Roaming Returns

038 - How To Understand And Navigate Different Types Of Investing Risk

• Tim & Carmela • Episode 38

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Risk holds many people back from investing because it causes a lot of fear, but most risk can be mitigated by doing a few specific things. 

Having a strategy in place to pick the right stocks, setting asset allocation rules and ensuring proper diversification are a big part of risk mitigation. But another important component is keeping your emotions in check. 

And one of the easiest ways to remove emotional reactivity is to have an emergency fund set up. That one thing alone negates the need to pull money out of the market at the wrong time and all the stress that comes with taking losses.

We talk about many stocks in this episode, but not all of them are good buys right now. The ones we mentioned that are


Drop your comments or questions for this episode on one of our posts. 


 If you're looking for a more detailed summary of this episode, click here.   

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Ticker metrics change as markets and companies change, so always do your own research. The content in this podcast is based on personal experience and is for educational purposes, not financial advice. See full disclaimer here.

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Welcome to Roaming Returns, a podcast about generating a passive income through investing so that you don't have to wait till retirement to live your passions. In today's episode, we cover the long awaited talk on risk and risk mitigation. We cover a few things that these so-called experts don't even bother mentioning in those articles they write.
It really just boils down to a handful of things. If you can implement the strategy that we use, you'll be set. Let's roll.
All right, guys. So we are back with the risk mitigation episode. I know, excitement from everybody.
It should be exciting. We've been talking about this freaking forever. We've been hitting on it.
I've just looked back through the emails. We've been hitting on it for months, and I'm sure we've talked about it in the podcast a few times, and we actually never just put it all together. Yeah.
So are we going to start first with what actually creates risk when investing, and then go through mitigation tactics? When you're investing, you have risks. That's just- I mean, there's inherent risks, obviously. The first thing that people have to understand is there's no matter what you invest in, there's risk, regardless.
But our opinion, at least my opinion, I think Tim also shares my sentiment, majority of your risk, though, is self-induced through your own emotional reactivity. Well, when we're talking about investing, there are a plethora of different things that could be risky, like the market risk, which means if the market's going down, all investments go down. If the market's going up, all investments go up.
So if you say you invest in Icon, and then whatever the market does, that's where the beta comes into play? Yep, yep, yep. That's that. Then the financial risk is the company can't afford to pay the bills, they'll go bankrupt.
There's operational risk where the company can't produce anything, and they're not making any products. Or economic reasons, right? That's the same thing. Yeah.
So economic reasons, like during COVID, when the climate shifted, everybody wasn't selling things because stuff was closed. I mean, that's a risk just to keep in mind. There's credit risk and interest rate risk, which are kind of like- The same thing? Tied in the same area.
Credit risk being that they can't afford to pay back the money they borrowed. And interest rate risks being that they're borrowing money at a higher rate, which can then lead to credit risks. There's volatility risk, which that basically says, well, we've touched on that before, where you get into something, but you can't get out of it because there's not enough volume in a day to sell it.
So you have to be careful of that. Is that actually what that one's saying, or is that more of the beta type thing? Volatility is just like- Either or. It could be both.
And then geographical, political, legal, they're things that you should know about each investment that you invest in, where they're located. If they're doing oil drilling, and you see that there's going to be a non-oil drilling party coming into control, then there's that political risk. And the legal risk is like, a lot of utilities have this problem, because they've been around since before all of us were ever around it.
They have old stuff, and Hawaiian Electric is one, PGE, I think it's PGE, and California's another one, where the stuff they have faults, and then it causes fires or damage, and then they get sued. That's the legal risk of companies. One of the other legal risk things that I read about was weed stocks.
I mean, Triple M's one that has a lot of legal risk, so that one's you have to pay attention. But weed stocks aren't, quote, legal everywhere, so there's a thing where if something you're investing in isn't necessarily legal in all areas, then legal could also branch into that. So what we just mentioned is each individual investment could have any of these points of risk.
Or the market as a whole. So you have to identify what the risk is in each thing that you're investing. It's mainly to keep it in mind, a good to know, because it's like if you're not okay with one of these, like utterly in totality, don't invest in that company.
But before you even do the research, you should do a research on yourself and determine what risk you're comfortable with to begin with. Yes. And that's where- We did that before.
I forget what it was called, but like you determine if you're- Investor profiles. If you're a conservative, a moderate, or aggressive, you have to determine what your risk tolerance level is. And once you do that, then you can identify potential investments to research and decide to buy or not.
For example, we'll just touch on real quick. If you're a conservative investor, you're not going to want to invest in things that are not in the fixed income category. Bonds are a good example of things to look at.
Closed end funds are a good thing to look at. Preferred shares would be a good thing to look at. It's more a retention of portfolio value consideration when it comes to conservative investing, whereas when you get towards the riskier side, you don't really care about your volatility of price or value of your portfolio.
You're more concerned for the long term picture and overall growth. And then the immediate one- Moderate. Moderate is the kind of a combination of the two, which I think is where we fall in.
It's where I hope to fall in. It's our goal. Because we have a different approach.
It's not completely long term, because we're generating income for hopefully short term lifestyle shifting and funding. So that's why we think moderate is the best approach for what we're trying to do. So you'll have to choose that for yourself.
I hope you see that you have to determine what you're comfortable with. And then once you determine what you're comfortable with, then you can start determining what risks of individual investments there are. Then you can mesh those together, hopefully, and come up with a portfolio that fits your investor profile, your risk style with investments that are less risky or more risky or moderately risky, depending on- Or a little bit of each.
So it balances things out. At the end of this, I'll explain to you how I navigated this without actually doing any of this. I didn't know about any of this when I put the portfolio together.
That's awesome. Intuitive risk management. Okay.
So now we're going to cover the different strategies to minimize investing risk. Take it on, Tim. Basically, the number one thing, if you look up a risk mitigation in Google, it's going to tell you to diversify your portfolio.
And the number one way to reduce risk is, according to the people, experts, not me, is to diversify your portfolio. I actually think we fall into the camp where we don't diversify, but we position size. But I'll get to that.
Well, that's allocation. Allocation. That's allocation.
This means investing in a variety of different assets, gold, silver, oil, stocks, bonds, CDs, art, cheese, whatever. Basically, it's the don't put all of your eggs in one basket mantra. I think the thing that people either mess up here with diversification is that they think diversification either is buying 10 different stocks, but they might all be in the same sector.
What happens a lot is people buy ETFs or closeted funds, and they actually overlap. JEPQ and XBG, they kind of are the same thing. We have both.
So they own the same stocks, right? Yeah, they own the same stocks, and they have a similar way they generate income. So they're basically the same thing. We own both, but that's us.
Other people might think they have a diversification in the technology sector because they own two ETFs or two funds, and they literally cover the same thing. So you're not diversified. So the problem with that is awareness.
We do it. We're aware of what's going on. It's part of our strategy.
If you are not aware that the two funds that you're invested in, thinking you're diversifying, you're not actually diversifying. So that's just something to keep in mind. And I've seen other portfolios where people actually think they're diversified in the energy sector because they have different utilities, but it turns out that they have two different utility companies that do the same thing.
Do the same thing. So it's like if oil takes – oh, the AT&T Verizon thing would be good. If you had AT&T and Verizon, you're oversaturated in the telecommunications sector.
And then when that lead thing happened, pretty much all those stocks went down. And that's that risk of diversification. Then there's the allocation part.
That's what I adhere to. I basically break the portfolio up that nothing's going to be more than like 5%. That's what I try to stay to.
I think we usually land on 6%, 6%. Well, you land on 6% because we have runners and stuff like that. But then that's – Like if you've been listening to the podcast, you'll know that's actually what happened with us and Icon.
Another aspect of risk mitigation is rebalancing your portfolio to get it back down to the 5%. So it's like a pretty – it's a perfect balancing act between diversification and asset allocation because it's the percent and then the diversified component. So like with Icahn, we've been talking about if you've been listening to the podcast since inception, we were overinvested, overallocated in Icahn.
Being overallocated when that bad news came out, our portfolio having too many eggs in that one basket plummeted and then the dividend got cut, which I think is probably another one of the risk management strategies I would assume. No. There's like literally they only have like six different things.
Okay. From everything I've read, they only have six different things. One of them is diversification.
The other one is allocation. Then there's the monitoring your portfolio, portfolio rebalancing. That to me is just allocation again.
It comes up as a different thing. Investing consistently is another way to actually mitigate risk. If you keep putting money into it, you're going to be buying high.
You're going to be buying low. So like once you've actually constructed a portfolio that has a good diversification, good allocation, then you just invest consistently into those different things. And that automatically does the dollar cost averaging, which is essentially what this is getting at.
And if you have your drips turned on, that'll do the same thing. Even though we like to do like a hybrid strategy where if the value of a stock is high, we'll actually turn the drip off for that one and funnel that money then into the lower valued stocks as a way to try to keep the portfolio allocated throughout the year. Another mitigation of risk is requiring a margin of safety.
And I've actually, we've addressed that, how we do that. Margin of safety basically being you're not going to, if you're a value investor, you're not going to buy anything that's overvalued. You're going to, and you have like a set 10%, 20%, 25%, 15%, whatever your value is that you're looking for something undervalued before you even entertain buying it.
We pound the table on that all the time. Always buy assets when they're undervalued, not when they're overvalued. And that's why a lot of people will actually navigate themselves without knowing it to closed-ended funds and bonds because it's the easiest way to monitor the margin of safety because it'll tell you right on the thing, whether it's undervalued or overvalued in the closed-ended funds and bonds.
If it's below 100, it's undervalued. If it's above 100, it's overvalued. And that's why we talk about starting with those types of assets when you're new because it's so easy to determine whether they're undervalued or overvalued.
So it gives you a good training wheel set up essentially to then get comfortable and then branch into more of the other types of assets. I think a really good example of that would be we always talk about Hercules Capital being a great company, an awesome company to invest in. But because its recent earnings smashed stuff out of the park, that company has now become overvalued.
Well, in my opinion, it's overvalued. I don't know yet because they actually like... By our metrics, Hercules Capital has become overvalued. It's at its all-time high.
So to me, that's overvalued. So I turn the drip off just to see what happens. If it keeps going up, great, awesome.
If it goes down, then I'll turn the drip back on. But I have my allocation in that particular investment. So I don't really care what it does, to be honest.
But that system that we have is creating that built-in margin of safety to reduce risk, which is the whole point. And it keeps you in the game because the more money you lose, the less money you have to invest to generate, the more you get frustrated and lose confidence. And it just becomes this vicious downward spiral.
But what I was doing the reading for this podcast, what I actually didn't read was most striking from all these experts. They all have these risk mitigation lists, how to risk management and risk mitigation, but none of them actually discuss the emotions of it. It's fascinating to me.
I see. That is really interesting because I think that's actually, in my opinion, the biggest... Probably the top three things to have on your risk mitigation is taking the emotion out of it, just relying on numbers and metrics. Well, that's a component of it.
The other component of it is the emotions tend to creep in when you don't have your savings account set up and you don't have your emergency fund set up. Because if something then happens, say you blow a tire out or I don't know, you get an unforeseen medical bill. Well, to me, that's part of diversification is actually having an emergency fund.
If you're looking at it from that perspective, but I don't think when you look up diversification, they talk about that component. So my point is just that if you have that set up, that system in place, it is so much easier to not have an emotional freak out session when you see your portfolio value dipping, knowing you have to tap that income or you're going to buy a house soon or whatever the heck your horizon is. In the same token, that might be why more people that are in their 50s and 60s navigate themselves to income for CDs and bonds and everything so they don't have to worry about that, I guess, emotional part of investing.
It's fascinating to me that no one discusses it. We've actually been kind of discussing it ad nauseum, but it's super important. Well, I think if you figure out if your fear of the value going down is because you need the money for something else and it's showing essentially that you don't have the emergency fund set up or the other thing, that might be an easy way to nip that in the bud and not be as tweaked out.
I mean, the other component you could do is literally just do what we've said several times, look at your share quantities growing and your monthly income generation growing, not the actual value of the portfolio. So sometimes it's just a tweak of perspective to get rid of that emotional component. What I've done.
Or you could be a lovely robot like Tim. Literally, before I invest in anything, I don't deliberately think about it, but I assume that it can go to zero. That's why I have my allocation of the portfolio set up the way I do, that I don't like to have more than one or two and stuff that I'm not sure about.
And then I'll have like 4% or 5% and stuff that I'm pretty sure about, then 5% and stuff I'm definitely sure about. So like if I say I invested in NEP, well, I only put like 2% of the portfolio into NEP because I'm not sure what it's going to do. It could go to zero because it's, but I highly doubt it.
It's a utility company. But like I just use that mentality that everything that I invest in can go to zero. If you think like that, then it actually helps you set up your portfolio in a way that you don't actually overextend at all.
Well, I think that goes into the psychological realm where if we set a specific expectation and the expectation is not met, that's when we're met with fear, anger, disappointment, villainization of whatever we're doing. And then it's like, you're like, I'm not doing this anymore because this didn't meet my expectations, but it's a personal expectation thing. So just like what Tim just said, if you assume an investment is potentially going to go to zero.
What's it called? Assuming the worst. Plan for the worst, hope for the best. I love that quote.
But that's how all the things I've invested in, I've literally just, if it went to zero, how would this impact everything? And that's where diversification and the allocation percent make it easy to say, hey, I don't want all my eggs in that one basket because it's possible that that can go to zero. So I'm going to not put more than 5% of my portfolio or 1% of my portfolio in that company. And then like another point that they bring up is, which I don't believe in, but whatever, it's establishing a maximum loss plan.
Like at what point will you sell things, stop losses and whatever? I guess that's a risk mitigation. So if we spin this into our strategy. We're going to discuss what I did after we get through this boring shit.
Well, but I was going to say, if we spin that into our strategy, maximizing loss plan, that is more of a dividend cut thing, in my opinion. The general public, I would assume, would have that 25, what is it, 25% stop loss nonsense they tell you to do? Well, if you look at historically speaking, the most that the markets ever went down is 44.2% in 1931. So you get a black swan event.
That's like the absolute worst. Like, I mean, generally, like you're probably looking at 12 to 15. So like if I was conservative, and I actually believed in the stop losses, it would probably be 15 to 20% would be my stop loss.
I hate them. But if I was conservative, that's what I would do. Because most of the time, the markets don't really go more than 30%.
So maybe even 30%. I don't know. The problem with that approach, though, is that if it's a one off situation, a bad news, people overreacting to a situation, you can't cherry pick.
That stop loss is going to take effect no matter what happens. So to us, it's better to see what happens. And most of the time, they have a rebound effect.
So if your stop loss automatically goes off, you don't get the rebound. I've seen that numerous times. Like say you're in a company that had a shitty earning report.
What will happen is it'll like tank in pre-market. And then as soon as the market opens, it'll tank. And then by like 11 or 12, it'll rebound some.
So if you did a stop loss, you're selling at like 930. But like had you waited, you could have sold. If you don't believe in the company anymore, you could have sold like 1130 or 12 o'clock and actually cut your losses in half for the day.
Generally, that's what happens when they tank. Every now and then, you get like when Icon tanked, it like literally just tanked all day. But normally, what happens is it'll shoot down.
It'll trigger. I think what happens is a lot of people have their stop loss. And so it'll shoot down.
It'll trigger the stop losses. And then it'll shoot back up. So I don't believe in stop losses.
That's where monitoring your portfolio comes in. If you don't want to monitor your portfolio, then you probably shouldn't be in individual stocks. You should be into ETFs and funds and things like that.
Yeah. That's a great mitigation strategy. The last thing they discuss is volatile markets.
You don't want to be in volatile markets. But we're in volatile market now. I feel like the stock market by definition is a volatile market.
So that to me is just like, OK. I think with that, like if I'm interpreting what I read correctly, like the most difficult part of volatile markets is people enter at the incorrect prices. Buying high and selling low.
They buy high. But it's just because it's a volatile market, it's bouncing around. That could just be another spin on the emotional component where it's like with HTGC.
Everybody's like, oh, this is an amazing stock. I want to get in and just smash this earnings. And we're looking at it from the perspective of, hey, this is overvalued.
If you're going to jump into this stock or not realizing that it's probably overvalued and then the other savvy investors who are in it see that it's overvalued, which is going to be the hedge funds, which is going to be the bigger investors. As soon as they start dumping their shares, that's when the prices recorrect back and the people who got greedy or FOMO essentially lose the value of the asset because they couldn't keep a curb on or do the actual research. Well, to me, it's all about entry price getting in when it's undervalued because it literally doesn't matter what happens.
I personally think volatility is a good thing because it gives you opportunities to get in at better prices. But not everybody feels that way about volatility. That's why crypto is so... Crypto is insane right now.
And that's why people are so anti-crypto because the volatility component is so much more than the stock market realm. But there are certain individual stocks that are very volatile in themselves. And if you want stocks that are less volatile, you can go back and listen to our beta episode because beta is an indicator that will mimic the stock market movement.
I found that beta is usually available on every brokerage and pretty much every financial page like CSNBC, Yahoo Finance, CNN Business. They all have the beta on there somewhere. You just have to know where to look, but they all have it.
It's an easy metric to identify. But that could be a really good strategy for you if you don't like the volatility component to help you choose your stocks more appropriately for your risk tolerance. Okay.
So that's in general what the people experts say. Air quotes. Air quotes.
They can't hear the air quotes. Quote, unquote. But that's basically diversification, allocation, and stop losses, which I don't... Not investing emotionally.
That's the big one. They don't even discuss emotion. I know they don't discuss that one, but we're adding it because it's the most relevant one, in my opinion.
Okay. So with how we set up our portfolio, I'm hoping to educate you a little bit on how I did it. I determined first where I want my money to be.
Do I want it to be in REITs, BDCs? All the things we went through months ago ad nauseum to introduce you to the different areas you can invest in. LPs, regular stocks, closing the funds, dividend stocks, blah, blah, blah, blah, blah, blah. I determined where I wanted my money.
Basically, because we were trying to make a lot of money per month, it ended up in REITs and BDCs. Okay. So I'm going to ask a question here.
I'm assuming, or would you say that the different kinds of assets will change proportionately based on the economic climate from quarter to quarter or every year or something along those lines? I don't think it'll be quarter to quarter, but we're going to enter an economic climate where I'm going to have to do a vast overhaul of the portfolio. Once they start lowering interest rates, some of these things are going to just pop off and I'm going to have to determine what I'm going to do at that point. Because the REITs all, in theory, should go up.
The BDCs all, in theory, should go down. So we just talked about diversification from not putting all your eggs in the same sectors, but when economic climates shift, sometimes certain sectors- But it seems like we are in the same sectors, but if you actually identify each of these, we're not. Okay.
So that was kind of what I was going to segue to. ABR is a REIT. AGNC is a REIT.
How much of our portfolio is REITs? MBW is a REIT. It's like 12%. Okay.
So 12% of our portfolio is REITs. EPR is a REIT, but if you look at each of these individually, if you looked at it as a whole, you'd be like, oh, they're invested kind of heavy in REITs. But ABR does single family homes.
AGNC, they do mortgage REITs. Completely different. Single family homes are houses.
Mortgage REITs are the debt. We went through that. EPR does the specialty stuff like movie theaters.
So that's, again, completely different than single family homes and mortgage. MPW does medical REITs. Completely different.
And so our REITs are broken up and we're not overlapping. So he's diversifying by choosing REITs appropriately. But what I was essentially getting to is that we're REIT heavy because the interest rate climate, the economic climate makes those better undervalued opportunities.
So there's several different things in play. We're kind of heavy in BDCs because we have Trinity Capital. We have SLRC Capital.
We have Main Street Capital. We have Hercules Capital. Again, Hercules Capital, they supply money to technology and certain sized companies.
Main Street Capital, again, they supply money to different sized companies. I think it's $50 million and then one's $25 million. Trinity Capital supplies something.
It seems like we're heavy in BDCs and REITs. But if you actually identify and look into their clients, it's not. We actually – what we've done is we've – I've tried to encompass as much of the REITs as I could to different – like movie theaters, like mortgage, like houses, like industrial.
I tried to encompass all that I could with just like five or six different REITs. I did the same thing with BDCs. I tried to get like tech companies and healthcare companies and startup venture companies, venture capitalists, whatever.
I've tried to encompass as much as I could to the many different branches of BDCs as I could with like four or five different BDCs. Now, are you choosing BDCs and REITs just because of the undervalued component or are you also considering the investor profile moderate consideration? Because like we said before, I think your portfolio would be a little more heavy if you were more fixed income, low risk oriented. If you're fixed income, you do a lot of prefers, a lot of CDs, a lot of bonds.
So, your portfolio would not have the level of BDCs and REITs. You'd be more invested in those closed-ended funds, preferred shares and bonds, right? Preferred shares and bonds, yeah, and CDs. You'd be investing in stuff that's – the money is guaranteed basically.
That's what a bond is. So, it's a combination of the two then with the economic climate or the economic whatever and our investing strategy or our investing profile? Yeah, ours is moderate. So, like I have a moderate risk.
A moderate portfolio. A moderate risk. I believe it's moderately risk.
We have a bunch of utilities, which there's not a lot of risk in utilities. To me, an income investing conservative portfolio should have utilities because they're not going anywhere. Now, their price might fluctuate but their income is pretty much guaranteed because they have monopolies on wherever they're located in the country and their dividend keeps growing.
So, if their share price depreciates, so what? You're actually getting a higher dividend with more shares. I'm not – conservative to me is utilities and preferred shares. But because we actually own the conservative stuff, our strategy is more based in the metrics, which we're going to go over next week as opposed to getting really deep and dirty into – Because you can see how it's a moderate.
The standard definition of diversification, I think. If you look at it because down here is like the risky shits down here. The risky shits down here.
Like USOI, TLSY, SLVO. Well, I'm going to go in your mom's account here so they can see what I think is a conservative portfolio. And just so you know, my mom's value is like crushing.
Like her growth in the last couple of weeks has been just like blowing us out of the water. So, to me, ours is a moderate portfolio. We have a lot of REITs.
We have a lot of BDCs. We have a couple of companies like ICON and NEPs, stuff like that, that are kind of like on the middle to upper end of risk. Her mom's account, on the other hand, has just like blue bloods.
We have a couple ETFs just for giggles, but then everything else is blue blood. Like she has ABR, AFG, ALB, ARCC, BMY, BTI. Like all these companies are like – They've raised their dividend for like 12, 15, 20 years at a time.
They're like the blue bloods. I guess that would be like aristocrats and achievers and things of that nature. So, what I did with her is rather than – I mean, I put some money into preferreds and some money into bonds, but for the most part, I just picked up all the blue bloods.
Triple M, Verizon, IIPR, HTGC. But you did that when they had undervalued dips, right? Oh, yeah, absolutely. So, that's the big kicker there.
Pfizer, ExxonMobil. I mean, like, dude, her – It's just insane. Like her account is so good.
So, this is, to me, is a conservative – The ideal conservative portfolio. Portfolio. Now, what I had to do, I just didn't say, hey, I want to be in Bristol-Myers Squibb.
I actually waited until Bristol-Myers Squibb presented the opportunity based on its PE and its PE compared to its peers that to me, it was undervalued. Then, of course, I went in like Bristol-Myers Squibb. I went in, saw that its PE was well below its peers, and then I looked at its maximum chart.
I didn't look at a one year. I didn't look at a five year. I looked at its maximum chart to see like where it's been historically.
And once I determined that where it's at in like the last year is an aberration to where it's historically been, I was like, okay, I feel comfortable with the PE, with the revenue growth, with the debt reduction, and where it's historically been to actually buy this. There's a whole – Like it's a whole different mentality when you're investing in a conservative portfolio with stocks than there is with a moderate portfolio. I didn't look at all that.
I looked at some of that for our portfolio, but for your mom's, I looked at everything pretty in-depth. And the reason that we did that and have my mom in the conservative category is because she's 65 at this point, so she's going to need to be tapping this. So she needs her principal to stay intact-ish with like the potential for growth, plus having dividends with dividend growth.
So she needed like all that, whereas we just needed income and income growth. She needs a preservation of capital, income, income growth. And that's the differentiator.
And that would be two separate investor profiles. And then us taking that approach, running it through what types of stocks match up with that type of criteria and the system that we go through for finding the stocks that are undervalued or the assets that are undervalued, and then buying them at the right times, allocating only specific parts of the portfolio to each one of those. Yeah, she only has, I think – My limit on hers is I want to say 4%.
So like her allocation is everything's under 4%. Okay. So I will tell you if my mom had access to her portfolio, maybe we should get her on here at some point, but if she actually had access to her portfolio, she would have literally liquidated so much of it during some of these pullbacks. Because she's called me, I can't even tell you how many times. And my mom's the kind of person where she thinks she sees signs everywhere, like she does that numbers 111, 222, 444s, whatever. Do you remember that text message where she was like, I had a dream about goose eggs and something about feathers.
She's like, I think this is telling me to pull my money out. And I'm just like, So I let her do what she's going to do. And I'm like, yeah, yeah, I'll think about it.
And I never do anything because that's just ludicrous. It was it was so funny. I have to keep reassuring her that the media that she's consuming is all fear based.
Well, that's like if you got the last. If you got Friday's email about the negativity bias. So I did like I like I literally went through all my emails for a week.
And I just like positive news, negative news. And it was like 75% of everything I got was like the world's ending. And only 25% is a hey, there's a there's opportunity in this sector.
So then I was like, well, why the hell is it so bad? Which we'll actually get to it with another episode. But we noticed a big pattern with most of the people who pump that fear and fear and doom and gloom crap are selling you a product to solve your problem. That only they can supply.
Like I'm the only person that knows how to actually navigate this volatile market when it comes to utilities. Or I'm the only person that knows how to validate to navigate this volatile market when it comes to BDCs. Like crypto or whatever.
It's fascinating. I got so many of them during that crypto winter. And I can tell you that like reading that actually does pull you into that grip.
So I just stopped reading my emails because I was like, this is just. So the way that I've actually constructed. OK, I'm a little off topic.
OK, the way that I've actually constructed portfolios is I use a value metric, which generally is the price to earnings and then price earnings versus its competitors. And then I do like a historical price to earnings if I'm not sure how to do a historical price to earnings is I just look at the five year P.E. That's how I determine if something's undervalued. But there's another layer of risk protection.
Just being undervalued is not enough. Then I look at the dividend history, the dividend growth history, if it cut the dividend. Then I look at the revenue one year and then five year.
I make sure the revenue is going up. Then I look to make sure the debt's going down. Like there's a lot of different layers to the risk mitigation for investing that I use.
Like I mean, there's a couple like the yield maxes. Obviously, I just said YOLO on those because. It's strategy focused.
So if you set up a primo strategy for what you're trying to do and have specific assets, you apply that strategy to and you go through that same process over and over and over again, you become consistent. You do not make decisions based on emotional erraticness. And then you start seeing your portfolio go up in value and you start seeing your dividends go up and you start seeing your share quantities go up.
And it just the system is where the discipline happens. I think the discipline you like to you actually have to. This is my my opinion, but you actually have to be balls deep into it when it's a bad market time, like in July when the markets tanked.
Or was it August? I forget. I think it was July. I think I think it was August, like July 31st.
Everything looked great. And then like the month of August. It was August, September.
It's just a horrible shit show. I think you actually have to experience that so that you can see how your investments perform in a really crappy market. Yes.
And we talked about that in the earnings report episode where you need to constantly reevaluate your stuff based on different market climates. And then as you go through all of them, eventually you get your strategy really dialed in. And then you can literally navigate any situation for the rest of your life.
So to me, to mitigate risk is to look at its price to earnings, to look at its dividend history, to look at its revenue history, look at its debt history. You want to look at it if you can. I know Schwab is awesome, but I don't know.
Vanguard's ass. If you have Schwab, you can look at its projected EPS growth for the next five years. And you can also look at its profit margins.
All that stuff together is the way that I mitigate risks quite easily, actually. It's actually quite easily done once you've determined what factors you're looking for in your own process. And when we go to the screener, I'll— I was going to say once we actually get to the screener episode next week, you'll see what Tim screens for encompasses a lot of what we're talking about in this episode.
It makes sure that they're undervalued. It makes sure that they're— It'll make sure that they're at least valued compared to the market. Then you have to do a deep dive into like the list.
But I'll go through that next week. But that's what we're going to talk about next week. He'll show you how to actually take a lot of what we're talking about today, create it into a system.
So today's biggest contender or the biggest outlier outside of the screener is more so you're matching your types of investments to your investing profile, your risk tolerance. But also like another thing that I implement that I don't know how to define it is I have kind of a crystal ball. Yeah, that's something that I can't replicate.
A lot of people are not going to be able to replicate that unless they're like specific personality types. The reason that I've held on to NPW is not because NPW is a great company. It's because it's in the right sector that will be beneficial in the next few years.
The reason that say I just picked up Newmont Mining is not because Newmont Mining itself is a great company, but it's in the right sector that I think two to three years from now is going to be a banger because it's like they mine gold and silver. So I got into it whenever it had a shitty earnings report and the stock went down like 12%. I was like, time to buy because that's the contrarian.
We went through it. Contrarian investing is like when everybody's selling, you seriously have to consider buying. And at the same time too, what he just talked about, he's actually incorporating a further vision of macro trends.
Well, that's what we did discuss, macro trends. Because if you look back at the dot-com bubble, this is a prime example of this. Anything with a dot-com went up, even if they were the crappiest company in the world, just because they were a dot-com.
And that same thing what he's just talking about in the medical thing, he sees a huge change of that coming on the winds. Well, that's why if you can find any good pharmaceutical companies that have AI, that'd be like a prime example of something. I was going to say AI is the next one that's just going to really take off.
Something that I see like in the next five to 10 years, if you can find a pharmaceutical company like EXAI, we've mentioned it, they literally are going to be big in like five years time. Because they're hybridizing the medical and the AI component. So we got that at dirt cheap and I'll just let it do what it's going to do.
So that's his approach on those couple of things. And again, because he has the asset allocation and diversification dialed in, he allocates a specific percent of the portfolio for these random flyers that he gets that instinct, that intuition on. I guess.
And then like another one that I really think that people should use for risk mitigation is DOGG, Snoop Dogg. Snoop Dogg. Is it actually his thing? No, it's just the dog of the Dow's.
Dog of the Dow. It's the ones that performed the worst last year that have the highest yields and they ended this year. They'll reallocate it to be the ones that performed the worst this year with the highest yields.
They do all the work for you, but basically you're just betting on their blue blood companies like Triple M, Verizon, stuff like that. That's part of the dog of the Dow, D.O. Double G and they do all the work for you. You're basically using that.
They're not going to have two shitty years in a row. They'll figure out whatever was wrong last year. They'll figure it out and they won't have a shitty year this year.
And because they're doing that- And it yields- They put it into a fund and the yield is incredible. It yields 9%, 9.35 right now. That's really awesome.
So you get 9% yield on something that's fairly conservative. I mean, that's how I do things. I don't like, it's very difficult to explain, but that to me is a very conservative ETF.
Whereas JEPQ, like see, we have JEPQ, we have NBXG, they're basically the same thing, but we're up a shit ton in both of them because it's the tech. And I thought tech was going to be big. So I just loaded up on tech funds rather than individual tech stocks because, and the same thing with PDI and DSU, they're both bond and they're both up a lot.
So what people fail to do, I think if they choose, it's harder to pick individual stocks from a growth perspective. That's why these funds are a lot better because it does a pool of different things in a sector. That way, whenever the leaders push out, you still acquire that growth as opposed to trying to individually pick the right ones.
I mean, the ultimate conservative play, I guess, would be to just do an index fund. That would be the ultimate conservative, but that's not always the right approach. Would be like the ultimate conservative.
And the problem with that though is you don't have the dividend component. So we're doing a really unique hybrid of the fund approach with the dividend thing. And what's really, really interesting is that everything that we read about crypto and the penny stock world, it's essentially you have to pick 10 different stocks for you to hit one that actually takes off.
Not to toot my own horn, but I told him about BITO months ago. And BITO, we're up, dude, we're up a lot now. Holy crap.
Yeah, Tim's number is actually lower than that. So I can't replicate that because he's just- We're up 60% in BITO. There's that Oracle crap thing again.
Well, that makes sense. It's literally a Bitcoin future strategy. Like, you know Bitcoin's going up this year.
We discussed it whenever we did the crystal ball of 2024. Because it's happening, you know Bitcoin's going up. And in her mom's account, she's up, I think, 40% in something called ARKY, which is ARK's version of the Bitcoin Ethereum futures strategy.
And she's up a shit ton. Like, there's certain macro trends that you have to be familiar with. That's why you have to do research.
I know a lot of people don't like it. It's a dirty word. But like, if you know ahead of time that 2024 is going to be a really good crypto year, then dude, buy some crypto funds.
Well, and we always talk about Tim's Oracle. But honestly, the Oracle essentially happens when you take in enough information that you start subconsciously noticing patterns. And that's essentially what Tim's gotten to.
We've been doing all this stuff for so long. Or he's been really immersed in this stuff for so long. Well, that's why I've been beating the table about utilities.
Utilities are probably going to go down some more this year. You have a chance to buy them undervalued, get your dividends compounding because they'll probably go down some more this year until the interest rates start going down. And then they're going to go up.
So what I'm doing is I'm planning for a year or two from now, maybe five months from now, who knows when they're going to lower the interest rates. But I have a pretty conservative chunk of the portfolio in utilities, whether it be Black Hills, whether it's NEE, whether it's NEP. I have a lot of utility stocks in the portfolios because I know where the prices are going to go like two years from now at the most.
So I'm just accumulating shares. And basically, if your time horizon is less than that two year mark, you should not be in the stock market. You should be in worthy.
You should be in. You can be in bullet shares. If you want to be in the market on the sidelines making something, you can totally go into bullet shares.
Your bullet shares, if you didn't listen to that episode, you probably should. The bullet shares are quite good. We didn't do an episode on bullet shares.
There was an episode where we talked about them. I think we should do an actual bullet share episode. That would be just short.
It's like, here's the bullet shares. That's fine. There's like 26 of them.
Even if it's 10 minutes. Just picking shares. Basically, what a bullet share is, is they invest on a time horizon.
It'll be like one to five years. And they're investing in bonds. So they're doing all the work for you.
And they pay you a monthly dividend. And the price doesn't fluctuate more than like 1% up or down. Yeah.
It's pretty sweet. So to me, it's like a long term high yield savings account. Yeah.
I was going to say, it's a stock market version of a high yield savings account, basically. So that's where I dump money. I don't know what I'm going to do with it.
Or I'm waiting on a pullback. Or I have an idea. But it's still too high.
I'll just put it in bullet shares. And just let that accumulate some shares. And then I'll just sell the bullet shares as I need the money.
You're going to hear us talking about bullet shares a lot if 2024 really does go into a bull market. Because we're going to not be having the drip on once things hit the overvalue thing. Because we don't want our drip to rebuy at higher prices.
Yes. So we're going to funnel a lot more money into bullet shares, waiting for the dips and the contrarian stuff to kick back in. So be prepared for that one.
The fact that we'll be recommending going into the most conservative thing during a bull run, it's going to be hilarious. We're not recommending sell stuff. We're just recommending turning the drip off so you're not buying your dividend reinvestment at a way overvalued price.
Because seriously, if you go to the store and you see something priced at $100, and you go to a different store and you see it priced at $50, why would you buy the $100 one? The exact same item. I don't know. No, like what I'm still trying to figure out.
Once I do, for sure, I'll do a podcast episode like, when do you sell? Yeah. I know when I take profits, but when do you just sell? Like that's, I guess, an art form that I'm kind of okay at. I'm not great at it.
Sometimes I'll sell and I should have held on a little bit longer because it went up like 10% more. But the lucky part about that is that if you do the approach that we do and you do the research going in to mitigate the risks, you don't have to sell very often. What I've found that what I've been doing is I just take profits and then I take it like once I keep a spreadsheet where I know exactly how much I invested in anything.
And if I'm taking profits, then once I've taken my initial investment out, then I can give a shit what happens. And we've talked about that with the yield maxes. We've talked about that with the... JEPQ just hit that in our account where I took some profits and now everything in there is all profit.
I don't even have to worry about what happens to JEPQ. Oh, yes. Speaking of yield max, we sold... Remember how we talked about selling off CONY? We sold off CONY because it greatly went up in value.
So we took our entire initial investment off the table and we're just letting it ride. Well, was it Tesla? It was NVIDIA. So NVIDIA just did the same thing where he came over.
He's like, what should I do? This is up. He's like, but da, da, da, da, da. And I was like, well, what's our goal for the yield max? Our goal is to get our initial investment out as soon as possible.
And that's so we took out our initial investment and we have, I think, half the shares left that we initially bought. And we're just letting it compound from there because it's free money riding, doing whatever. So your strategy applies to different kinds of stuff to reduce risk.
So we took all the risk completely off the table with yield maxes, which should, in theory, be a higher risk. And I've taken half of... I've taken some of my profits in SLVO. I find it easier to just take profits and then just keep track of what you sold, what you actually initially invested.
That way, once you hit zero, it's like, whatever. Do whatever you're going to do. I don't care.
It's very, very cool. It's like once you get your house paid off or... The problem is going to be because we're entering a bull market. So when I'm taking profits, I'm literally just going to have to dump it into a bullet shares from now on unless there's something that's down like utility stocks, which is nice.
It's nice that utility stocks are still down because I have a place to park my money now. And that's how the portfolio allocation will get shifted a little bit during different economic climates. So it's like everything kind of is in flux.
But once you understand the underlying principles of everything and the systems of everything, you can navigate and adjust your approach as climates change. So to sum up, allocation, just come up with whatever percentage is good for you. 3%.
Like the reason you do that is to say like something that you have 3% of your money and goes to zero. Well, you're taking a 3% hit. Whereas if you had 8% of that, you'd be taking an 8% hit.
So you want to allocate your portfolio to whatever is comfortable for you. To me, 5% is a good number to not have anything above that. We do have a couple above that right now.
That's just because QRTEP went up a lot. ICON went up a lot. And Hercules Capital went up a lot.
That's three of them that are above 6% in our portfolio. So I think the general rule of thumb, if you're in something risky, 1% of the portfolio. If you're in the dividends, the good companies, the aristocrats, 5% to 6% is a good rule of thumb.
If you look at all of ours, we're generally between 2% and 4% and everything except for a couple outliers. There's that. Then the diversification, make sure your stuff's not overlapping.
Like for example, we have MBXG and JEPQ. Literally, they're overlapping. So that means we have 2.5%. And so we have 6.3% in tech ETFs.
So we are probably going to take some profits at some point to make that back below 6%. So you can do that or you can just incorporate it into that 6% and still invest in both. Make sure your valuation metrics are good, whether it's the PE, whether it's the PEG, whether it's historical PE, whatever your metric is for valuation, make sure you're getting stuff under value.
That way it's a lot less stressful and you make sure that you have your metrics set up so that there's no emotion. And that's how I've mitigated risk and done quite well with it. And I'm going to say it again, to mitigate a lot of the emotional risk, really get that savings account dialed in and really get that emergency fund dialed in, wherever you pick, whatever.
That's why when we went through, I said, if you're investing, say $100, I would put $25 into Worthy and I put $75 into the portfolio. I understand you want to grow your portfolio as quickly as possible to get your income coming in. But you also want to have the peace of mind that your emergency fund will cover any bills that you... It's like we have, I want to say $10,000, $11,000, $12,000 in Worthy.
I'd say we have probably like $20,000 total between everything in our emergency fund. Our emergency fund is probably at least 20% of our portfolio balance. I'd like it to be 25.
So I'm going to keep putting money into Worthy until I hit that. And then I have probably, I want to say 2% in bullet shares right now in Wells Fargo. So bullet shares are literally just Worthy, but in the stock market.
But I do think that number is going to significantly go up as we go further into the bull market. So we'll update you on that as we go. I did fail to mention that the most important part of investing is the emergency fund because then you have peace of mind knowing that you don't have to touch your portfolio at all.
Because the biggest risk, even though we didn't cover it and none of these experts said it, the biggest risk when it comes to investing is needing to take your money out before it's able to actually run the way it's supposed to. Because if you think about worst case scenario in our current situation is, okay, we need money to live on the road. So we have money set aside where we can live on the road for at least a year.
So I have a year to get the portfolio to do what I need to do. If I need to put more money into bullet share so that we have that income coming every month, or I need to liquidate something, I have a year to figure out what I need to do. Because we have a year worth of money.
And I actually have a prime example of this. So me and my mom, when the crypto was all off and greedy and FOMO and stuff, we didn't do enough research and we kind of screwed ourselves in the foot. But this is a prime example of even though we screwed the pooch from a value perspective, when our portfolios, when our retirement accounts went down 60% of the value, I'm talking 60% drop.
That's huge. We did not sell. We held on.
And my mom is up $13,000? She's up $40,000. My mom's up $40,000 and I'm back to break even or a little bit up I think at this point. You're like 5%.
Your mom's up like 25%. So right there is a prime example of if we would have panic sold. Because that's why they say that the biggest factor for wealth accumulation is lengthen the market.
And having a plan for your emotional reactivity. Because trust me, it was not easy to be like, oh my God, I'm down 60%. It was easy for me because I knew how I had them set up.
And I had been in it long enough where it's like, I really do truly believe crypto is going to rebound. Like her mom's is like 60% Bitcoin, 25% Ethereum, and then 15% altcoins. Carmela's is 50% Ethereum, 35% Bitcoin, and then 15% altcoin.
So like the way I have it set up, I didn't care. Yep. And like I said before, I looked at that money as I can't touch it in 30 years anyway.
The crystal ball that I knew Bitcoin and Ethereum, what they're going to be worth in the future. Hopefully you guys can get to that point where you realize it's not about the value of the portfolio. It's about the longer term.
Length in the market. Length in the market. If you read any of the quote experts, the biggest contributing factor to wealth accumulation is length in the market, duration in the market.
So don't do a set it and forget it because you actually have to monitor stuff to make sure that your diversification, your allocation, and all that stuff is good. But like basically set it and forget it outside of that. But if you want a truly set it, forget it, look at index funds and plan on working at least 30 years.
That's the alternative. It's a trade-off. You got to pick which one you want to do.
And that's absolutely fine if you realize you're the kind of person that's like, hey, I'm okay with working 30 years. I want it to be simple. I want to do index funds.
That's absolutely fine. We're just giving you guys an alternative. The investor profile.
If you're like us, if you're like us, where we're like, hell no, we want to freaking retire in a couple of years. We're done. All right, guys.
Thanks so much for tuning in. Next week will be the screener. I will walk you through what to look for.
That's actually going to be super helpful. Like probably the most important of the three is going to be that one. So these last two prepped you to get to that point.
And we hope to see you next week. Okay. I'm done with this guy.
Thanks for tuning in.