reason why:  it all goes back HOW investments are acquired for my portfolio.

PRUDENT INVESTING

I buy investments using a financially conservative approach, the investments must have strong operating fundamentals, and I pick them up at a discount to their true value.  In the case of this particular rental property, the property still produces positive cash flow at only 50% occupied, I’ve got ample cash reserves to cover all operating expenses, I’ve got a robust insurance policy on the property, and I purchased the property in a municipality where the landlord-tenant laws are very favorable, which ensures quick and inexpensive evictions.  These factors dramatically reduce the risk profile of the investment and allow me to continue operating it comfortably even at a reduced occupancy level.

DIVERSIFIED INVESTING

Now, the other reason I’m not at all concerned is because my portfolio is heavily diversified.  My personal Pay Me Plan is constructed from non-correlated, high-quality, productive assets that yield investment income.  I don’t just have a single real estate holding where I’m at the mercy of a disgruntled tenant.  Rather, I’ve got a robust portfolio comprised of income-producing assets that hail from various investment cohorts.

For example, even though there’s a vacant unit in my portfolio of rental properties, I received substantial dividend and distribution increases from some of the financial instruments in my Pay Me Plan over the last few months.

I’ll start with Chevron, the oil behemoth that recently bumped its investor payout by 10%.  Northrop-Grumman, a major defense contractor, boosted its quarterly distribution by 11%.  Public Storage, a real estate company with a pristine balance sheet, raised its dividend by over 13%.  Those inflation-trouncing income hikes more than compensate for the vacancy at the rental property.  See how this works?  That’s the power of diversified income streams and why you should have a panoramic portfolio of investments.


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To paraphrase the founder of Standard Oil Mr. John Rockefeller, it’s a lot better to have one hundred people owing you a dollar than to have two people owing you $50. The point is this:  when you have money coming in from electric utilities, oil companies, income properties, private businesses, gas pipelines, consumer loans, software developers, tax lien certificates, corporate credit, healthcare manufacturers, option premiums, etc., it’s going to take some extremely hellish economic scenarios to adversely affect your financial standing.

I’ll give you a little insight into my personal Pay Me Plan.  As of right now, no single investment or investment class constitutes more than 20% of my portfolio.  Think of the tremendous defensive moat and margin of safety that provides.  Even if an entire investment class gets hammered by 50%, that only impacts my total portfolio by 10%.  It’s nearly impossible to get “wiped out” when your portfolio is structured in such a conservative fashion. Want to sleep well at night? Diversification helps.

Moreover, when you don’t have all your eggs in one basket and you’re appropriately diversified, you don’t have to worry about selling low in a market crash and succumbing to “behavioral economics”.  Instead, if you recognize that the prices of select, high-quality investments have declined, you view it as an opportunity and can accumulate more assets at discounted levels.


Divide your portion to seven or eight, for your do not know what misfortune may occur on Earth. –King Solomon, Ecclesiastes 11:2


By investing prudently and maintaining ample diversification across non-correlated productive assets that provide organic income growth, risk can be reduced and returns can be enhanced.  Decades of financial research have come to the irrefutable conclusion that a little prudence coupled with proper diversification are some of the keys to safe and profitable investing.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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Gerald Larue thumbnail pictureThis post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.


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