REDUCING CRAZY STOCK MARKET RISK (How To Diversify With Dividend Stocks)

so we all know that investing in the stock market carries risk and I want to discuss my personal strategy today my personal strategy in my own portfolio I have 37 dividend paying stocks and I want to discuss the very steps that I take to mitigate risk the steps that I take to lower my level of risk my strategy is multi-tiered I have a variety of different levers that I use to manage my risk and this is really a top-down strategy here on my channel PPC Ian this is a thriving community of dividend growth investors. I do a lot of bottom self analysis I’m looking at specific stocks and analyzing specific stocks today’s article is a little bit different it’s more of a top-down approach I’m taking a portfolio wide view and I’m looking overall at my portfolio how I made a gate risk and this is actually a recent subscriber question so I’m really excited to queue this article up we actually subscriber asked me this question just the other day and I just had to do it. Because the subscriber is spending a lot of time investing in his education he’s reading this book poor Charlie’s Almanac this is the book of Charles Munger Charlie Munger Warren Buffett’s famed business partner and. I actually have the book right here it’s funny this is a gift that I received I’ve actually not not read the book yet. But I’ve got a signed dish and check that out there’s some Charlie Munger’s signature right there on the the opening page they are of the book so I’m really excited about that I’ve got to read this and this subscriber actually really piqued my interest with this particular question and the subscriber basically said hey Ian I’m reading this book and Charlie Munger basically says that there are cases there are cases out there where stuff just comes out of left field there are things that you never envisioned there are things in life in investing that just come come into the forefront of of your investment portfolio that you could have never saw before and I look at that is risk with investing there’s risk there’s things that can come up even Charlie Munger acknowledges that despite all of his best efforts Warren Buffett’s best efforts there are things that come to the forefront in their portfolio that they didn’t expect and so how can one deal with that how can one position themselves for that that is what today’s article is all about so welcome to the article thank you again for the amazing subscriber question I really really appreciate the question great one and I have so many questions I am doing my best to get through each and every one of them so I’m excited to do another subscriber request article so let’s get started first and foremost I have talked about this before if you’ve been on my channel for a while I don’t want to spend a lot of time here. But inherently dividend growth investing this is investing for dividends like I do dividends that come in that can be used to pay the bills something is small is going out and buying a cup of coffee at Starbucks or something as big is paying for one’s mortgage payment or or one some apartment rental costs as well there are all kinds of uses of dividends and I invest for dividends when I buy a stock the only thing I’m looking at is how much income will that stock pay me over time and as the company grows as it grows its dividend will my dividend income increase that’s all I look at I don’t look at stock prices in terms of capital appreciation it’s just I’m not looking to buy low and sell high and so let’s look at this by nature dividends take away risk why is that in this chart here I have two lines I have one that’s price per share as we all know PPS price per share for any given stock it can be all over the map when one looks at over time ups and downs all over the place if one is relying on price per share to pay their bills that can be a little bit tricky. Because what if one buys here and then oops right here the mortgages do or down here I’ve got two got to sell some stock to pay my property taxes there are so many challenges with that strategy in my personal opinion especially looking at shorter periods of time that in my opinion it’s a no-brainer to go the dividend route. Now by contrast let’s look at this line this red line is dividends and dividends for the types of companies I own like McDonald’s for example they typically raise the dividend each year and they have done this for over long periods of time and so despite where this price per share is despite where the share price is going my dividends are a stream of income it’s typically up and to the right and that alone takes away the risk. Because I just don’t care where the share prices I surely care from an entry point the lower the share price the better my entry point the better my starting yield. So I love it when share prices are down and certainly over long long periods of time I like to see the share price up. Because it’s indicative that the company is doing well it’s just another way of measuring company performance. But in the short run medium run share prices up and down I take a lot of comfort that my dividends are up and to the right and so investing in dividends investing for dividends for that cash flow alone having that as my strategy it just takes away so much inherent risk in the stock market as long as I don’t need my principal I don’t need to sell the stock to make a profit and so that alone is why invest in dividends. But we talked about this before. So I don’t want to spend too much time I want to move on. Now to my diversification strategy it is so important in my opinion to diversify and a lot of people think about diversification the wrong way this is actually why I wanted to do this article a lot of people stop start more like bottoms up they just start buying stocks and they’re like hey I’m buying whatever’s on sale and buying whatever is attractive at the moment and I’m doing that to diversify however I think a lot of people they’re not always achieving the goals that they want to. Because they’re not thinking about things more from a top down approach and. So I want to go from my top down approach and you’ll see how it’s very different from just picking and choosing different stocks or more of a bottoms-up method so check this out first one is just time it’s important in my opinion to diversify buy time what does this mean let’s say I $50,000 right. Now and I want to invest it in the stock market well if I take that $50,000 and I put it all in tomorrow that is not diversifying by time that is taking a lot of risk I am assuming that tomorrow is going to be a great entry point. But I just don’t know that what I’ve always found is dollar cost averaging is a great strategy if I have some money I’m going to deploy it in the market why not take that 50,000 and put it in slowly. But surely over time a little bit each and every month until I’m fully in and I’ve done a article actually on how I would hypothetically invest $50,000 if I were starting all over again I’m in a link in the description below to that article if you want to check it out. But basically this is the concept of time time diversification is more important as once portfolio gets bigger and is one’s amount of money they’re deploying gets bigger let’s say I was hypothetically starting over again with $1,000 I would not diversify by time I would just get that thousand dollars working for me immediately. Because that would be my first stepping-stone in terms of adding more to the market. But again is some some money get bigger in let’s say at 50,000 or 100,000 or even 500,000 hypothetically to invest I would certainly want to diversify by time I would personally take the money divvy it up and deploy a little bit each month and of course is the sum of money getting deployed gets bigger the more time it will take to deploy it all and that way I’m it agates some of the market risk price per share of various stocks or just the market overall tends to go up and down I’m not taking a big bet on any one moment in time I think this is huge this is something that goes lost on a lot of investors out there I think dividend investors generally get this especially. Because this is typically how if one does participate in dividend reinvestment plans I’ll link in the description below what those are all about those tend to cater to these types of investors who want to diversify by time like myself anyways let’s move on industry so don’t look at the companies right. Now don’t look at the stocks that I have listed here let’s just start with industries before I do anything when I am creating a portfolio when I am planning my portfolio I’m in determining how this portfolio will be I like to put a weight put aside the companies at the beginning and I start just thing about industries what industries do I need representation across to achieve diversification these are not all of the industries that I have in my portfolio. But these are the ones I’ve discussed so far, on my channel. So I wanted just to use familiar industries that I’ve already discussed here on PPC Ian I own stocks in healthcare consumer none cyclical industrials restaurants utilities real estate energy chemicals technology a lot of different industries this is really important to think about industry before thinking about company. Because if one just thinks about company they may pick a bunch of different companies thinking they’re diversifying. But then they look back and they’re like wait a minute all these companies I have they’re in the same industry they’re all utilities if someone just buys a bunch of utilities that’s not really going to diversify one’s risk away. Because the utility sector more or less will probably perform most of the stocks in tandem they will tend to perform in lockstep surely there will be winners and losers and I like to diversify within industry we’ll get to that in a minute. But before diversifying within an industry it’s mostly important in my opinion to get representation across most of the eight major industries. Now maybe there’s a certain industry you don’t like you don’t feel comfortable you don’t like it at all it you don’t have to have all the industries and. In fact, I’m missing certain industries I’ll tell you one industry actually that I am missing right. Now in my portfolio is insurance I’m nothing against the insurance industry actually I just don’t have representation and so that’s an industry I’ll probably add in the future it may be sooner than later. But right. Now I don’t have it representation in that industry. So you don’t need every industry I don’t need every industry to achieve diversification. But I surely like having representation across a broad array of industries so next once I picked out the industries that’s when I start picking stocks and here is a representation of just some of the stocks that I have shared on my channel. Now I own 37 stocks this isn’t all of them this is a good chunk of them here health care for example I own Johnson Johnson and Pfizer consumer none cyclical Pepsi Procter Gamble kimberly-clark Clorox General Mills and Campbell’s soup so on and so forth here’s where it gets interesting once one is diversified by industry it may make sense in certain industries to have representation from more than one company especially if it’s a paler industry it’s one of your favorite industries it’s an industry that is a bellwether within the portfolio if you’ve been following me. You know. I’m all about consumer non cyclical I love consumer non cyclical so just here alone these are. I actually have more than this I have more stocks than this in consumer non cyclical. But you can see here one two three four or five six of them listed here. Now what’s in important to notice is some of these industries are broader reaching in scope than others consumer non cyclical is a great example of that Pepsi for example makes food and beverages Procter Gamble makes household goods kimberly-clark household goods and also goods that are used in industry paper goods Clorox cleaning supplies. But they also have some new other other products as well like the Burt’s Bees line and I think they own glad bags as well so they’ve got a few different lines one in the beauty mostly in kind of cleaning cleaning type of stuff General Mills Campbell Soup food. So you see here if I had a bucket them Pepsi General Mills Campbell Soup they’re kind of all in one bucket general like the food bucket. But in terms of kind of cleaning household goods type stuff I’ve got Procter Gamble Kimberly Clark and Clorox and. So this is really important when one has already picked their industries one is already decided hey I’m going to diversify by time. Now I’m gonna start picking companies it’s really important not to just pick all the same companies for example if I was starting over again and I was buying my consumer non cyclical stocks would I want to just buy Pepsi and General Mills and Campbell’s Soup probably not if I had a smaller portfolio and I just starting out and I wanted a few stocks in consumer non cyclical I would probably buy one food stock maybe Pepsi and then maybe I’d start with something else like a kimberly-clark to kind of diversify into consumer goods and so it’s really important to think about things that way and again the the approach of just coming bottoms up and picking a bunch of companies it doesn’t always achieve diversification. Because one may actually be defeating their there themselves they may actually be buying the very stocks that are all similar coming from bottoms up they may say hey Kimberly Clark is on sale right. Now Procter Gamble is on sale right. Now o Clorox looks good and then all of a sudden one might think hey I own three stocks I’m kind of diversified well not really. Because they’re all in the same industry and within that industry they all do more or less similar things so moving on you’ll see some of these industries here I don’t need quite as much diversification. Because some companies are just so diverse if I’d in themselves I’ll give you example well I’ll start with my favorite company Johnson Johnson and I’m going to link to some articles in the description below I have articles representing a lot of these companies already on my youtube channel if you want to learn more check out the the link in the description below we’ll go through those in great detail. But Johnson Johnson is a big company 326 billion dollar market cap they have business units across pretty much everything as it comes to health well-being medical pharmaceutical medical devices all kinds of stuff and so in healthcare for example I could probably be fine just owning Johnson Johnson and this has actually been my strategy on Pfizer too. But I’ve got the lion’s share of my money for the healthcare sector in J&J and I feel good about that. Because it’s diversified within itself however let’s take a different look at another company like consumer not cyclical Campbell Soup. Yeah, they’ve got a lot of products and it’s pretty well diversified. But it’s a smaller company they’re pretty dependent on certain product lines at the company is that going to get me the diversification I need to represent the entire consumer non cyclical bucket no and so it’s important to look at things that way as well as how diversified is a particular company and if a company is not that well diversified sometimes it makes sense to pick up other companies in the same sector to give yourself that diversification another way I like to diversify is based on market cap so these companies all have different valuations different market capitalizations the market cap is the number of shares outstanding x multiplied by the price per share it’s how much aggregate value is the company worth like I said J&J 326 billion that’s a big company. But there’s other companies that are smaller like Southern Company one we’ve talked about here a lot 47 billion and even smaller Realty income the company that I own that pays a dividend every month a monthly dividend company 15 billion I like to diversify by market cap. Because there’s certain market cycles where mega cap stocks do well certain market cycles were mid cap stocks do well certain market cycles where small cap stocks do well I like a portfolio where I see stocks going up and down the same time they kind of cancel each other out they mitigate some of the risk and I have always found that having a diversification strategy where everything is the same they’re all mega caps that just doesn’t work for me I like to have small caps like Realty income mid caps like southern and large caps like Johnson Johnson I diversify by market capitalization when I’m building my stock portfolio what else quantity of positions this goes without saying. But in general the more positions the more diversified one’s going to be the more risk is going to get mitigated away I own 37 positions if something happens to one of the companies in the portfolio it’s not going to make or break me if it were mainly if it were my number one stock Johnson Johnson is something Horrible’s happened like the company folded certainly that would have an impact on the company. Because I have a good chunk of the portfolio in there that being said it still wouldn’t make or break me. Because I diversified so well here’s what it comes down to I love having a lot of positions in the portfolio. But at the same time it can become a management overhead at a certain point enough is enough and I have found at 37 I’m getting there adding one or two more I’ll probably do it like I said at some point I want exposure to the insurance sector that being said I am in no rush. Now to add more positions. Because it’ll be a management nightmare that being said having too few I would have the the opposite challenge I would be a little bit more worried a little bit more concerned about being able to weather any storm like like Charlie said in poor Charlie’s Almanac it’s just these curveballs they can come your way you don’t know what’s coming the unexpected well by having 37 stocks I can weather the unexpected I can weather the unexpected even if it happens to several of my positions at one time. So I like having 37 positions and when I have my 37 positions I like to think about how I will weight them some of them I weight as core positions some medium some small I do that to mitigate risk as well and I’m going to link in the description below I have a whole article about that strategy how I like to weight different stocks in different buckets a lot of it just comes down to which socks are the best and core positions which ones are kind of medium study players which ones are just more ancillary one exposure. But I don’t feel quite as comfortable adding more money as I would to my more favored companies. But anyways just by having 37 and a lot of them are a good chunk of them represented here it just gives me that peace of mind that look even within the same industry a certain company maybe just something really wacky has happened something really weird having that diversification surely helps anyways I’m gonna move on. Now we’re talking about how to mitigate risk what I’ve talked about so far, mitigates risk within the portfolio itself. But there’s other types of risk in life. You know. certainly my stock portfolio could be doing great. But what if an unexpected bill comes up what if something unexpected happens at the job what if something just unexpected happens that requires a lot of money well I have come to realize in 2018 that it is really great to have an emergency fund it is really comforting it is really nice to have an emergency fund it was not always that way for me I’ll link in the description below in most of my years of investing I went all-in never had an emergency fund I’m glad I did it I when I was younger when I didn’t have kids when I could take on a little bit more risk I just went all-in and I wanted to. Because I knew the market was that really depressed levels as well and it was a good buying opportunity. But over time the market has gone up my life has changed I have two beautiful kids. Now and a wife and. So I have responsibilities and. Because I have those responsibilities it’s really important to have an emergency fund it helps me sleep at night it helps me weather the unexpected in surely if something unexpected happens I don’t want to have to sell stocks and so look my emergency fund right. Now it’s still just getting off the ground floor. But I am adding to it every month and it’s something that’s at top of mind it’s actually been challenging for me quite frankly. Because when ever money rolls in my natural reaction is to put it in the market I just can’t stop buying dividend stocks. I actually link in the description below I did a whole article about this I. I get I get to this point where I just have to buy dividend stocks I can’t I can’t get enough of it and I’ve had to be very conscious this year and very much exercising self-control to earmark the money for the emergency fund and not not deploying it all in the stock market and so that’s been a new challenge for me. But it’s important. Because I’m all about mitigating risk at this point it’s really important to me at this stage in my life and I’m I’m really thankful for the emergency fund one of the other things I want to mention is other assets how can one mitigate risk well maybe it’s not all about dividend stocks this is kind of a an interesting point it’s a nuanced point if you’ve been following my channel. You know. I’m all about dividend stocks that’s my thing sometimes I dabble in angel investing as well smaller sliver of my portfolio and I’m actually am a proponent as well of retirement accounts as long as they provide some unique benefit so one example of unique benefit does the employer offer an employer match another unique benefit is does it does the retirement plan potentially allow one to defer taxes maybe it’s a pre-tax retirement plan another example of a retirement plan is that may make a lot of sense is maybe it’s a retirement plan that allows one to compound money tax-free anyways one thing I have come to realize over the years is too many accounts is a management nightmare it’s just a management overhead it is too complex too confusing to manage. But at the same time too few accountants could expose oneself to risks so what I have come to terms with is have the great dividend strategy have the emergency fund pepper in a few other assets not too many. But a few strategically where it may make a lot of sense. So this is my fun article here on mitigating risk today thank you so much for watching and thank you for that question that was a great subscriber question and it was really fun leveraging poor Charlie’s Almanac here. Now and my interest is really piqued I really want to read this thing this is a big book by the way thick book and this will be a fun one I got a reading I got the signed edition so it’s been on my to-do list forever before I leave today I want to add a full disclosure I own the stocks mentioned in today’s article. So I am long I own Johnson Johnson ticker symbol J&J Pfizer ticker symbol PFE PepsiCo ticker symbol PEP Proctor and Gamble ticker symbol PG kimberly-clark ticker symbol can be Clorox ticker symbol clx General Mills ticker symbol G is Campbell Soup ticker symbol C PB wow this is this is getting interesting United Technologies ticker symbol UT x3m ticker symbol mmm McDonald’s ticker symbol MCD Starbucks ticker symbol s bu X Southern Company ticker symbol s Oh Realty income ticker symbol o BP British Petroleum ticker symbol BP Air Products and chemicals ticker symbol APD and finally IBM ticker symbol IBM Wow. Okay, those stocks I own they’re all in my portfolio in terms of full disclosure also before I leave today just a friendly disclaimer I am NOT a licensed investment advisor today’s article is just for fun and entertainment today’s article is not investment advice before you go out and invest in the stock market or anywhere else please do consult a licensed financial advisor first thank you so much for being here today for being part of the PPC e’en community please leave your comments below I would love to see how do you mitigate risk how do you think about risk is risk important to you do you not care about it this is my strategy on how I mitigate huge risk in the stock market and I can sleep well at night knowing that I’ve done my best to mitigate risk I will see you in the next article.

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