If you’ve read my work, you probably know that my grandfather was my inspiration for getting into this business. He did well in the stock market, and his enthusiasm for investing rubbed off on me.
My grandfather lived by his own homespun version of Peter Lynch’s advice to “buy what you know”; he had a strong preference for the shares of local companies.
Well, as it happened, my grandfather lived in Fort Smith, Arkansas, and there was a certain local company up the road in Bentonville that was shaking up the retail market in the 1970s.
You might have heard of it… goes by the name of Walmart (WMT)!
My grandfather never retired. Working was such an important part of his identity that he continued to go to the office until the very end. But the modest investment he made in Walmart shares ended up paying for my grandmother’s retirement, my college education, my sister’s college education, and my mother’s modest retirement today.
He never expected to hit a home run like that in the stock market. He owned a small warehouse downtown, and he always imagined that, once he was gone, my grandmother’s expenses would be taken care of with the rental income from that property. (He owned that property free and clear of any mortgage, I might add…)
Renting out the warehouse ended up being more trouble than it was worth. My grandmother sold it, and she ended up living on her Walmart dividends, bond interest, and Social Security.
There are some important lessons we can learn here – they are the foundation of what we do in Peak Income.
To start, capital gains are nice, but you can’t assume they’re going to be there when you need them. That’s not something you can control.
As a man who lived through the Great Depression, my grandfather knew that. If you lived through the markets of the 1970s or 2000s, you might have gotten a similar lesson. Between 1968 and 1982 and from 2000 to 2013, the S&P 500 Index went nowhere.
If you’d been counting on capital gains to meet your retirement expenses during those stretches, you might’ve had to move in with your kids.
Second, diversification is critical – and “diversification” doesn’t mean owning five slightly different mutual funds. It means owning assets that don’t rise and fall together.
For my grandfather, this meant tying devoting significant capital to his small businesses and keeping his liquid assets divided roughly evenly among stocks, bonds, and cash.
For me, in today’s market, “diversification” means keeping my assets divided among complementary short-term trading strategies, longer-term income strategies, and income-producing real estate.
For you, the mix might be different. The key is making sure the pieces of your portfolio move independently of one another. It does you no good to save for a lifetime if it all gets flushed down the toilet in a major bear market.
And finally, make sure you’re getting paid in cold, hard cash. It seems so “old timey” now, but my grandfather carried around a money clip with a big wad of cash in it. I don’t remember ever seeing him use a credit card.
Investments that generate regular cash payments allow you to realize gains without having to sell anything. It’s like the old analogy of slaughtering a cow for meat versus keeping it alive for milk. (Remember, my family’s roots are in rural Arkansas…)
With the former, you eat well for a bit… but then it’s gone. With the latter, you can enjoy fresh milk for a lifetime… and you still reserve the right to slaughter the cow for meat later.
Dividend-paying stocks, REITs, MLPs, and other income investments are the same. You enjoy the milk every quarter… and you can still have your steak later if you ever decide to sell.
And, while you’re waiting, that cow just fattens up and produces more milk…
Chief Investment Officer, Sizemore Capital
Charles, a registered investment advisor based in Dallas, specializes in dividend-focused portfolios and in building tax-efficient alternative allocations with minimal correlation to the stock market..
He is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.
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