Saturday, November 26, 2011

COI and ROI – Creating Multiple Income Streams

Robert G. Allen wrote the book Multiple Streams of Income. In it he states that rather than depending on a single income stream, e.g. a salary it would be much more prudent to live on multiple sources of income. This idea stuck with me for a long time. For more details on this book visit Robert’s website:

If you are a growth stock investor, your investment return comes mainly in the form of capital gains. If the growth stocks stop rising so does your income. In fact worse, you will make no further gains and  ALL your income disappears. If you had invested in both dividend paying stocks and growth stocks, you would have had two sources of income: capital gains from appreciation and dividends. So with capital gains disappearing, you at least would make money from dividends.

In the 1980s you could make a lot of interest income just from cash and GICs so there is another income stream. Today that income stream is all but gone. Over time, the source of your income varies. Having multiple sources of income appears a lot more prudent on the day your pay cheque stops coming in or your employer’s pension plan goes bust.

So when looking at creating a portfolio, rather than worrying about what asset classes to invest in, why not take care instead of a diverse source of income or better cash flow?  COI is cash on investment and it is a lot more predictable form of return on investment than waiting for the time that you investment has appreciated to its full potential. Using the idea of creating a diverse source of income streams I created a new spreadsheet to help design a more reliable portfolio. At the end of the 'COI and ROI' series, we should have discussed most aspects of this spreadsheet and if you’re interested to have a copy of the spreadsheet just e-mail me.

We start the spreadsheet by taking inventory of our multiple income streams as shown in the figure below. The yellow fields are for you to enter data, the blue fields are calculated by the spreadsheet using my nifty equations of higher elementary school math.

Figure 1 Cashflow allocation for a 25 year old.
The beauty of this scheme is that you no longer have to worry about whether you need 70% or 40% of stocks in your portfolio. The types of income streams and how much income each stream generates will take care of that. When you’re 20 years old, you probably have most of your revenue from salary and you likely would be aiming for capital gains from real estate and stocks (e.g. figure 1), while when you’re 60 you may be less interested in employment income and more in dividends and interest. When you’re sixty-five you likely have little employment income, but your Canada Pension is starting to kick in along with more dividends and rental income (figure 2). So by determining where you want to get most income to come from or where you plan to get most income from at a certain stage in your life, the spreadsheet will create the appropriate portfolio composition (allocation) to achieve that. Cool eh?

For Now, why don’t you determine what your current income streams are and in what form you would like to receive your income 5 years from now, or when you retire. So we’re carefully designing COI and appreciation will come when it may.

Figure 2. Income stream for a 65 year old of moderate means

Oh, while you're at it, also make an estimate of your current cost of living and what it is when retired.


  1. What about a revenue property in a solid location with zero or close to zero cash-flow due to mortgage payments or capital upgrades. However, every year it provides, let's say $50,000 in equity through value improvements and/or mortgage paydown .. tax free ! Yes, at some point you may sell it. Where do you count this ? i.e. where is the line "passive income" or "net worth improvements" ? I understand that it is not cash yet .. but having $1M in equity in an asset could be turned into cash in a few months after a sale, at 6% say, so $60,000/year !

  2. Hi Thomas,

    Most real estate equity gains would come under capital gains by selling off the real estate property in part or whole.

    How to deal with the proceeds of re-financing or mortgage paydown I am not quite sure. Maybe you have an idea where to fit that on the income allocation portion of the sheet - possibly under 'other' since tax wise mortgage paydown is reported earlier as part rental income. Note though that income on this sheet is before tax. Hmmm many subtle angles here - too subtle for a spreadsheet?