This article follows another recent one, Context for the RPD Retirement Portfolio. That article discussed my finances, scaled to those of a retiree needing $100k of income and having $1M of pretax savings. Here, as there, "my" numbers refer to this scaled portfolio.

My secure income is $55k, so I need $45k from the investments. I recently placed 25% of the pretax savings with the investing department at a trusted bank. Those funds are in a standard diverse portfolio of US and international stocks and funds.

My intent is that this pot of money will not be touched for at least 20 years. Eventually, I plan to place barriers to my own access to it, to protect my portfolio from potential cognitive decline, discussed in Define A Strategy For Your Own Cognitive Decline.

My cash and liquidity would cover three years of expenses, if needed. Ultimately, my active-investing funds need to provide a minimum average return of 6% to last 20 years.

More importantly, my goal is to grow these funds to provide both a cushion and more legacy. So, I am seeking a total return substantially above 6%, and ideally much larger.

On an after-tax basis, my scaled, active-investing portfolio has a value of $525k. Here, I describe what I am doing with these funds, and how I came around to those plans.

A few years ago, I began reading widely in the retirement literature, looking toward a retirement portfolio and income plan. For reasons discussed in the prior article, bond investments make little sense for me in particular.

Also discussed was my view that bonds don't make sense for any retiree at present. This followed in part from some modeling of bond ladders and other portfolios with bonds, done before I began writing for Seeking Alpha.

Modeling two-bucket approaches like the one I have taken was my next topic of investigation. My earliest articles on Seeking Alpha discuss models of such approaches.

A two-bucket strategy also later solved my problem of how to handle cognitive decline, and ultimately, this is why I have taken it. My present long-term allocation of 25% to the long-term bucket is on the low side of optimum.

The long-term bucket may turn out to support only a reduced level of spending. Ultimately, I decided to take that risk. My wife and I both favor living as we want to now at the risk of having to cut back later.

It is my deep belief that all investors are ignorant in ways that matter. One can never know enough about a firm and all the factors that affect its future profitability to predict with certainty its future.

This point of view favors relatively broad diversification. Even so, we have discovered on the High Yield Landlord chat that many of our members need to diversify in a way that fits their psychology. Some need few investments they can closely watch. Others need many investments, so a single failure does not cost too much.

There was a period of time where I was thinking hard about approaches to producing 6% to 8% distribution yields, so that my active-investing portfolio would last as long as needed, or longer. If this is the goal, what would work for me psychologically is a very broadly diversified portfolio of about 100 selected investments paying distributions in that average range.

I went this direction beginning in early 2019 with widely distributed preferred-stock investments when they were undervalued and with investments in diverse REIT sectors.

My natural orientation is toward value investing. Invest in securities undervalued by the market and reap the rewards as they are re-evaluated. (See Figure 1.)

An example of the sort of investment I prefer is Spirit Realty Capital (SRC). They were beaten down by the market in response to their complexity. The company shed some problematic assets and during 2019 positioned themselves as a standard net-lease REIT. Yet they were and are valued much less than other similar REITs. I made good money on SRC during 2019 as they gradually appreciated, exited a while for cash flow reasons, and am now back in.

Figure 1. Unlike this economist who believes in efficient markets, value investors will pick up those hundred (or more) dollar bills the market leaves lying around. Source.

Following momentum plays has no appeal at all for me. I don't object to people who do that, but note that they are going head to head with a lot of computers.

Investments that depend heavily on financial engineering, like mortgage REITs and BDCs, also have little appeal. My view of these, among others, is that, whenever the other shoe drops, a lot of investors are going to lose a lot of money.

The challenge for value investors is always to avoid the firms whose price has been driven down because it should be. One, of course, finds many arguments on Seeking Alpha about which ones those are.

Dividend-paying stocks offer a higher yield on cost when undervalued. As one example, the much-discussed Simon Property Group (SPG) has offered a yield near 6% for quite a few months. I believe they are a genuine blue-chip company and am delighted to be able to obtain that yield on cost.

In my case, some of the securities selected, from the opinion that they were undervalued (especially the preferred stocks), returned to more reasonable prices during 2019. My investments overall produced a total return that was a multiple of 6%, despite one big loss and not much gain in the latter few months as I shifted my investing focus.

Both positive and negative factors altered my thinking. One positive factor was my evolving belief that I could find market inefficiencies and profit from them. In doing so, I believe good research is essential and worth paying for.

I learn about and test ideas for REIT investments at Jussi Askola's High Yield Landlord, for which I also write some articles. I also pay for research at Michael Boyd's Energy Income Authority and J. Mintzmyer's Value Investment Edge. Each of these services easily pays for itself.

A second positive factor was the realization that, to me, having an increased cushion and more secure legacy funds does matter and is worth some risk. Achieving this means making investments focused on higher gains.

The negative factor is this. I realized that watching my portfolio decay away as gradual failures (dividend cuts or worse) eat away at its value is not the most comfortable approach for me personally. In thriller movies, I am far more comfortable with the violence that follows than I am with the suspense leading up to it. I'd rather find a high-conviction opportunity for substantial gains and take my losses all at once if my investment thesis fails.

More detailed attention to REITs led me to conclude that mall REIT securities were significantly undervalued. I decided to build a basket of mall REITs. I discuss the motivations for these investments in Retail Apocalypse Not.

I had not thought much about this more active approach until I had dinner with a friend who was passing through town. I started telling him what I was doing and he said "Oh, you are an INVESTOR". The capitalization of INVESTOR was clear in his voice. I thank him for causing me to do some focused thinking.

You need to ask yourself some questions before becoming an INVESTOR.

Do you have the motivation to track your investments in appropriate detail? Can you use clear judgement in deciding whether and when to sell your winners? Will you hang onto losers too long or can you shed them as needed? Investing will bring you crises. What is your track record at handling crises?

This last item may be the most important. Per Warren Buffet

If you can't watch your stock fall by 50% without having a panic attack, then you shouldn't invest in the stock market.

Any financial advisor will tell you stories of the phone calls they get from panicked investors during market declines (Figure 2).

Throughout my life, I have been the calm one during crises. This has served me well for decades, at home and at work. In contrast, my spouse panics and loses emotional control. I've known stellar female investors and leaders who could stay calm amidst turmoil, but she is not among that group. Before you try to imitate what I am about to describe, ask yourself the questions above.

Figure 2. Which one is your brain in a crisis? Source.

Having decided to pursue larger gains by value investing, I can expect loud proclamations that I am an idiot in various investment decisions. I expect to be in the position of Brookfield Asset Management, discussed in this piece on Morningstar, which summarized a Wall Street Journal article. It popped up in our chat room at High Yield Landlord:

"The sentiment is so negative on malls," said Vince Tibone, lead retail analyst at real-estate research firm Green Street Advisors LLC. He said "if you buy a mall and you're wrong, you're probably going to get fired."

Brookfield remains optimistic about a portfolio that ranges from Baltimore's Mondawmin Mall to Portland, Ore.'s high-end Pioneer Place.

In an interview, Brian Kingston, chief executive of Brookfield Property Partners, expressed confidence that the bet will pay off despite recent weakness. "This is part of our strategy in that we're contrarian investors," he said. "This is what it always feels like."

While I did well in 2019, and am hopeful for 2020, it would not surprise me to lose money (on paper) in 2020. Even so, most of the investments will spin off a good bit of dividend income. My hope is for gains within a couple of years, and my expectation is within five.

Figure 3 shows the composition of my active investing portfolio for 2020. I have deep value investments in three baskets: mall REITs, midstream MLPs, and shipping. For each of these areas, I have a written investment thesis, so that I can frequently assess whether it remains valid.

Figure 3. The RPD active-investing portfolio for 2020.

I am a strong believer in selecting baskets of firms within undervalued sectors (Figure 4). The markets often embrace oversimplified narratives and undervalue certain stock sectors as a result. I prefer baskets to individual securities from the perspective discussed above that one cannot avoid being ignorant about important developments for any individual firm.

My baskets reflect the oversimplified narratives of today: Malls are dying from the retail apocalypse. MLPs can't be trusted, depend strongly on oil prices, and will never recover from their recent bear market. Shipping will never be profitable again following its recent extended bear market.

In the case of mall REITs and MLPs, one can get paid well to wait for the market to come to its senses. I anticipate yields of about 10% from both of them. I also anticipate both taking gains and de-risking these baskets when the appreciation occurs.

Shipping, in contrast, is so cyclical that dividends are also strongly cyclical. I have invested in sectors for which I judge the fundamentals to be strong for the next few years, anticipating extraordinary dividends and hoping for gains that let me take some profits.

At present, I am in all the mall REITs, overweight SPG and Macerich (MAC). I am in 12 midstream MLPs, with largest positions in Energy Transfer (ET) and MPLX LP (MPLX). In shipping, I am in 8 stocks, with Euronav (EURN) as my largest position.

Looking ahead, in five years I hope to retain some mall REIT and MLP investments for income but to be finding undervalued baskets elsewhere. Shipping is a wild card. If I am still there, it will likely be in different shipping sectors.

The rest of the portfolio is more mundane. The Dividend Aristocrats are a good choice for long-term appreciation. The other REIT commons are moderately undervalued selections paying moderate dividends.

The crowdfunded real estate loans are intended as an uncorrelated cash generator. I expect to work that sector up toward a 10% allocation in the future, and that it will yield 8% to 9%.

I've run out of room to discuss specific securities further. I would like to share the detailed structure of my mall REIT basket, which has some subtle aspects. I will probably write about that.

Figure 4. Why hold baskets: Which is on average less threatened in a windstorm? Source and source.

If you work through the above material again, you will see that it is chock full of decisions that are specific to my circumstances and my psychology. Understanding the implications of your own psychology must be central as you plan your own portfolio.

I believe that there are strong opportunities today in the undervalued areas of mall REITs, midstream MLPs, and shipping, and also that in each case investing in basket of securities is the most sensible approach. Consider investing in these areas, but before you do, reassess their suitability for your psychology and circumstances.

Also, note that all the percentages above would need to be multiplied by 3/4 to represent their fraction of my total investable funds. They represent an even much smaller fraction of my net worth as implied by my fixed income streams. I hope that absolutely no one will go out and put 60% of their entire net worth into high-risk stocks or baskets in response to this article.

As you put together or reassess your portfolio, bear in mind that different sectors have different stability. The Dividend Aristocrats and Large-cap equity REITs (and some mid-caps) are relatively stable, although always subject to fluctuations with the market. Out-of-favor REIT sectors carry more risk.

Midstream companies (especially MLPs) are a minefield. Many factors matter, from corporate finances to product mix to geography to the overall market. Yet midstream companies are an island of peace compared to what I have seen so far of shipping, where wild cyclicality and massive volatility are normal.

Having shared my motivations and my chosen path, I hope you will find a path that is a good fit for you.

At High Yield Landlord, We spend 1000s of hours and well over $50,000 per year researching the REIT, MLP and other real estate markets for the most profitable investment opportunities and share the results with you at a tiny fraction of the cost.

Take advantage of the 2-week free trial and join our community of >1300 "landlords" before we hike the price!

Disclosure: I am/we are long SRC, SPG, MAC, ET, MPLX, EURN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Go here to read the rest:
The RPD 2020 Active-Investing Retirement Portfolio - Seeking Alpha