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Implementing a money system from scratch in 2018

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Ozz81

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Nov 28, 2017
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Hi everybody! This is my first post after my introduction:

Introduction - Please allow me to introduce myself...

I immediately subscribed to the Fastlane INSIDERS as a form of "thank you" to MJ for providing me the tools to make the most difficult and most important decision of my professional life: selling my company.

I am now facing a very nice problem. Nice, but still a problem :) I have a considerable amount of cash that must be deployed.

The way I see it is something like this: until a few months ago, I used to have ALL that money invested in a single company, my own. This was a huge concentration of risk, but it also gave me control and a nice income.

Now that I disinvested, I feel I should reinvest in other companies, since companies are the only asset to preserve wealth and earn an income in the long term.

Only this time these other companies must be:

1- many different companies, in different industries and different markets. Since I can't have control of the management, diversification is my way to exercise control
2- solid businesses with a long history of stable or growing dividends (think Dividend Aristocrats...)
3- they must pay me rent (a.k.a. dividends) so that I can enjoy life without worrying about working to make ends meet. Something around 4% to 5% per year would guarantee that to me and my entire family.

What really scares me is that stock prices are so high nowadays that it's hard to find a 4%-5% dividend without lowering the quality of the companies to invest in. And I'm afraid that soon prices will come down, presenting very interesting buying opportunities.

On the other hand, the market might go up for another 6-12-18 months and I would waste time and money doing nothing.

I find it a dangerous time to deploy a large sum all at once.

Is anyone in a similar situation? Does anyone have any suggestion on where to start building a money system in 2018?

Thank you all for your help!
 
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ljean

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The future is unknown and there is no right answer. Perhaps you would be more comfortable investing half now and half later.
 

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What is the goal of this money system?
What types of returns are desired?
What levels of risk can be tolerated?
 
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Ozz81

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What is the goal of this money system?
What types of returns are desired?
What levels of risk can be tolerated?
That’s going to be the paycheck pot.

The goal is to earn an income that can comfortably pay for my lifestyle and the lifestyle of my family, without touching the principal. This is a mandatory condition.

A return in the 4 to 5% whereabouts is my ultimate goal. Very low risk tolerated, since this is the paycheck pot. There’s no need to grow the principal, the purpose is to earn a recurrent income like dividends and interests (a “rent”, so to say).

Oh, I forgot to say that I’m already exposed to the real estate market to the upper limit of my asset allocation, so this money system must be as close as possible to the one described by MJ in Unscripted .

Thanks for your replies guys!
 

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I'm not sure how to answer since you are in Switzerland, totally different investment and economic environment.

The big chapter in Unscripted probably isn't relevant to your country.
 
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Ozz81

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Nov 28, 2017
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I haven’t it all figured out yet, but I think there should be no problem to operate in the US financial market or to apply the same principles to the Swiss or European markets. The only additional thing I must consider is that my expenses are almost exclusively in CHF or EUR, so currency exchange rates must be accounted for.
 

MTF

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@Ozz81, congrats on your successful exit.

What I'm personally doing is investing in multinational dividend stocks. To make sure that I stick to it religiously, I decided to make it extremely simple. I might not get the best returns, but I don't have to deal with subjective company valuations, worry when to sell, worry about the crash, etc. My time investment (after the initial research which took a lot of time) is minimal.

First, instead of worrying about prices, I focus on income. I only invest in companies with a stable history of consistently growing dividends (ideally at least 25+ years of dividend history).

I use the dividend payback period calculator (check the article and download it here: http://www.suredividend.com/the-dividend-payback-period/) and only invest in companies whose dividends (based on the current dividend yield and historical average dividend growth) will pay back my initial investment in less than 20 years, which translates to 5% yield. I know, the calculation is simplistic, based on assumptions and might not be entirely correct but I don't care. I want things to be simple.

My reasoning is that I'm buying stocks for income. I don't care about their prices because I don't ever want to sell them. It's like buying real estate to rent it: you don't care about its current market price because you'd rather receive regular income.

Imagine you bought your dream house for, say, $1mm. A week from now a guy knocks on your door and says that your house is now worth $800k. Would you care knowing that you don't ever want to sell it? That's my thinking: as long as they don't go bankrupt (and it's highly unlikely considering I only invest in multinational blue chips, often with more than 50-100 years of history) no matter how much their prices drop or increase I don't care: I only care whether they continue providing regular income (growing dividends).

Second, because most solid dividend stocks are US companies (for some reason there are few non-US companies that have a stable dividend history), to diversify my risk, I only invest in multinational companies (and by multinational, I mean they generate substantial sales in several countries other than the US). I also invest in some European companies with a global reach (for example Nestle based in Switzerland - a great choice for you if you're after safety, L'oreal in France or Reckitt Beckinser in the UK).

Third, I only invest in companies that I believe will be around in several decades, that are simple to understand and that sell products that will be always needed (mostly consumer staples). This means that I don't invest in technology (Google might be extremely successful today, but Nestle has a much bigger chance of still existing in several decades due to the Lindy effect), banking (this is also because few banks have a stable dividend history and they're generally not to be trusted), energy (who knows what happens when solar becomes ubiquitous), or industrial (because I don't understand it so can't make any assumptions about its future).

Fourth, I never sell unless a company cuts a dividend. This dramatically simplifies the entire process as each month I only choose the best stock at the given moment to buy (making sure that all of my investments are more or less balanced) and forget about it until next month when I invest again.

At the moment my average portfolio yield is just a little over 2%, but based on the historical dividend growth of the companies in which I invested, each year my yield will grow by 10-15%+. It doesn't sound particularly sexy, but after 5 years my yield on cost will cross 4% and in 10 years it will be over 7%.

Also, please note that I'm only talking about dividend income. I don't focus on capital gains because again, I don't care about the price as long as the dividend is right. Obviously, if it goes up, that's a great thing but it doesn't really change much because I'm not going to sell anyway so it's just a paper gain.

Now, just to emphasize, I only started doing this a few months ago and am by no means an expert. However, I'm regularly investing five figures a month and intend to continue doing so until my dividend income covers all of my living expenses with a margin. Then I'll probably consider expanding to something else for additional diversification.

Please keep us updated what you plan to do.
 

Ozz81

Contributor
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Nov 28, 2017
22
47
40
Switzerland
@Ozz81, congrats on your successful exit.

What I'm personally doing is investing in multinational dividend stocks. To make sure that I stick to it religiously, I decided to make it extremely simple. I might not get the best returns, but I don't have to deal with subjective company valuations, worry when to sell, worry about the crash, etc. My time investment (after the initial research which took a lot of time) is minimal.

First, instead of worrying about prices, I focus on income. I only invest in companies with a stable history of consistently growing dividends (ideally at least 25+ years of dividend history).

I use the dividend payback period calculator (check the article and download it here: The Dividend Payback Period - Sure Dividend) and only invest in companies whose dividends (based on the current dividend yield and historical average dividend growth) will pay back my initial investment in less than 20 years, which translates to 5% yield. I know, the calculation is simplistic, based on assumptions and might not be entirely correct but I don't care. I want things to be simple.

My reasoning is that I'm buying stocks for income. I don't care about their prices because I don't ever want to sell them. It's like buying real estate to rent it: you don't care about its current market price because you'd rather receive regular income.

Imagine you bought your dream house for, say, $1mm. A week from now a guy knocks on your door and says that your house is now worth $800k. Would you care knowing that you don't ever want to sell it? That's my thinking: as long as they don't go bankrupt (and it's highly unlikely considering I only invest in multinational blue chips, often with more than 50-100 years of history) no matter how much their prices drop or increase I don't care: I only care whether they continue providing regular income (growing dividends).

Second, because most solid dividend stocks are US companies (for some reason there are few non-US companies that have a stable dividend history), to diversify my risk, I only invest in multinational companies (and by multinational, I mean they generate substantial sales in several countries other than the US). I also invest in some European companies with a global reach (for example Nestle based in Switzerland - a great choice for you if you're after safety, L'oreal in France or Reckitt Beckinser in the UK).

Third, I only invest in companies that I believe will be around in several decades, that are simple to understand and that sell products that will be always needed (mostly consumer staples). This means that I don't invest in technology (Google might be extremely successful today, but Nestle has a much bigger chance of still existing in several decades due to the Lindy effect), banking (this is also because few banks have a stable dividend history and they're generally not to be trusted), energy (who knows what happens when solar becomes ubiquitous), or industrial (because I don't understand it so can't make any assumptions about its future).

Fourth, I never sell unless a company cuts a dividend. This dramatically simplifies the entire process as each month I only choose the best stock at the given moment to buy (making sure that all of my investments are more or less balanced) and forget about it until next month when I invest again.

At the moment my average portfolio yield is just a little over 2%, but based on the historical dividend growth of the companies in which I invested, each year my yield will grow by 10-15%+. It doesn't sound particularly sexy, but after 5 years my yield on cost will cross 4% and in 10 years it will be over 7%.

Also, please note that I'm only talking about dividend income. I don't focus on capital gains because again, I don't care about the price as long as the dividend is right. Obviously, if it goes up, that's a great thing but it doesn't really change much because I'm not going to sell anyway so it's just a paper gain.

Now, just to emphasize, I only started doing this a few months ago and am by no means an expert. However, I'm regularly investing five figures a month and intend to continue doing so until my dividend income covers all of my living expenses with a margin. Then I'll probably consider expanding to something else for additional diversification.

Please keep us updated what you plan to do.
MTF thank you for your message! Your approach is exactly what I have in mind! Great to know you've just started on the same path!

So you are buying every month the best companies that qualify after your rule-based screening. That's a very similar approach to the one suggested in the Sure Dividend blog that you posted (BTW, I'm a subscriber of the Sure Dividend and Sure Retirement newsletters).

What's your expected deployment timeframe? If it takes 18-24 months, this could be a great way to cost average any market crash along the way. I say this not because of the price drop itself, but because it improves yields on great companies.

I also love your market diversification based on multinational operations of the companies you buy.

One thing I was considering as an option is some dividend ETFs as a form of market and industry diversification, but I haven't concluded my homework yet. I want to understand very well the distribution criteria, since my only two goals are income generation and principal preservation.

Thank you again for sharing your journey!
 
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MTF

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So you are buying every month the best companies that qualify after your rule-based screening. That's a very similar approach to the one suggested in the Sure Dividend blog that you posted (BTW, I'm a subscriber of the Sure Dividend and Sure Retirement newsletters).

Yes, this site was a big inspiration for me. They make a few things too complicated for my liking, though, so I came up with my own system that perhaps might reduce my overall returns, but greatly increases my peace of mind.

What's your expected deployment timeframe? If it takes 18-24 months, this could be a great way to cost average any market crash along the way. I say this not because of the price drop itself, but because it improves yields on great companies.

I invested a lump sum back in June and now am adding monthly. If everything goes well I'll reach my basic target income in a year or less (my original target was June 2018 but I decided to invest more in my business first).

One thing I was considering as an option is some dividend ETFs as a form of market and industry diversification, but I haven't concluded my homework yet. I want to understand very well the distribution criteria, since my only two goals are income generation and principal preservation.

I was thinking about dividend ETFs, too, but in the end decided against them because they're overdiversified and invest in plenty of companies that have no future or are unethical according to my standards (big oil, tobacco, alcohol, etc.).
 

Ozz81

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Nov 28, 2017
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Switzerland
I was thinking about dividend ETFs, too, but in the end decided against them because they're overdiversified and invest in plenty of companies that have no future or are unethical according to my standards (big oil, tobacco, alcohol, etc.).

That’s why I love the free market! You can vote with your wallet and this is the only vote that can make a difference without harming other people’s rights!
 

MJ DeMarco

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I haven’t it all figured out yet, but I think there should be no problem to operate in the US financial market or to apply the same principles to the Swiss or European markets.

Excellent. @MTF's strategy is pretty good and mirrors much of what I explain in Unscripted insofar as dividend use to create a paycheck income.
 
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Ozz81

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Nov 28, 2017
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Second, because most solid dividend stocks are US companies (for some reason there are few non-US companies that have a stable dividend history), to diversify my risk, I only invest in multinational companies (and by multinational, I mean they generate substantial sales in several countries other than the US). I also invest in some European companies with a global reach (for example Nestle based in Switzerland - a great choice for you if you're after safety, L'oreal in France or Reckitt Beckinser in the UK).

In this topic, I just stepped into this article on the Sure Dividend blog, you might find it interesting as much as I do:

5 Of The Best International Dividend Stocks Today - Sure Dividend

The fog is slowly starting to clear and I’m designing a strategy of building a dividend stock portfolio (US and Europe based) in at least 24 months, either buying stocks directly or selling cash secured puts.

The option strategy should help me buy at lower prices and earn some income on cash while waiting for a lower price. I have no experience, so I need to study a bit more and come up with a rule based strategy, in order to minimize my maintenance time.

Have a great day guys!
 

Mckenzie

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That’s going to be the paycheck pot.

The goal is to earn an income that can comfortably pay for my lifestyle and the lifestyle of my family, without touching the principal. This is a mandatory condition.

A return in the 4 to 5% whereabouts is my ultimate goal. Very low risk tolerated, since this is the paycheck pot. There’s no need to grow the principal, the purpose is to earn a recurrent income like dividends and interests (a “rent”, so to say).

Oh, I forgot to say that I’m already exposed to the real estate market to the upper limit of my asset allocation, so this money system must be as close as possible to the one described by MJ in Unscripted .

Thanks for your replies guys!

Weird enough,...I'm in this exact position in my life. I've also exposed to the real estate market to the upper limit as well. Since reading Mj's new book Unscripted , I had this cold nervous feeling running down my spine.....So, I'm looking at scaling down.
I'm re-reading and re-listening to Part 4 & 5 of the book, to see how I can do it differently....The paycheck pot.
 

Mckenzie

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Mckenzie

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One way or the other you will pay for your answer...

Money lost
Fees
Education
Thank you for this. It hurts a lot! but on the other side of the coin is triumphant victory...
 

Ozz81

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Nov 28, 2017
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Hi guys!

A little follow up on my research.

I stepped into this book, which I highly recommend if you are trying to educate yourself about income investing:

https://www.amazon.com/dp/0470581565/?tag=tff-amazonparser-20

Basically, it's a book that explains in detail the investing methodology of the Investment Quality Trends newsletter, that tracks dividend blue chips since 1966.

What I like about this approach is that it's extremely conservative and cautious, which is what we need for our Paycheck Pot.

I also contacted the author, Kelley Wright, to know about their consulting service.

I'll let you know if something interesting or helpful comes up.

Have a great weekend!
 

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