I’ve written before about my approach to investing and trying to create an income producing portfolio of assets. It’s been difficult to find stable and secure investments over the last few years; especially if you’re trying to find income producing investments. Naturally, my search for income isn’t restricted to a single asset class, but historically, I was pretty focused on safer options of fixed income, like bonds. A large portion of my portfolio was allocated to things like government bonds and corporate debt. Over the last decade, these assets have gradually performed worse and worse in terms of generating income thanks to slowing national growth, falling inflation and policies of quantitative easing (QE). Because of this, I’ve had to widen my search when looking for income producing assets.
Traditionally, I\’ve always been pretty risk averse, viewing the stock markets as a bit of a gambler’s paradise, but was forced to re-evaluate as fixed income sources became less attractive. In addition to this, I also started exploring options like REITs, as well as other more niche sources like P2P lending. These options have helped to diversify my portfolio and to re-inflate declining income streams.
Of course, with new income options come new risks, and so a larger part of my portfolio strategy is now dedicated to trying to understand and mitigate those risks. After all, if I put £1000 into an equity which yielded 7%, I’d receive £70 a year, but if the company went bankrupt after three years then I’d have lost the £1000. Naturally, this is a situation I want to avoid, so I’m constantly trying to balance risk and yield.
Keep a clear objective in mind when building your income producing portfolio
Trying to balance risk and yield isn’t a straight forward exercise, so I try to keep some clear objectives in mind when selecting investments. Some investors are focused on trying to acquire capital growth, but these opportunities aren’t necessarily right for me unless they produce the income I’m seeking. I try to look for relatively stable, established opportunities, with low volatility and high dividend cover.
At heart, I’m a pretty defensive and conservative investor. I generally try to find safe opportunities which still pay a good yield. I’m also looking to build in diversification and choice rather than building a portfolio of similar assets. I\’ve found that actually picking individual securities gives me the flexibility to add and remove assets which perform well across a range of scenarios.
This flexibility is really important to me. Trying to blend assets which have different characteristics is a regular feature of my investment strategy. Obviously, pursuing yield increases the risk of acquiring unsustainable equities, where dividend yields look high initially, but further investigation reveals that the companies are in trouble and consequently going to slash dividends or potentially even collapse.
Likewise, if I’m looking at alternative assets like property, or high yield bonds, they tend to be pretty cyclical; if the economy is doing well, they’re great, but when things don’t look so rosy, they generally lose value pretty rapidly.
The solution, therefore, is to blend those assets with a range of equities of varying characteristics, as well as governments bonds and so on, ending up with a portfolio that has the ability to perform in a range of circumstances. This means that when some parts are not performing as well as I might like, they’re generally being offset by the better-performing assets, lowering the overall volatility of my returns.
As I stated at the start of this blog, bond yields and fixed income assets are generally performing less well than they have traditionally. I try to keep an eye on individual assets, rather than blocks, allowing me to seek out new opportunities to replace singular parts of the portfolio rather than reallocate bigger chunks. This means that even though a particular class (say government bonds) begins to underperform other classes in my portfolio, I can try to find individual assets which are better performing in that class than the one I currently hold.
For me, it’s all about taking advantage of the breadth of choice in the markets and maintaining a flexible approach. As opportunities arise, this positions me to take advantage of them. For example, earlier this year UK property took a nose dive as people panicked about the impact of Brexit. This was part of a wider collapse of markets, which opened up lots of great opportunities to acquire some decent quality equities with good yields at a solid discount.
I wouldn\’t say I\’m an expert at building an income producing portfolio – on the contrary, I\’ve had some really variable returns in the past, but the key focus for me is maintaining that flexibility and staying focused on my objectives. When buying new assets, I always consider how they fit into my larger portfolio, and if they\’re a good match for adding diversification whilst still supporting my long-term investment goals.