Reduce Risk and Increase the Love to Your Portfolio!

October 11, 2011|By David Lester

Reduce Risk and Increase the Love to Your Portfolio

We’re having some crazy days on the market for the last six months or so and it looks like we’re entering a time of slower economic growth. This new economic cycle will be a time of volatility and fewer company profits which equals less stock price appreciation. To compensate for this slower growth, investors should be looking for to reduce their risk anyway they can.  Here are three ways I do this.

Number one, load up with strong companies that return a solid 3% dividend, or more. When times get tough, money managers build positions in large dividend paying stocks and therefore there will be more of a demand for them. All our pension funds and boomers need yield moving forward and they’ll get it in our big blue chippers that pay dividends. If there isn’t any growth in the stock price-moving forward like we’ve been seeing for the last six months, at least I know I’ll be collecting the sweet sweet dividends.

Second, write covered calls.  What I do in my portfolio ads a spin to just collecting dividends from our big blue chips. Find an ETF that writes or sells covered calls if you don’t want to do it yourself.  Horizons has the Canadian TSX 60 top stocks and writes calls on all of them – symbol HEX.  I’ve written about it and BMOs has ZWB that writes calls on the six top Canadian stocks before. Diversify your portfolio and collect income from not only the dividends but covered calls too.  Check out more on HEX at the link below.

Horizons HEX

Thirdly, us an equal weighting strategy.  I like to keep all of my money so I buy stocks and build my portfolios myself to save the management fees.  I make sure that I equally weight each stock and rebalance stocks quarterly to make sure that one sector doesn’t get too big.  When oil hit record levels earlier this year it was smart to rebalance and buy some weaker sectors like telecoms or railroads.  Now that oil has come back down I didn’t have that extra exposure to the energy sector.

Bonus point!  Set your account up on a DRIP (Dividend Reinvestment Program) and let it automatically buy more shares each payout for $0 trading costs.  Many of the large dividend paying companies have a discount if you sign up for the DRIP program.  BMO gives you a 2% discount every time your dividends re-invest in shares.  As prices fluctuate you lower your average cost by buying at the lows and increasing your overall yield of the portfolio.  Win, win. 

My overall idea here is that by reducing your risk in your portfolio you can hunker down for the next market cycle and concentrate on the dividend paying stocks dividend income and option premiums. Creating a portfolio that is diversified, equally weighted, and paying solid dividends will ensure a retirement asset to fulfill your goals and aspirations – and help you sleep.  

Have an awesome and profitable week!



David Lester
About David Lester

David Lester is a best selling author and professional Financial Coach, helping people be better with their money. David has written a personal finance book that breaks with traditional attitudes towards finance and describes his own philosophy to money that he has gained through his personal and professional experiences. His philosophy on money applies to many areas of everyday life, including banking, investing, goal setting, shopping and entertainment.