In my culture there is an old adage: “Don’t put all your eggs in one basket.” It’s a quaint agrarian saying that captures a great deal of wisdom.
This principle applies most directly to savings and asset allocation. Savings are key but today I’m writing about income.
When it comes to income the expression is don’t have all your eggs come from one chicken.
In truth many people have almost no income diversity.
To stretch the analogy way to far: most workers have access to one chicken and in exchange for their work they get a small portion of the eggs the chicken lays. If the chicken stops laying eggs or the person who owns the chicken doesn’t want want or need a worker anymore, then the workers go hungry until they can find access to another chicken.
They have their job (and little to no savings or maybe a little to a lot of debt) and that’s it.
If they lose their job and can’t find another one they are in a very bad place. Without a job many people can’t service the debts they have, they can’t pay for their basic needs, it’s a hot mess. An emergency fund and savings are helpful but I was unemployed for 100 days and it was stressful even though I do have savings!
Unless you’re self employed you don’t own your job and can be let go even if you work hard and do a great job!
Losing a job happens all the time. A company gets bought and people get laid off. “My boss is a jerk and I can no longer stand to work for her.” The industry you’re in collapses. Dollars don’t buy as much and a raise doesn’t cover the difference.
Even if you are gainfully self-employed the market you’re in could contract and squeeze your earnings.
Multiple Income Streams
Multiple income streams, income diversification, it means not keeping all of your income “eggs” coming from just one chicken.
Multiple income streams provides strength and security. If one has multiple streams of income and lives below their means it isn’t a big deal if one of the income streams stops.
If all of your income comes from your job, and you lose your job for any reason, you have to rely on any savings you have until you find another job.
But if you have income from 4 sources and one of them stops yielding; you’re still getting a large percentage of your income.
Going out and getting four full time jobs is probably not possible. I know I’m only one person and can’t be two places at once and there are only so many hours in the week.
Right now my day job is the main engine that drives my economic wagon. But I’m saving money so that won’t always be the case.
I continue to develop additional income streams including ones that make money even while I sleep. Some of the areas I’m capitalizing on are: dividend paying value stocks, bitcoin arbitrage, and trading options. While option trading is somewhat active during regular business hours (unless you place good till cancelled limit orders in the morning or evening), the others can be done with little time outside normal working hours.
I do still want to get into real estate (rental property) that has been on hold until I’m more established in my new career.
It’s popular to talk about diversity and diversification, but when it comes to income the norm seems to be getting one job and working there for a long time. That isn’t always possible, practical or prudent in “today’s economy.” Branching out into multiple sources of income provides most financial resilience and security.
Great article John!
So your mention of Bitcoin arbitrage got me curious- I’d never heard of such a thing. So I read your post about that too (no comment section there, so I came back here to comment). Fascinating concept. Curious if you think that the value of Bitcoin will correlate with the stock market or move inversely in the case of a market downturn. Ie would you use Bitcoin arbitrage find to hedge against stocks?
Thanks for the question Dan! That is a thought provoking idea…
The short answer, in my opinion, is that BTC would not be a good hedge against the stock market tanking. But I have some additional thoughts that might help you make up your own mind.
The bitcoin arbitrage fund that holds gains in BTC would follow the price of Bitcoin plus the 10+% interest rate of that fund. So the question would be is Bitcoin a hedge against stocks?
I think this this website: http://coincorrelation.com/ will help answer this question.
According to that site, over the short term (15 days) bitcoin is negatively correlated with the S&P 500 (which could be thought of as a proxy for the stock market). BUT over longer periods of time the correlation falls to such a low level that I suspect it is not statistically significant and in fact the correlation actually turns slightly positive!
In other words Bitcoin would tend to go up if the S&P 500 tanked, but only in the short term. Since the correlation is only large over the short term, one would have to be pretty good at timing the market and moving out of BTC and into stocks and then back so I would not personally use BTC as a hedge against stocks since I haven’t figured out a way to “time” the market.
Market timing: Right now I think stocks are overvalued relative to historic P/E ratios but I don’t know *when* they will return back to being more fairly valued.
I see BTC as an alternative investment outside the traditional financial system. So it would have more of a chance of being a hedge against central banks and dollars (although that opinion is not supported by coincorrelation.com since the USD index is positively correlated with BTC).
Having said that I own very little to no actual Bitcoin at this time. I favor the bitcoin arbitrage fund that holds gains in USD. I get a 12+% annual return and I don’t have the risk of BTC price fluctuations.
I’m exposed to dollar debasement but I have other assets to protect against that (like physical precious metals). Those are my opinions and thoughts, which may or may not be helpful or suitable for you.
Wow! Thanks for such a detailed breakdown! You should turn that into a post of its own! I’m definitely anti-market timing (http://penniesanddollars.com/stock-picking-horror-story/), so I’d personally want something that negatively correlates to the stock market over the long term. Nonetheless, the Bitcoin arbitrage fund (USD) still sounds like a fantastic way to further your diversification while still achieving yields similar to what you get in the stock market.
Also, am I understanding correctly that I can not invest in the USD arbitrage fund via regular brokerages? Only via BitBays?
That’s a great idea for a post!
I’m not aware of any regular brokerage that offered a Arbitrage fund.
Looking forward to reading your stock picking horror story post when I get the chance.