Focus On Income Predominantly In The Stock Market

“Fear & Greed”. These are the two emotions that primarily exist in the stock market (NYSE:SPX). However if you really think about it, these two emotions can be eradicated if one adopts an income mindset instead of a capital gains mindset. Fear is present when you one of your positions is tanking at a rate of knots. The position may be profitable but is loosing paper profits every day. You become fearful and eventually sell. On the other hand greed occurs when one of you positions may have rallied hard and you want more. Maybe you even take out some form of leverage to fund your purchase. Unfortunately the house of cards comes tumbling down in the aftermath when you come to the realization that you bought at the top of the market or cycle and to add insult to injury – with leverage.

This whole nonsense can be done away with by adopting an income mindset. However I must say that only the minority will be able to adopt this mindset. Why? Because the stock market and its associated commentary will do its very best to lure you into its false sense of security. In fact, it is so easy to change one’s game plan in the markets when so much commentary on stocks is right in front of you on a daily basis. Articles on stocks going to the moon are not only there for click-bait reasons but also to lure you back into the markets at a moments notice. Furthermore many of these articles are written by professional finance writers and on the surface look really slick.


However here is the critical issue. All of them bar none focus on timing and that is the key word. The articles are usually based off improving fundamentals or improving financials in a stock and you become worried or “fearful” that you could miss out on a move. What happens as a result? One’s portfolio gets dragged from pillar to post as it always chooses the perceived best stock at a given point in time. This strategy long term is set up for disaster as one’s emotions are heavily involved due to trying to time the market. Our portfolio does things differently. We are going to call the shots and not be at the behest of the market at any given moment.

The first crucial step one can do before getting their feet wet in the market is to lay out a plan with their end objectives in mind. Having a clearly laid out plan as well as being income orientated is how to become laser focused on your goals. In fact, your brain is a servo-mechanism which means it will deliver the goods for you (and change….) if you program it properly. Since our premium portfolio will be income based, the first question you need to ask yourself is how much income do you want? This may sound strange but it absolutely crucial.

The end goal here is money, or cash flow would be a better way to coin it. You need to decide right now how much cash flow do you require every month and in what time frame – 3 years from now?, 10 years from now?, etc. These are the steps that many investors don’t take initially when they start out investing. They blindly go long some stocks and index funds and take a “see how they will do” attitude which is far too general and risky. I’ll say it again if it hasn’t sunk home yet. The reason to invest is for cash flow or money, period. It is not to have your shares stacked away in a portfolio for ages as you wait for your ship to come in. No we want to work on our income goals straight away.

We want to structure a portfolio where cash flow is king. We are not interested in speculative capital gains. If you can get this mindset down pat, you are most of the way there. For example, in the great recession of 08 and 09, most of the investors and speculators that went to the wall were primarily invested for capital gain. At the top of the market (2007), investors piled into both real estate markets and stock markets and many of them got wiped out in the process. You can see the sentiment chart below where emotions ran extremely high at the height of the boom as investors believed markets were going to the moon and they were going to get rich in the process.


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This brings me to another important lesson in investing. If you do the opposite of what the crowd is doing at any given moment, you are giving yourself the best chance for for success in a big way. For example, we will not be buying stocks for our portfolio when everyone else is buying. Our aim to be buying quality stocks for as cheap as possible. Our portfolio will be heavily diversified so one position along will not be able to hurt us. Let’s revert back to the great recession though as there were powerful lessons to be understood there. Income derived investors that had solid diversified portfolios didn’t lose any sleep. Remember the value (in terms of $ amounts) of the portfolio was secondary to the income being produced by the portfolio. In fact, astute investors used the steep decline in equities to buy more quality stocks at really attractive dividend yields. The same could have been said about the real estate market. Investors who focused on positive cash flow came through the great recession unscathed as the price of their assets was secondary to the yield the real estate was giving them. On the contrary, investors who needed capital gain appreciation (usually speculators or “flippers”) got wiped out when investors ran for the doors.

So make the decision today – the decision to be primarily a cash flow or income investor. It may not be the “sexier” choice but believe me it is by far the most predictable strategy when looking for long term gains in the stock market. Investing for income should definitely form the lions share of portfolios, especially investors who do not have meaningful savings or a pension as it involves far less risk and is far more predictable over the long term. The advantage of income is that it forces you to looks for returns now, not in months or years from now like in other types of portfolios. We want to be always focusing on the present (yes right now – as you are reading this blog post) as now is the only time you will ever have.  Therefore shouldn’t we make “now” the most important and productive time ever?

I believe we should but remember that the whole stock market industry wants to take you away from the “now”. They want to sell you on the next and best thing that will generate huge returns for you in the “future”. Nope that’s not us. We want results now. We are not dreamers. We are action takers who will not be swayed by consensus or opinion. If you are still with me, let’s get this show on the road..

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