Risk is the Foundation of my Investing Style

The title of this blog is an obvious give away my primary investing portfolio is dividend growth, however I also have two other portfolios that I rarely discuss or share on this blog (including holdings); a cash portfolio and a total return portfolio.

From an investing perspective I am a firm believer of a an “eyes wide open” philosophy. I enjoy studying the strength and weakness of different investing styles, what conditions they perform well in, when to utilize them and do not believe one investing style is better than another.    As such, this has led me to using different investing styles depending on my risks and timeframe need.   Being only a few years out from retirement I see 5 major risks of which I use 3 investing styles to mitigate:

1. Medical Expenses
2. Market Volatility
3. Income Replacement
4. Excessive Taxes
5. Longevity

My Method

The largest decision is determining the percentage of my wealth to assign to each portfolio and to do that I use the following method:

1. Quantify the risk.
2. Develop saving/investing goals.
3. Develop strategies.
4. Monitor progress.
5. Adjust annually.

Here is an example: 

For Income replacement I analyzed what would happen if I retired at one of the worst times in market history (1970) by using market returns and inflation rates from 1970 to 2000 and developed several investing results.  From there I choose the one I could achieve which was to start retirement with dividend income that was equal to 115% of expenses, a minimum 4% dividend growth rate, and an additional 9 months of expenses in cash to mitigate market volatility.

In this example I defined a saving/investing goal for 2 different portfolios: one for dividend growth and the second for cash.

However not all risks can be solved with saving & investing. A risk can also be avoided with lifestyle changes.

Here is an example:

To avoid the risk of excessive taxes during retirement, my strategy is to maximize my Roth IRAs and to keep my expenses and income below the long term capital gain/qualified dividend tax bracket that qualifies for a 0% tax rate. These two strategies combined could eliminate 21% to 35% of my income from federal income tax depending on when I collect social security.

As I perform my monitoring / annual adjustment steps and notice I may not achieve my goal I could supplement this by adding an additional strategy of relocation to reduce property taxes and/or state income tax.

The Flaw in my Method

I do have one flaw in my method and that is if I cannot quantify the risk it doesn’t get addressed.  One example is the risk of a boomerang child for financial or health reasons.  I have yet to figure out what the financial impact would be if an adult child returns home. 

All of the research I have seen to date is strictly anecdotal.  Some stories are benign (only living rent free), others surprisingly expensive for accommodating health issues, and some are outright morally and criminally cringe worthy stories of children robbing parents as well as abuse.

Summary

I am not a licensed professional and cannot tell you if what I am doing is the right or wrong way to approach this.  However, they way I process information it seems logical to me and who knows maybe it is just a product of me working in the Engineering field for decades and my brain is just wired differently.

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