Let’s dive deep into managing risk in your investment portfolio and how it’s done differently at Fly High Investing.
Navigating the world of investments may seem challenging, but by adopting effective strategies, you can turn it to your advantage. Let’s begin by delving into the fundamentals. Many investors prioritize risk management in their portfolios, with the most common approach investing in index funds. This entails investing in the overall market rather than individual stocks. One big problem with indexing is that about 25% of the companies in the S&P 500 (the most popular index fund) are not profitable. At Fly High Investing, we take a unique approach to managing risk by focusing only on highly profitable companies that pay high-yield dividends.
Risk is subjective, varying from person to person. While some depend on analyst ratings, typically presented as a numerical scale from one to ten, this method poses a challenge as the criteria used by analysts may not align with your criteria. Alternatively, others may embrace a high-risk strategy by investing in meme stocks, a potentially rapid path to financial setbacks.
At Fly High Investing, we adopt a distinctive approach. We categorize a stock as risky when a company is not generating profits, regardless of any attempts to conceal this fact. Our focus is on determining the overall profitability of the company, and this is where ‘Adjusted Earnings’ becomes pivotal. Adjusted earnings is a helpful metric because it excludes earnings distortions such as a one-time gain or loss from the sale of an asset. In other words, it tells us if a companyâ€™s underlying operations is profitable or not.
Adjusted Earnings’ is a key metric!
Looking at Adjusted Earnings is a better way to manage risk. We analyze a stock’s annualized earning potential, not just its past earnings. We also look at earnings estimates for the next two quarters, and not just from one source, but from at least two different analyst sources. This produces a consensus number that’s usually very accurate. And from that reliable earnings number, we can assess whether the dividend a company pays is sustainable. This method has been remarkably profitable for us over the years.
Here’s a fascinating tidbit: during the Fly High portfolio construction phase, there was an exhaustive process of sifting through approximately 7,000 stocks on the US exchanges to identify those aligning with our earnings and dividend criteria. We developed a screening process involving some formulas and rules that narrowed the list down to the top 50 most profitable companies that paid most of their earnings to us, the shareholders. We wanted 50 stocks in the portfolio for diversification and to minimize single stock risk. With just 2% of the portfolio in any one company, even if one company’s earnings take a hit and the stock falls by 50%, it would have only a 1% impact on the portfolio’s overall value.
So, is the Fly High Investment portfolio volatile?
If by volatile here means a lot of turnover in the portfolio, the answer is no. One of the rules in our screening process requires a company to have an unbroken history of high profitability. This is the best predictor of future profitability and is why we rarely must rotate a stock out of the portfolio. Because it is so difficult for a stock to qualify for our portfolio, once they’re in they stay in unless there’s a good reason to remove them, and that reason is almost always related to earnings. In fact, it’s not uncommon for Fly High Investing to go many months without a single stock rotation. These companies have been successful for a long time, and they know what they’re doing. So, it’s a peaceful investment landscape for our subscribers.
To underscore Fly High Investing does not endorse any specific stock. The Fly High Investing website generates revenue solely through subscriptions. No company compensates us for featuring them in our portfolio, and we steadfastly uphold the integrity of our investment methodology. After all, our founder has 100% of his own money invested in the portfolio, and sleeps well at night knowing the money is invested in the highest quality dividend stocks in the world.
What if someone wants to invest exclusively in these 50 dividend stocks in the Fly High Investing portfolio?
Feel free to adopt our list as your primary resource. We conduct daily monitoring of these companies to stay abreast of any news that may impact them. And when an earnings report comes out, we analyze that report using the methods we discussed earlier to determine if the company continues to qualify to be included in the portfolio. Even with such rigorous analysis, we suggest distributing your investments evenly across all 50 stocks to effectively mitigate risks. A common investing principle is to maintain a balanced and diversified portfolio.
Earnings Fixes Everything!
Managing risk is crucial in the world of investing, and our approach of focusing exclusively on earnings has proven to be reliable and profitable over the years. That’s because earnings drive dividends and compounding high-yield dividends is the most powerful wealth generator the world has ever known.
We hope you found these blog discussions valuable. If you have any questions or comments, please feel free to reach out using the contact link below.