If you haven’t read Part 1 yet, then scroll back down my Blog Page a tiny bit and you should find it very easily from about a Week ago. It includes a list of the Parts to come and what is hopefully going to be in them (if I actually get around to writing them !!).
Features of an Income Portfolio
It’s probably easiest for me to write this as Bullets:
Managing an Income Portfolio
This aspect is very important and it is worth creating your own set of ‘Rules’ that codify exactly how you will manage your Portfolio - I will put a Link at the End of this Blog Series to an Example of the ‘Rules Template’ I use myself and I will also include it at the bottom of this one. Here are some steers:
What happens when the Markets Crash?
Without doubt when the Market throws up a proper Bear Market (like in 2003 and 2008) this can be a difficult time for Investors’ emotions and in many ways it really is about keeping our nerve and trying to stay rational and mindful of the Bigger Picture.
Over time there have been many Bear Markets of varying degrees, I think from memory these tend to be fairly quick events and usually they are all done and dusted inside 1.5 years and the Markets soon recover their footing and start rising again. It is often said that if you look back at the Index Charts such as the FTSE100 and S&P500 in the US over perhaps 15 years, the most severe Bear Markets such as that in 2008 barely show on the Chart as a bit of a dip.
When you look back to 2008 and think about what has happened since, it is clear that all Major Stockmarkets have recovered and gone much higher and in that time they have paid huge and growing Dividend Payments which are such an important part of Total Returns (and are relatively easy to obtain - I see it as ‘Free Money‘ !!).
In reality, Bear Markets are actually a fantastic opportunity for Income Investors to buy outstanding Dividend Stocks at really attractive Prices and therefore consequently very High Yields - which is of course the key objective of our Income Portfolios. Without doubt it is not easy to buy at such times due to your Fear emotions but if you can stay rational and focus on the Long Term, then when you see a Stock with a really attractive Dividend that would complement your Income Portfolio’s Diversification then it might be worth snapping it up. Equally, you might want to buy more of Stocks you already hold if their Share Prices get really beaten up. Remember, as an Income Investor you are interested in the Dividend Income that your Portfolio generates and you should keep your mind focused on this. As long as the Cash keeps coming into your Account in the form of the Dividend Payments, then you can stay fairly emotionally detached and just ignore the fluctuations in the value of the Capital in your Stocks. In time they will recover.
Of course if you are very experienced and able to take an active stance, then you might be able to Sell some Stock early on and to move into a larger Cash Position in the hope that you can buy more Stocks (possibly just buying back the Stocks you had) much lower down - however, this has lots of Risk and such timing is extremely difficult - so for most people (especially the Inexperienced) it might just be best to sit tight. If you have Cash from other Sources that you have not put into your Portfolio (possibly from Employment or other Trading Activities etc.), then such a Bear Market is utterly a Godsend for you because you will be very well placed to exploit it and buy some proper Bargains.
If you are in the fortunate situation where you do not need the Dividend Payments for your Living Expenses, then you can let the Dividend Payments build up in the Cash Pile in your Account and when there are such Drops in the Markets you can deploy some or all of this Cash to buy Stocks cheap. Equally, even if you do use some of the Cash for your Living needs, if you have some left over that can obviously be re-invested to take advantage of Bargain Shares. For example, if your Portfolio has an Overall Yield of 5%, but you only take 3% out of it for your Living Expenses each year, then you will be retaining 2% Annually which you can reinvest into the Portfolio Stocks to help generate more Returns in the future.
I realise now that I should have mentioned this before because it is very important - but I would suggest that if you have an Income Portfolio producing 5% a Year it is best if you can to take out less than that once you are in Drawdown Mode - for example, taking out 4% or 3.5% etc. would mean you retain some Dividend Cash for Reinvestment which helps to ensure the Value of your Portfolio can continue to grow at a reasonable clip.
That’s it for Part 2, if the winds blow our way I should have Part 3 ready for next week,
Related Blog Links:
Here is the Rules/Parameters Template Blog - note it is considerably more complicated than what is really needed for an Income Portfolio but it is a Blog I wrote years ago and I suspect many newer Readers will not have suffered it before:
Here is the Averaging Down blog:
Welcome to my Educational Blog Page - I have another 'Stocks & Markets' Blog Page which you can access via a Button on the top of the Homepage.
Please see the Full Range of Book Ideas in Wheelie's Bookshop.