|Risky business be careful!|
CHEAP.SHOT: "CONTENDER! CONTENDER! are you alright? Sorry mate I thought we were still sparring. I did not hear PLAN.AHEAD calling us over"
PLAN.AHEAD took THE.CONTENDER to one side: "Look what happened, you dropped your guard. You thought you were safe and in control. This is a risky business and you need to have your wits about you at ALL times"
In part 1 of this post (found here) we had a look at the pros and cons of dividend investing. Here in Part 2 we are going to have a look at the risks of investing in dividend stocks, our strategy and tracking progress.
Personal Financial Goals
As we are well into our financial freedom plans we have been fortunate to accumulate enough savings and investments to be very close to our desired goal. This is to buy a "nice" property in France and enough passive income to cover living costs. Currently this nest-egg is 2/3 in cash and funds and 1/3 is in dividend stocks. Ultimately we need our investments setup in the following manner:
- 45% in cash to buy a property outright
- 45% in dividend stocks. We are aware the nominal value will rise and fall with the market and company performance but the income that we need will hopefully grow over time.
- 10% in our protection portfolio for emergencies cash and cash alternatives such as precious metals.
US shares carry a premium (more costly / lower yield) to them but the dollar is the reserve currency of the world. Likewise UK and Continental European stocks carry Pound Sterling and Euro risk (get the money printing presses ready, Mr Carney - New Bank of England Governor)
We are going to be living in France and paying for everything in Euros so what do we think are our options to reduce currency risk?
a) Ideally we want to have much more income than outgoings if possible. This is the ideal situation as we can continue to invest and grow our income and it will provide a buffer in hard times. Likelihood low - we want to spend as much as possible on a home.
b) Investments will be made in countries with strong currency fundamentals and good trade agreements that avoid double or punitive taxation. Global low cost funds can help to mitigate currency risk instead of trying to work out the "best" country to invest in. In our case we cannot invest in funds in the short term due to higher French taxation. Our income will be paid in multiple currencies before being converted to Euros.
c) PROTECTION - our cash will be spread across different currencies and cash equivalents. Primarily this will be covered by income from multiple countries in the form of dividends, pounds, euros and some precious metals fund.
d) We will monitor all investments and country risk monthly and change the mix of the portfolio as required. Our monthly dividend tracker and risk evaluator is outlined below.
There are several countries and currencies that are of interest to our little tribe Canada, China, Chile, Singapore and to a lesser extent Brazil, countries located in Eastern Europe and Australia.
Canada and Chile are of interest for example as they both have growing populations, an abundance of natural resources, are business friendly and have a lot of undeveloped land for agriculture and natural resources.
For more on risk management and the low cost fund approach to investing have a look at the videos on the Bogleheads wiki.
Please read on to have a look at the tribes own strategy and progress