Thoughts On Income Planning

Strategic Investment Mixology - Developing The "Holy Grail"​ Portfolio

Just like alcohol, addictive products created in lower Manhattan have led many an optimistic speculator down the Holland tubes

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at

So what do you or your investment manager have in common with your favorite neighborhood bartender, other than the probability that you spend more time with the latter during market corrections?

Antoine Tedesco, in his “The History of Cocktails”, lists three things that mixologists consider important to understand when making a cocktail: the base spirit, which gives the drink its main flavor; the mixer or modifier, which blends well with the main spirit without overpowering it; and the flavoring, which brings it all together.

Similarly, your personal investment strategy needs to help you:

  • Put together a portfolio that is based on your financial situation, goals, and plans, providing both a sense of direction and a framework for decision making;
  • Use a well defined and consistent investment methodology that fits well with the plan without leading it in tangential directions;
  • Exercise goal directed judgment in the day-to-day decision making that brings the whole thing together and makes it productive

Tedesco goes on to explain that new cocktails are the result of experimentation and curiosity. They reflect the moods of modern day society, and change rapidly as both bartenders and their customers seek out and popularize new and different concoctions.

The popularity of most newbies is generally fleeting while the reign of the old stalwarts is history… with the exception, perhaps, of “Goat’s Delight” and “Hoptoad”. But, rest assured, Manhattans, Martinis, and all y’all’s Mint Juleps are here to stay.

It’s likely that many of the products, derivatives, funds, and fairy tales now popular on Wall Street were thrown together after “ti many martunies” at Bobby Van’s or Cipriani’s. And just like alcohol, addictive products created in lower Manhattan have led many an optimistic speculator down the Holland tubes.

The most popular of today’s financial products are, themselves, Wall Street’s creative response to the speculative mood of an impatient (and, perhaps, effort averse) society. The “wizards” experiment tirelessly; their customers’ search for the Holy Grail portfolio cocktail is endless; the basic (perhaps boring) fundamental principles of investing are roundly ignored… they’re just not that tasty anymore.

Investment portfolio mixology doesn’t take place in the smiley faced environment that brought us the Cosmo and the Kamikaze, but putting an investment portfolio cocktail together without the risk of addictive speculations, or a bad aftertaste, is surely a talent worth developing.

A trip to your local “portfolio tending” school would introduce you to an interesting, action based, curriculum in the “investment mixology” discipline. Some brief course description teasers follow this sidebar.

Passive investing is popular because mutual fund “managers” don’t consistently “beat” either market or sector indices. But why is this so? Mutual funds are really “managed” by their own mob of unit holders. If the fearful mob wants out of the market, the order taker must sell securities. When greed rules, the order taker must buy securities. This is hardly portfolio management… and ETF prices? Dictated by the very same mob.

IM 101: Understanding Investment Securities

Investment securities can be divided into two major classes, making the planning exercise called asset allocation relatively straightforward. The purpose of the equity class is to generate growth in the form of (realized) capital gains. Income securities are expected to produce a predictable and stable cash flow in the form of dividends, interest, etc.

Lesson One is the importance of having an appropriate mix of growth purpose and income purpose securities. In my practice, for example, I refuse to manage a 100% equity (growth purpose) portfolio. I insist upon having at least 30% (preferably 40%) of capital working to produce income… because my experience has taught me just how reluctant people are to add to portfolios during the correction phase of the market cycle.

IM 202: Minimizing “Financial” Risk

I refuse to manage a 100% equity (growth purpose) portfolio. I insist upon having at least 30% (preferably 40%) of capital working to produce income... because my experience has taught me just how reluctant people are to add to portfolios during the correction phase of the market cycl

All investment securities involve both financial and market risk, in addition to several others. Financial risk (the ability of the companies, or governments whose securities you own, to meet their commitments) is clearly the most important. But Wall Street, the media, your golf, buddies, spouses, etc, are much more concerned with “market” risk.. which is really not a risk at all.

It’s not “risk” because it is the basic spirit of investing… all security market values fluctuate. There’s no stopping it, so the investment process must be designed to deal with it. And that will be much more difficult if it doesn’t address “financial risk” effectively from the get go.

Lesson Two, without going into nearly enough detail, teaches the use of “four essential risk minimizing” ingredients… no, not just the one or two with the familiar flavor. All four are necessary or your cocktail will fail to produce the desired euphoric impact… eventually.

  • apply classical diversification rules to position size, security type, sector representation, and global participation, among others
  • only select securities offered by high in fundamental quality, profitable companies and/or actually managed portfolios with five or more year successful track records
  • own no equity security that does not pay dividends; own no income purpose security that is illiquid, and the final one, that each of you reading this is guilty of ignoring much more often than not, particularly during rallies…
  • let no reasonable profit go unrealized

If you have minimized the financial risk, market value fluctuation will become an expected and welcomed feature of all your securities… it is semi-predictable, cyclical, manageable, and easy to take advantage of.

IM 303: Day To Day Management Decision Making

There are three basic decision processes that require guideline development and procedural disciplines:

  • What to buy and when,
  • What to sell, and why
  • What to hold on to so long as it is doing its job.

Books have been written on each of these processes, mine includes a chapter on each… but creating the necessary buying, selling, and holding guidelines is only half as important as having the discipline to implement them… all the time, without looking back.

There’s absolutely no room for hindsight in investment portfolio management
Lesson Three involves “information filtering”, or applying the K.I.S.S. principle to protect your process. It’s important to limit information inputs, and to develop filters and synthesizers that simplify decision-making. What to listen to, and what to allow into the decision making process is part of the experienced manager’s skill set… kind of like knowing when the additional flavoring or modifier will overpower the main spirit of the cocktail.

Wall Street mixologists promote cocktails that have broad popular appeal but which typically create unpleasant aftertastes… like bursting bubbles, market crashes, and shareholder lawsuits.

IM404: The Indispensable “Spirit” of All Portfolio Cocktails

Grow the “base income” every month, every quarter, every year and you will approach retirement with the ability to say, unequivocally: “neither a market correction nor rising interest rates will have a negative impact on my retirement income. In fact, the impact may well be positive.” (Base income is the total of dividends and interest produced by the portfolio.)

IM505: Final Exam Prep

Five conceptual ingredients that you need to blend into your “holy grail” investment cocktail.

  • Using indices and averages as benchmarks for evaluating your performance ignores your asset allocation and the differing purposes of the securities you own.
  • Using calendar months, quarters and years as measuring devices reduces the investment process to short-term speculation, ignores market and interest rate cycles, increases fear of market volatility, and guarantees disappointment with whatever strategy or methodology you employ … most of the time.
  • Buying any type or class of security, commodity, index, or contract at historically high prices and selling high quality companies or debt obligations for losses during cyclical corrections eventually dilutes the strength of your cocktail.
  • Technical analysis contains excellent tools for developing an understanding of the past… nothing can predict the future.
  • Growth in market value fuels the ego; growth in realized income fuels the yacht.