How To Make Your Portfolio Invincible
About a week ago, I started reading Morgan Housel’s new book titled Same As Ever, which is a collection of stories and ideas about what never changes in an ever-changing world.
Specifically, it talks about the things people have always done and will continue to do. One part of the book focuses on the vicious cycle of recessions, and how market stability inevitably leads to instability.
Based on Hyman Minsky's Financial Instability Hypothesis (real riveting stuff, I know), when an economy is stable for a period of time, people become optimistic. This leads them to confidently take on more debt, which causes the economy to eventually become unstable.
In the book, Housel points out that, “a lack of recessions actually plants the seeds of the next recession, and that’s why we can never get rid of them.” Recessions happen as a result of human behavior and psychology, and those things never change.
As it applies to the stock market: When investors are feeling optimistic about the market, they start buying more stocks, which drives prices up. Too much optimism can make the market sensitive to bad news because people aren’t used to it, and recency bias tells them that stocks are only supposed to go up.
Ironically, when people are convinced that the market won't crash, that's often when it's more likely to happen, which is why analysts pay attention to things like the Fear and Greed Index.
If people are overly confident in the market, it could be a sign that a crash is around the corner, even though most people aren't expecting it.
So, how do you protect yourself? You can't predict exactly when crashes will happen, but you can be ready for them.
The key is to construct your portfolio so that it can withstand these unforeseen, yet certain events. This means investing with a margin of safety, maintaining a long-term perspective, and investing in fundamentally strong companies that are resilient to change (like the five in this video here).
By understanding what never changes about human behavior (things like fear, greed, etc.), you can build a more durable portfolio based on these enduring principles. Risk, recessions, and market crashes can never be fully controlled or eliminated, but they can be anticipated.
Sun Tzu once said, “Invincibility lies in the defense.” The key to building an invincible portfolio is to prepare it for the inevitable, even if you can't predict when it will happen.
With that said, I want to hear from you: What is your approach to building an invincible portfolio? Write to me here and let me know.
And a big thank you to all of the readers who responded to last week's newsletter! You can read some of the responses down below in the "Hot Takes" section. 👇
Dividend Investing Democratized
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Overall, if you’re looking for something with more functionality than a spreadsheet, and are looking for another great place to connect with like-minded investors, getquin is definitely worth checking out and is free to join.
You can follow me on getquin (@ryne) to see all of my posts, check out my portfolio in real-time, and see all of my purchases + dividend payments as they come in.
IN MY PORTFOLIO 📈
Track your portfolio for free with getquin. You can also follow mine there (@ryne) to see all of my purchases, dividends, and other updates in real-time.
ICYMI 🎥
Revealing My Entire $62,000 Dividend Stock Portfolio 📊
In this video, we’re taking a look under the hood of my entire dividend stock portfolio. I’ll be showing you all of the holdings across my two different accounts (my main taxable brokerage account and my Roth IRA), and we'll see the total performance of each one as well as the dividend income generated from them.
CAREFULLY CURATED 🔍
📺 The Truth About Dividend Investing - An oldie, but a goodie from PPC Ian. This video uncovers some of the major misconceptions surrounding dividend investing and the stock market as a whole.
🎧 Inside Poor Charlie's Almanack - If you haven't noticed yet, I like sharing stuff that talks about the wisdom of Charlie Munger. He was someone I really admired and still continue to learn a lot from, so I like to share things about him whenever I can, like this episode of the Founders podcast. It talks about what you can learn from reading Poor Charlie's Almanack — a classic book that every investor should go through at least once.
📚 Cheap Stocks, Big Raises - Dividend stocks haven't been performing as well as growth stocks lately, but this difference in performance might open up opportunities to find discounted dividend stocks, like the six in this article that have been offering big dividend raises.
SINCE YOU ASKED 💬
"Wouldn't it be a lot simpler just to put that money into a high yield savings account (5%) and make the same amount per month?"
- @lewinmg | YouTube
While parking your money in a high yield savings account is definitely a safe and attractive option in the short term due to the guarantee of principal and the relatively high interest rates we're seeing, it's important to consider the bigger picture from a long-term perspective.
Over time, successful dividend-paying companies tend to increase their dividends on a regular basis. At least, that's the hope.
And when you combine the power of dividend growth, dividend reinvestments, and share price appreciation over the long term, the total returns (and total income) from investing in dividend stocks can significantly outpace the returns from a high yield savings account.
With that said, I still think that having a high yield savings account is a great idea, and it certainly has its purpose.
For example, if you're saving for some short to medium term financial goal (down payment for a house, wedding, vacation, etc.), then a high yield savings account may be the best way to go.
But if you're working towards financial freedom 10, 15, 20 years down the road, then I believe investing in the market will get you a lot closer to your goal.
Have a question? Ask me here to see it featured in an upcoming newsletter.
HOT TAKES 🔥
Last week, I asked readers which stocks they consider to be dividend yield traps. Here are some of the responses:
Russ said: I think that almost every mREIT is a yield trap because they depend on low interest rates and high leverage to generate income.
John said: VZ, T and MO, but I have shares of MO, and they've been growing the dividend for 50+ years.
Pat said: 1 - AGNC: 15.19% yield. Stock price May 2008 was $19.70. Price today $9.36. It invests in non-guaranteed residential and commercial mortgage backed securities. 2 - TDS. Stock is same price as in 1989. 4% yield is not worth it. It's a high yield, but would take FOREVER to make up the original purchase price of the stock, with no guarantee that it will even exist in a year.
Lance said: WPC, VZ, T, as well as the classic case of MPW…I do not believe it was on anyones radar that WPC was cutting the dividend and many people hyped that great stock. I cut my losses on each of them and sold them short of MPW, which I still hold…I will ride it out with that guy but I just assume it’s best to cut my losses, regroup, and do better after these “mistakes.”
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