You Need to Diversify Your Income
After posting the first installment of the Money Sprout Dividend Income Index, I realized there were some changes needed to my portfolio. There is a good reason why I am tracking my income results from this stream. Not only am I trying to motivate my readers to work hard and start their own income streams – I am also posting these results to help me reach my goals.
Prior to publishing this stock index, I had always assumed that I was building a diversified portfolio of stocks (18 of them at the time). It wasn’t until I saw my numbers that I realized my portfolio wasn’t diverse at all.
Even though I owned shares in 18 dependable dividend paying companies, the allocation was off. For example, I did not own any stocks in 2 sectors (Materials & Telecommunication Services) and owned 5 in another (Consumer Staples). One sector (Industrials) accounted for almost a quarter of my portfolio (22.1%) while another only represented 2.5% (Information Technology).
I could make the case that there are valid reasons why I put so much money into one sector rather than the other. After all, some sectors may offer better buying opportunities during certain periods than others.
Unfortunately, that wasn’t the case and I didn’t have a valid reason for my allocation. I thought by investing in 18 different companies, I was automatically diversified. Fortunately, I was able to recognize my weakness and am now taking steps to “fix” my portfolio.
In addition to “fixing” my portfolio allocation, I have also created some guidelines for building my portfolio as a direct result of publishing my holdings. Instead of sitting back, I took action to correct my weaknesses to build a stronger and healthier income stream.
Diversify Your Investments
Even if you don’t invest in the stock market, there is still an important lesson here. If you have a financial planner, they have probably told you to “diversify” your investments. Whether that is in stocks, bonds, annuities, real estate, etc. – it really does not matter. The point is to spread your money out across multiple investments.
As I mentioned earlier, I am now building a diversified portfolio of stocks across multiple sectors. That way, if a weaker sector is down – the stronger sector (at the time) will bring the overall portfolio back up. I may not see the highest possible gains following this plan but I will certainly limit any risk my portfolio may be exposed to.
The concept of diversifying is certainly not rocket science nor is it anything new.
One area however, where I think most people miss the boat is when it comes to their income. I can count on one hand the number of people I know that have sustainable diversified income streams – for now this doesn’t even include me.
Just as your financial adviser would tell you to diversify your investments, I am telling you to diversify your sources of income as well.
Diversify Your Income
Let’s assume you hold down a full time job making $4,500 per month after taxes. Let’s also assume that you rely on the income from this full time job to cover 100% of your expenses. Whatever little is left goes into a savings account each month. You have no other income sources other than your job.
What would happen if you lost that job which covered 100% of your monthly expenses? How would you pay for your mortgage? Pay for groceries? Continue to enjoy your way of life?
I am sure you could get by for some time without working. Maybe you have an emergency fund or could borrow from family.
Wouldn’t it be great if you could rely on a collection of other income streams in the event you lost your job? Or maybe you are fed up with your employer and want to take a break. Having other sources of income would sure come in handy.
My Diversified Income Goals
Let’s be clear – I don’t hate my full time job. Sure I could think of plenty of other things I would rather be doing instead of going into work everyday. But I do value my job and want to succeed in it. I feel fortunate to be able to support my family on income I earn at this job.
However, I don’t want to sit back and rely solely on this job for my only source of income. I have a goal to replace the amount of income I earn ($4,500 per month) every month from a collection of other income streams. Yes – the example earnings per month example above was me.
I don’t want to wake up one day and out of a job for reasons that I can’t control.
Instead, I want to take action and control how I earn my income. I don’t want to rely on others for my family’s well being.
Just as I am planning to “fix” my stock portfolio by diversifying my investments, I plan to “fix” and diversify how I earn my income as well!