11 steps Kevin O’Leary recommends for making a good and balanced investment portfolio
If you have watched shark tank, or been around the industry of investment and finance, chances are you have seen or heard of Kevin O’Leary.
He is among other things a Canadian businessman and he has made lots of money from the world of business that most people know him from.
They talked about a lot of things that Graham did right and those that needed improvement but I also noticed that he gave so many useful insights in how to build a strong investment portfolio starting from zero which I thought could be extremely useful to anyone that needs to have a stable and less risky investment portfolio that can weather the bad times.
I have thus picked out 11 points that were extremely useful in which all of us could take, apply, and benefit from the video. Here they are.
Even though Kevin does not endorse credit cards, he also acknowledges that it is very hard to advance your credit rating without having a credit card.
He, therefore, advises that the first step you should do if you do not have one is to first get a credit card with a small limit on it (say $1000) and put on it about $200 every month.
Furthermore, for you to improve your credit rating, you must make sure you pay off that $200 every single month so that you can get a good credit score.
One tip I learned about this from another multi-millionaire is that if you can, just let that $200 you spend be on an income-generating activity like starting a low-cost business.
Using that spend on starting a business gives you a double advantage.
- You get to use non of your own money to start your own business leveraging what other people’s money which can be a great advantage in helping you maintain your lifestyle as you embark on building a business.
- You get to have an extra income source while building your credit rating.
Kevin gives an example of how his son Trevor has a pristine credit rating with only a few thousand dollars on his card. This is because Trevor took his dad’s advice and got a card that he could put $50 on and pay off monthly and in time
There is no way to game the system without establishing a credit rating.
In the video, we see that Graham benefits from the appreciation(real estate) as long as interest rates go down.
This is a dangerous position to be in if you have most of your investments in one asset class for obvious reasons that if, for instance, interest rates were to go up from here (which is inevitable by the way), the majority of your investment portfolio would suffer.
This is an inherent risk for Graham, for example, because for now, when interest rates are low, it is a way the federal reserve tries to stimulate the economy.
When the federal reserve lowers interest rates, it becomes very cheap to borrow money from banks, so all of a sudden, people can go borrow money for which they will pay low interest.
This, in turn, makes more money available, and people have it and are willing to spend it, which in turn drives up the prices or things like real estate.
This is what Graham has to his advantage right now.
If tomorrow, however, the federal reserve now raises the interest rates, it becomes more expensive to borrow money from banks and so fewer people have access to loans and so even less money in the economy.
This is, in turn, drop the demand for things like real estate as fewer people are willing to buy or rent…
It will be reflected in the market by the depreciation of those things in value, which will then reflect in your portfolio if you have too much concentration in one asset class.
If you go however and average out the concentration around multiple asset classes, you will not have a big dip in your portfolio when one asset class drops significantly.
If things go wrong and the values go down across any asset class, you still owe that money you borrowed. You have to be ready to pay off that million at any time.
Kevin gives an analogy of a NewYork real estate developer friend.
He came to America from Europe at the age of 18, and he’s not a multi-billionaire. Let us call him David (Not his real name).
David classifies his buildings into two;
- Pasta Buildings
- Protein Buildings
These are buildings that David still has loans on. He and his wife always eat pasta when they get such buildings until they fully pay the loans off.
These are buildings that David has no loans on. Once they have paid off the loans of a pasta building, they begin eating steak again hence calling it a protein building.
This is the strategy that has helped David whether the worst economic downturns while many people went under.
During the downturns, David’s protein buildings provide the cash needed to spend, and when the economy picks back up again and times are good, then the protein buildings provide the money that they need to buy more buildings.
David never extended himself so far that to a point where the cash flow from the protein buildings could not pay the mortgage of the pasta buildings and as a result, has succeeded in building a multi-billion dollar company
If you take on debt, you should be able to pay it off at any time. Kevin O’Leary has no debt which was a surprise to me considering I have heard so many people talking about good and bad debt but I haven’t heard any talking about no debt at all… Maybe I hadn’t just looked hard enough.
If you are taking on debt for your businesses and investments, then that is good for you as long as it is well managed and does not exceed what you can pay off anytime it is needed.
Kevin advises that you should never let any of your asset classes become more than 20% of your net worth.
If you love an asset class a lot, the way Graham loves real estate, your goal then should overtime be to build up a broad enough portfolio that makes that asset class only 20% so that if that asset class really has a hard time, it cannot take you out of business.
Every 90 days, trim back any stock over 5% and put it into something else you’ve decided to go into. No sector in your portfolio should be more than 20%. No stock more in your portfolio should be more than 5%
Again, Kevin says that the biggest mistake you can make in your life is to worry about taxes. The fact that you are worried about taxes is a wonderful problem to have because it means that you are making money.
But if you say that you don’t want to sell a stock that is 11% of your portfolio because you fear the tax, you’ll have to pay for balancing that stock, you will pay a brutal price for it. This is because there will be massive corrections, and you won’t have taken any of your gains but rather lose them back to the market.
Never in your life ever use margin in stocks. I have read a book about this in detail before that will show you the true extent of how bad leverage can be.
You should instead always have some cash (30%+) in your portfolio that you can use to acquire new investments that may come up.
Margin is attractive, but stay away from it and get your investments without it.
You must be willing to write off high-risk investments because there is a 50% chance you will.
Investments in startups, for example, can be high risk, so they should obviously not make up a significant portion of your investment portfolio.
Keep these types of investments really low in your portfolio percentages and be ready to write them off if they do not turn out alright as many do.
Once you raise more cash, buy more diversity, and be more conservative with stocks. Kevin O’Leary always prefers to buy into dividend stocks that way he can raise enough money to serve as cash flow monthly.
When it comes to this, I would like to end by advising you to buy Tony Robbins’ book called Money Master the Game (not an affiliate link). This book will be very instrumental with over 700 pages of practical steps and explanation on how to take full control of your finances.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.