Friday, April 24, 2020

Putting the Diversified in DD4L...

(*Post introduction music - I got you babe by Sonny and Cher)

Welcome to Groundhog Day!! Phil...? Phil...Connors?

Since the last post life in the DD4L household is pretty much the same and has been every day and as it turns out that is just fine, it's actually good to be sat here locked down in our apartment with Mrs DD4L. Periodically relaxing on the balcony in the sun listening to the local birds of Oklahoma. Also taking great comfort in the fact that the moment lockdown is done then I'm retired...officially. Out again..done so lots to look forward to, for now just take it easy and let life happen. Surrender is definitely the key here, meditate on the breath and relax.

The flights we had booked back to the UK for the end of April never happened so we rescheduled for
June 5th. Will even those happen? No idea. Not up to us and the realization is now that it never was, we were delusional in thinking we were in control of the situation.

To stay true to the name of the website I'd like to report more trading in the past month, but that would be an untruth. Since all the purchases from mid March the portfolio has pretty much encountered a lockdown all of it's own. I actually think I'm done purchasing for some time now, indeed quite the opposite phenomenon has occurred and a large scale stockpiling of cash has begun, filling the void left from all the purchasing. It's almost like it no longer matters what gyrations the markets are experiencing, we're now fully backed off and what will be will be. Bargain buy and hold has kicked in. Cash is now king for now and the foreseeable longer term future.

There have been plenty of dividend suspensions now with the last one being Las Vegas Sands (LVS) which is quite rightly due to the fact that the casino's, like their hotels are sitting empty. I can't by any means get mad nor frustrated at Sheldon Adelson (Mr Yay Dividends!) for using his god given common sense and preserving the cash pile. Same goes even for Invesco who have reduced their dividend as a result of folks running screaming to the hills and abandoning their portfolios. This is a black swan event and any cash preservation by affected industries is perfectly justified. That said I understand perfectly if my fellow retail investors wish to sell, nobody knows another's circumstances and cash might be tight right now after a furlough or worse a job loss. Survival mode brings out whatever reaction it decides. Best of luck to all. 

So as it stands we're scouting around for some CD's to park any future wages, dividends, interest or rental income that might come our way. Something like a Goldman Sachs or Discover 5 year ladder maybe, have to keep a watchful eye on and be ready to pounce.

On the positive too the 2nd income property, Southport UK this month starting to produce cashflow via
the new tenants which was nice to see considering the melee and confusion out there. This means when we do return to the UK we need to find a temporary place to rent as we search for property 3 on the south coast of the country. First world problem producing zero complaint.

This example dovetails us nicely into the point of this post. Diversification.

For it is in a black swan event such as Covid that diversification becomes the lynchpin of your entire FIRE income enterprise and keeps the unwanted job at bay (assuming one is available....) 

Sure enough those hotel, restaurant and casino dividend-producing investments were an excellent addition to the portfolio when times were good and money was flowing with high employment but right now the opposite is true. Now is the time you hopefully thank your past self for diversifying out to the Proctor and Gamble's for the Charmin toilet roll, the Unilever's for bleach spray, the Colgate Palmolive's, utilities like Southern Company and American Electric. These are the companies who should now step up to the plate and keep raising the dividends to pick up the slack for the pauses. 

So does this mean we run scared of all tourism, hotels, restaurants and casino's from now on? Once bitten twice shy? Not at all, everything has it's time and place and these industries will come roaring back at some point, just not here and definitely not right now. Maybe not for a while but patience young Daniel-San. Buy low for now and chill ignoring the short term pain if funds allow such extravagance.

Same goes for the rental income, now and moving forward it becomes ever critical to understand the source of all the income we take for granted, run the analysis and take the lessons. In rental income terms it's important to recognize exactly from where the income originates and decide if it is reliable or not during a black swan. If your AirBnb is susceptible to zero income during lockdown then it's important to complement it if possible with other properties containing more diversified and reliable sources of revenue. Does this mean we fear and give AirBnb a wide berth from here? Not at all, again patience Daniel-San, normal service will resume at some point.

For our example the USA rental income comes from a College Tennis Head coach, is this a reliable income source? Hard to say. All college tennis is rightly on lock right now as with most sports and unlikely to return before 2021 so the decision here is entirely with the college to decide if our tenant is employed or furloughed? Our rental income in turn rests on this decision and this is also where paid off property is king. When the taxes and overheads are all paid it's more straightforward to cut the tenant some slack with a rent holiday at a time when they need it most and can focus on putting food in their mouth. 

For the UK property the income originates from a Postman and Sales Manager at a Betting shop. While the former is unaffected at this time the latter is a concern but should be covered by the UK government 80% income replacement bailout for employed people. Quite the godsend really. Even still though nothing is taken for granted. Postmen can go on strike, gambling is susceptible to government legislation so a backup fund is necessary worst case with about 6 months of overheads covered per property. Again paid off mortgage-free property is optimal so that rent holiday's don't produce a painful grimace.

So as you can see from these two examples it's critical in more prosperous, non-recessional times to understand the income sources of your tenants or any other dividend producers for that matter and the subsequent effect of any black swan event. Though for the record it's more likely that 2008 would not have resulted in the same issue so YMMV rule applies as usual.

So in conclusion...

Diversification!! Not just dividends for life but Diversified Dividends for Life. Different industries that react differently, whether positive or negative to different world events. Life happens and it's the only way to give your income a fighting chance to sustain itself until the prosperous times return, which they will. Have faith as hard as that may seem right now.

Easy to say in hindsight but FIRE is not just about quitting the job in the good times, it's about understanding your portfolio inside and out to retain some sanity for the not so good times. Maintaining a frugal, scarcity mindset and holding sufficient cash reserves beyond all this to keep yourself upright for at least 2 years of pain. 

Easier said than done when you're burnt out and the job is unbearable.

Love to all,


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