My grandfather, who did well in the stock market, lived by his own homespun version of Peter Lynch’s advice to “buy what you know.” He had a strong preference for the shares of local companies.
Well, as it happened, my grandfather lived in Fort Smith, Arkansas, and there was a certain local company up the road in Bentonville that was shaking up the retail market in the 1970s.
You might have heard of it…Walmart (WMT)!
The modest investment he made in Walmart shares ended up paying for my grandmother’s retirement, my college education, my sister’s college education, and my mother’s modest retirement today.
The funny thing is, that was never his plan.
He never expected to hit a home run like that in the stock market. He owned a small warehouse downtown, and he always imagined that, once he was gone, my grandmother’s expenses would be taken care of with the rental income from that property.
Renting out the warehouse ended up being more trouble than it was worth. My grandmother sold it, and she ended up living on her Walmart dividends, bond interest, and Social Security.
To start, capital gains are nice, but you can’t assume they’re going to be there when you need them.
As a man who lived through the Great Depression, my grandfather knew that. If you lived through the markets of the 1970s or 2000s, you might have gotten a similar lesson. Between 1968 and 1982 and from 2000 to 2013, the S&P 500 Index went nowhere.
If you’d been counting on capital gains to meet your retirement expenses during those stretches, you might’ve had to move in with your kids.
Second, diversification is critical – and “diversification” doesn’t mean owning five slightly different mutual funds. It means owning assets that don’t rise and fall together.
For my grandfather, this meant tying and devoting significant capital to his small businesses and keeping his liquid assets divided roughly evenly among stocks, bonds, and cash.
For me, in today’s market, “diversification” means keeping my assets divided among complementary short-term trading strategies, longer-term income strategies, and income-producing real estate.
The key is making sure the pieces of your portfolio move independently of one another. It does you no good to save for a lifetime if it all gets flushed down the toilet in a major bear market.
And, finally, make sure you’re getting paid in cold, hard cash. It seems so “old timey” now, but my grandfather carried around a money clip with a big wad of cash in it. I don’t remember ever seeing him use a credit card.
Hey, times have changed. The only people carrying around wads of cash today are drug mules. But that doesn’t mean that cash isn’t king.
Investments that generate regular cash payments allow you to realize gains without having to sell anything.
Dividend-paying stocks, REITs, MLPs, and other income investments are the same. You enjoy the milk every quarter and and you can still have your steak later if you ever decide to sell.
Photo Credit: Mike Mozart via Flickr Creative Commons
- Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.