Long-Term vs Monthly Income Strategy for Retirement

Most investors think about making money in one way:

Buy something today and hopefully sell it for more later.

That's capital appreciation.

And it's an important part of investing.

But as you get closer to retirement, another question becomes more important:

How do I turn the capital I've accumulated into cash flow?

I think of these as two different jobs.

Long term = Grow your capital

The purpose of long-term investing is primarily to grow the value of your portfolio.

The process I use is fairly simple:

Step 1: Find companies I actually want to own

I generally start with blue chip companies.

I'm not trying to find the next unknown penny stock.

I'm looking for businesses where I know, I like and I trust:

• How the company makes money
• Whether the business is growing
• Whether the balance sheet is healthy
• Whether the company has a long-term competitive advantage

Step 2: Check the long-term trend

Then I open the weekly chart.

I want to answer one basic question:

Is this company generally moving up, down or sideways over the long term?

I use weekly charts because the signals are more reliable.

Step 3: Look for a more attractive entry price

Even a great company can be a bad investment if you pay too much.

So next I ask:

Is the stock currently expensive or discounted relative to its recent history?

One tool I use is Bollinger Bands.

I'm looking for situations where a company I already like has moved toward the lower end of its normal trading range.

Step 4: Check the fundamentals

If the chart looks interesting, then I go deeper.

I look at things such as:

• Revenue
• Profitability
• Cash flow
• Debt
• Margins
• Management
• Insider activity
• Recent news

This is where my CPA background helps me shortcut this process to 15-20 minutes

Step 5: Hold until exit trigger

This is the most important part

Getting in at a good price for a blue chip company is one thing

Holding as much as you can until you see the market turning around (or a pre-planned exit stratetgy) is what drives your true profitability

Short term = Generate cash flow

Income investing for retirement has a different objective.

Instead of asking:

How much could this investment appreciate over the next several years?

I'm asking:

How can I potentially generate cash flow from the capital I already have?

My monthly-income education focuses on options.

That does not mean the income is guaranteed.

It isn't.

Options involve risk, and receiving option premium does not automatically mean the overall trade will be profitable.

So I use a process.

Step 1: Start with the income goal

The first question is:

How much portfolio income am I trying to generate?

This gives you context.

For example, someone who is simply learning the strategy is in a very different situation from someone who is close to retirement and wants the portfolio to supplement employment income.

I'm not starting with:

Which option pays the biggest premium?

I'm starting with the purpose.

Step 2: Determine how much capital you're willing to allocate

Next:

How much of your portfolio are you actually willing to use for income strategies?

You don't necessarily have to use the entire portfolio.

You might have:

Long-term capital

and separately:

Capital allocated to income strategies

I like separating the two because they have different jobs.

Step 3: Find the underlying stock or ETF

Only then do I start looking for an opportunity.

I generally ask:

What blue-chip stock or ETF am I comfortable analyzing?

Recent examples I've looked at include:

GOOGL
QQQ
AAPL
COST
MSFT

The underlying security matters.

I don't want to choose an options trade purely because the premium looks attractive.

Step 4: Evaluate the setup

Then I look at the stock itself.

I ask:

Is the price attractive?

What's the longer-term trend?

What do the fundamentals look like?

Is there anything happening with earnings or news that materially changes the risk?

This is the same basic analytical process I use for long-term investing.

The difference comes in the structure.

Step 5: Choose the options structure

Only after I understand the stock do I think about the option.

Depending on the situation, that could involve different structures.

What matters is understanding:

How much premium is being received?

How much capital is required?

What's the maximum potential loss?

What happens if the stock moves against the position?

When does the option expire?

Those questions matter more to me than simply asking:

How much income does this trade pay?

Step 6: Compare income against risk

You have to evaluate the whole position.

Step 7: Decide whether the trade is worth taking

Finally:

Does the potential reward justify the risk?

Sometimes the answer is yes.

Sometimes the answer is no.

And sometimes the correct decision is:

Wait until next week.

That's the process.

My monthly-income checklist

Before I consider a monthly-income idea, I want to be able to answer:

1. What does the long-term trend look like?

2. What do the fundamentals look like?

3. How much income could the position generate?

4. How much capital is at risk?

5. What is the historical win rate?

Because you're learning the decision-making process behind the idea.