Are You Investing For Income, Diversification, OR Peace of Mind

Why 42 Holdings Might Be the Most Profitable “Arbitrary” Number You'll Ever Use and Why My Investment Style is Dividend Paying Stocks….

I don’t like to talk much about specific investments because I don’t give financial advice, but since most of my readers are Liability Advisors (commission-based lenders), I wanted to share a little about my approach to investing, which started when I was a commission-based lender full time.

Most investors either chase shiny objects or go all-in on the few things they think they understand. Then, the market reminds them they’re not as smart as they thought.

The system I started following was to buy Dividend-paying stocks (see quote above). And follow the Rule of 42. Let me break this down.

Dividend Stocks = Cash Flow Without Selling Assets

If you want to retire early (conceptually) then you want to avoid selling stocks. Selling your stocks is like eating the seeds instead of planting them. The reason I invested in stocks was to build wealth that would eventually replace my cash flow… the typical mountain journey of earning more than you spend along the way, so that when you aren’t working later in life you can spend the mountain you’ve piled up along the way.

The problem was the 2001 tech bubble crash, and then the 2008 crash - I saw the mountain cut in half, my gains weren’t gains (again see quote above).

Dividend stocks flip the script. You’re getting paid consistently just for owning them. Income. Cash flow. Money you can count on—without selling your positions.

But here’s the fear most people run into: they concentrate their holdings. All it takes is one bad earnings report or one black swan, and boom—you’re wiped out on a position so how much is too much… the report graphic I also share above showed that 42 was enough, so that meant I’d buy 2.4% of any individual stock and I could sleep at night. Also, the stock went up and down, but I kept getting dividends each month or quarter.

Enter: The Rule of 42

The Rule of 42 says: hold at least 42 different investments and no more.

Why?

Because academic research and real-world experience agree: by the time you hit 40-ish stocks, you’ve eliminated most of your diversifiable risk. After that, adding more doesn’t move the needle that much. You are just creating more complexity.

But fewer than that? It makes sense if you understand ETFs, which might have hundreds of holdings. For example, SPY pays a small dividend (currently 1.26%), and you get about 500 stocks, so you could just invest in SPY and earn that, but I always want something that is more like the current risk-free rate on money markets + 3%. I put my cash in USFR, which is currently paying 4.87%, as a ‘money market’ style investment… that is not risk-free but close to it as it is buying short-term US Treasuries.

To justify the risk of investing in a stock or ETF, I want around a 7.87% dividend. That is where the 3% comes in. Right now, SPY + 3% is 4.26%, and I can get 4.87% in USFR, so I have my ‘cash’ there. I seek to invest only in stocks or ETFs that pay 7.87% or better. Does that make sense?

I’m not telling you what to do; I’m sharing what I do because some of our students have asked. We are offering classes on how to become a liability advisor—a CLA—and profit from your own investing as a liability advisor!

So 42 isn’t just a random number (although it is a cheeky nod to "The Hitchhiker’s Guide to the Galaxy"). It’s a risk-controlled threshold. It's how you stay in the game long enough to win because the hard part is getting through the volatility. My checks keep coming in from dividends, so ultimately, all I cared about was future cash flow, so why not have the cash flow coming in along the way? Here’s what that helps!

What Will Your Income Be Next Month?

Answer: You don’t know! Neither did I. As I invested in dividend stocks, I started to see my monthly dividend income go from $1,000 to $2,000 to $5,000 to $10,000, and that was coming in whether I worked or not.

Here’s the fun part… if I had a good month as a lender, 100% of those dividends were replanted as new seeds (reinvested), and each time I could build another 2.4% position in another dividend provider.

If I had a bad month, I could spend that dividend income to make up any difference.

So what I liked:

• Income now to support my variable income job

• Risk mitigation long-term as I was taking money off the table along the way

• Freedom from market-timing madness, which kept me in the market

• And, practicing for ‘retirement’ as the point at which my dividend income exceeded my actual monthly spending needs meant I was working because I wanted to - not because I had to…

• Avoiding large capital gains payments when the market did stop me out.

What I didn’t like:

• Increased my taxable annual income at times since you are paying along the way

  • (for this reason, I have maxed out IRA, Roth IRA, 401(k) small business)

• You miss out on some crazy bubbles like NVDA, Bitcoin, etc.

  • (for this reason, I have adjusted my style and trade more actively (asymmetrical bets), which is another conversation.

Key Takeaways (For Your Investing Brain)

• Dividend income = freedom. It’s money you don’t have to sell to get.

• The Rule of 42 minimizes risk without needing a Ph.D. in portfolio theory.

• Diversification only works if the assets are actually different.

• Becoming a CLA liability advisor isn’t just helping clients better manage their risk—you can also learn to build an income machine that prints money for life.

a BORROW SMART CONCEPT
The Power of Reciprocity!

The Subtle Power of Reciprocity: How Giving Creates Invisible Bonds

Few psychological principles are as powerful and pervasive as reciprocity in the intricate dance of human interactions. Popularized by social psychologist Robert Cialdini in his groundbreaking book Influence: The Psychology of Persuasion," reciprocity is a social norm that compels us to repay what another person has provided us." I just shared a powerful way to use this in our Circle Community. Come join for free if you want to learn more!

The Invisible Transaction

Imagine receiving a free sample at a grocery store. Almost instinctively, you feel a subtle pressure to purchase the product. Or consider a colleague who helps you with a challenging project. Suddenly, you're more inclined to assist them in the future. This isn't a coincidence—it's reciprocity in action.

The principle is beautifully simple: when someone does something for us, we feel an inherent psychological obligation to return the favor. It's a deeply ingrained social mechanism that has helped humans build cooperative relationships throughout our evolutionary history.

Why Reciprocity Works

Our brains are wired to maintain social balance. An unsolicited gift or kind gesture creates a sense of indebtedness that most people are uncomfortable leaving unresolved. This doesn't mean people are calculating or transactional—rather, it's a natural impulse to maintain social harmony and fairness.

Businesses and marketers have long understood this principle. Free trials, complimentary consultations, and unexpected gifts are all strategic applications of reciprocity. By giving something first, they create a psychological trigger that increases the likelihood of future engagement or purchase.

The Ethical Approach

While reciprocity can be a powerful tool, it's crucial to approach it authentically. True reciprocity isn't about manipulation but about genuine generosity. The most effective exchanges are those where the initial giving is sincere and without explicit expectation of immediate return.

Practical Applications

• In professional networking, teaching others is a key way to start a relationship!

• In personal relationships, small, unexpected acts of kindness can strengthen bonds.

• In sales and marketing, provide genuine value before asking for anything in return. Critical when marketing to financial advisors.

The Deeper Connection

Reciprocity transcends mere transactional interactions. It's a fundamental mechanism that builds trust, strengthens relationships, and creates a sense of community. By understanding and respectfully leveraging this principle, we can create more meaningful and mutually beneficial connections.

Remember, the most powerful reciprocity isn't about keeping score—it's about creating a culture of generosity and mutual support. Playing the WIN/WIN game of life is the most fun version I’ve found…

PS—If you get value from this newsletter, please share. It is expensive in time and cost to produce, and my payment is seeing you benefit. Given that I can’t read your minds, subscriber growth is how I’m keeping score.

And, please connect and follow me on LinkedIn! (click and say HELLO…)

LIABILITIES
What’s Happening?

REAL ESTATE
What’s Happening?

ASSETS
What’s Happening?

ON BEING HUMAN
What’s Worth Sharing?

DOPAMEMES
And Other Happy Moments…

AI
and The Future of Work…

If you made it this far, here is your easter egg… I’ll share a recent coaching call…

Borrow Smart University || National Institute of Financial Education