The Second Income

"The question isn't at what age I want to retire, it's at what income"

-George Foreman

Welcome to The Golden Sense! The answer came to me one night while I was making dinner. I was trying to answer the question of what was the best designed animal. The whale shark was the answer I came to. Whale sharks are those funny looking sea creatures that swim around with their mouths wide open filter feedings on plankton. Let me tell you, these animals really know how to structure their lives. No hunting, no trapping, and very little work required. They just swim and eat at the same time. Food simply floats into their mouths, through their filter, and into their stomach. Plankton and small fish might not seem like a big meal, but it's the constant accumulation of food that provides more than enough nutrition for them to grow and be the big fishes they are. Their main strength lies within this act of constant accumulation.  

Back on land, in the human world, banks are the equivalent of the whale shark. Bank's make a extraordinary amounts of money off of interest income from loans. I work in banking and I have witnessed firsthand this business structure collect an astonishing amount of revenue. People walk into the bank every day and make deposits and ask for loans. The bank continually funds loans to individuals or businesses, in return, the bank collects revenue through the interest on these loans. Whether the loan is large or small the interest paid back to the bank continues day and night consistently accruing on the banks books. Like the plankton filtering through the whale sharks mouth, the bank is constantly receiving income. Sometimes the income appears to be small but it is the volume and consistency of revenue collection that brings tremendous wealth to banks.

As individuals we are always looking for ways to improve our income and financial well-being. Some get it right and some don't. Many people fail or under perform because they are constantly looking for the big winner that never comes. Most of the time, people lose their "shirts" investing by rolling the dice hoping to hit that big winner. 

As we see in nature and in the world of big business, a better approach is to mimic the whale shark and the banker. Instead of looking for that big pop in a stock price or that contrarian play, a better way is to consistently put your extra money to work in interest producing securities.

Now what does that mean? That last sentence sounds like a myth in of itself.

If you have money that you want to invest, put a chunk of it to work by creating an investment portfolio with bond funds, master limited partnerships (MLPs), and real estate investment trusts (REITS). All these investments provide a return to you as an investor. This allows you to effectively set up a second income stream. People often mistakenly fail to develop income producing portfolios because they deem them to be too small or insignificant. Whether they are big or small you want to create as many additional incomes as possible. The beauty of the second income is that you are no longer working for the money, the money is working for you.

In order to achieve this lofty goal of a second income, you have to create a portfolio with a system balanced for risk. Income producing securities are subject to price volatility just like stocks or precious metals. They go up and down in value based on demand and present day economic circumstances. All these investment categories have their shortcomings but by investing in at least twelve different interest producing securities you will reduce risk and find diversity.

In the modern world I see eight big categories that make up the economy. By investing an equal amount into each, you will create a diversified portfolio. The eight categories are financial institutions, corporations, government, energy, real estate, individual consumers, transportation, currency and gold. I consider currency and gold as the same category.

The following portfolio shows how interest rates at 6% can create a substantial income. By spreading your money out into the eight different categories and twelve different securities you will reduce the portfolio risk substantially. Whether it is a substantial one million, ten thousand, or even one thousand invested, the portfolio produces a nice cash flow.

 

Second Income Investment Fund
Diversified into 12 holdings
Yields 6% annually
Average principal fluctuation in 2014 was 0%
Diversified Class Exposure
Government Bonds
Financial Institutions Debt
Corporate Bonds
Real Estate (REITS)
Energy MLP's
Currency and Gold
Transportation Loans
Consumer Loans
Total Investment $1,000,000
Type	Ticker	Price	Yield	# of shares	Dollar amount	1 Year Return	1 Year Price Fluctuation
Blended: International, Government, MBS, Corporate	EVG	$14.37	7.51%	5799	$       83,333.00	$   6,258.31	8.58%	$                (7,149.97)
Floating Rate Corporate Bonds and Convertible Securities	PFL	$11.60	9.30%	7184	$       83,337.00	$   7,750.34	1.27%	$                 1,058.38
Taxi medallion loans and consumer loans	TAXI	$  9.55	10.02%	8726	$       83,333.00	$   8,349.97	30.70%	$              (25,583.23)
Market-weighted performance of the bank institutional loans	BKLN	$23.80	4.15%	3501	$       83,333.00	$   3,458.32	4.43%	$                (3,691.65)
Energy Infrastructure MLP's	IMLP	$27.70	4.99%	3008	$       83,333.00	$   4,158.32	4.48%	$                (3,733.32)
Blended: Actively managed equity strategies	AB	$25.39	7.43%	3282	$       83,333.00	$   6,191.64	10.85%	$                 9,041.63
Private equity, real estate, and hedge fund	BX	$33.89	5.65%	2459	$       83,333.00	$   4,708.31	4.14%	$                 3,449.99
Junk bonds mix	SNLN	$19.18	4.41%	4345	$       83,333.00	$   3,674.99	4.20%	$                (3,499.99)
High yield corporate bonds hedged by treasury futures	HYHG	$71.60	5.65%	1164	$       83,333.00	$   4,708.31	11.08%	$                (9,233.30)
Real estate investment trusts	VNQ	$86.00	3.38%	969	$       83,333.00	$   2,816.66	29.76%	$               24,799.90
Price of gold bullion hedged by Canadian dollars	HGY	$  6.17	5.97%	13506	$       83,333.00	$   4,974.98	3.93%	$                (3,274.99)
Petroleum pipelines	MMP	$75.14	3.52%	1109	$       83,333.00	$   2,933.32	21.89%	$               18,241.59
							Total	$ 425 or 0% fluctuation
					Total Invested	$   1,000,000.00
					Yield	6%
					Return	$       59,983.47

 

After one year invested in the securities of your choice, it is important to sell all of them at the market price. This will force you to evaluate your portfolio and mitigate any unforeseen risks in some of the securities. Be sure to reinvest any unused income and create a larger portfolio for the following year. This is called compounding. As Richard Russell says, "compounding is the royal road to riches". Over time your portfolio will become larger and larger and your second income will eventually become your main income.

Remember that all securities have different tax structures and you may have to report your gains differently for each one. That is something everyone should research prior to making any investment decision.

Creating a second income portfolio takes a little bit of time and research but it really isn't very hard. The long term benefits are substantial and are vital to every ones financial health and longevity. Banks aren't making millions of dollars every year with a bad business model. It is their business model that makes them so successful. Whale sharks have lasted millions of years because of their body's structure. Both the whale shark and the bank constantly accumulate. By mimicking these successful structures, you can create lasting wealth for yourself as well.

Sincerely,

T. Norman