Blueprints for a Multi-Engine Wealth System

People intuitively understand the benefit of having more than one income source.

I’ve shared my multi-engine wealth system before. It features a portfolio of dividend paying stocks, an options writing strategy, a direct lending strategy and a family of e-commerce businesses.

Remember that a diversified approach helps mitigate risk, but it's important to have a clear understanding of the risk profile of each engine. You can simply create more surface area for things to go wrong when you get overactive. The key is maximizing the effectiveness of your system without sacrificing efficiency.

Or peace of mind.

Today we’re going to look at the blueprints in more detail, so we can better understand the configuration, strengths and weaknesses of our systems.

Dividend Income Engine

Purpose: Generate consistent, passive income through regular dividend payouts.

Basic Implementation:

• Carefully select high-quality, dividend-paying stocks across diverse sectors.

• Consider factors like dividend yield, dividend growth history, financial stability, and industry outlook.

• Regularly reinvest dividends to accelerate compounding.

Dividend payouts can fluctuate based on company performance. I spend a good amount of time (3 to 5 hrs most weeks) evaluating the P&L, margin dynamics, cash flow changes and other things that might impact the company’s ability to maintain the dividend.

Candidly, I am looking for increases in the yield as operating conditions (and cash flow positions) improve.

If you own 30 dividend paying stocks with a traditional quarterly distribution schedule, you will receive 120 annual income distributions via your wealth engine.

Maintaining this many unique positions can be challenging without a system for monitoring the operational and financial wellness of your portfolio. You must also invest time understanding the broader industries included in your holdings, too. Understanding any company intimately is impossible without knowing the markets they compete in.

Once you have a system it becomes possible to work your way to 90+ dividend paying stocks. At this point you will receive 360 dividend payments that you can use to offset operating expenses, or reinvest into purchasing more shares and thereby enlarge the engine.

You can read more about the Dividend wealth engine here in a 7-part series.

Options Income Engine

Purpose: Enhance returns on existing stock holdings by generating additional income through option premiums.

Basic Implementation:

• Write covered calls on stocks you already own to collect premiums while potentially capping upside.

• Explore other option strategies like collars (buying a protective put along with writing a covered call) for a more conservative approach.

• Actively manage options positions to adjust for market conditions.

I cannot stress enough how difficult it is to make money with options.

Traditional equity investing is challenging, and you only need to get the direction (up or down) of the stock to “win”.

With options, time becomes the bad guy. You need to get the price direction right… but you also need to nail the when. You pay premiums for the privilege (when you buy options) so you start off by losing money right away… and then you hope price action on the underlying moves correctly.

I see it as a physics problem, here’s the set-up:

Velocity

• Speed: How fast an object is moving.

• Direction: The path along which the object is moving.

Options

• Speed: How quickly the price of the underlying asset moves in the anticipated direction. As we’ve discussed, options have an expiration date, so the price change needs to happen within that timeframe for the option to be profitable.

• Direction: Whether the price of the underlying asset goes up (for call options) or down (for put options).

Just like an object with high velocity covers a significant distance in a short amount of time, an option with the right combination of speed and direction can result in substantial profits. However, if either the speed or direction is off, the option might expire worthless, leading to a loss.

Options trading requires a solid understanding of the underlying mechanics and risks. The precise way an option’s price changes in response to the world around is captured by the “Greeks”.

Imagine options trading as a road trip across a profit space.

Your vehicle is an option contract, and your destination is profitability.

But like any journey, there are various factors influencing your route and outcome. These factors are known as the "Greeks" and they act as your trusty co-pilots, providing valuable insights to help you navigate the twists and turns along the way.

Delta (Δ): The Compass

Delta is like a compass, indicating the direction your option is likely to move relative to the underlying asset's price. A delta of 0.50 suggests your option will move $0.50 for every $1 move in the underlying asset.

A high delta means your option is closely aligned with the asset's direction, like a car speeding down a straight highway. A low delta indicates less sensitivity to price changes, like a car navigating winding roads. By understanding delta, you can gauge how your option might react to different scenarios and make informed decisions.

Gamma (Γ): The Accelerator

Gamma represents how quickly your delta changes. It's like the accelerator pedal, determining how fast your option's directional sensitivity increases as the underlying asset moves.

High gamma means your option's delta can change rapidly, like a sports car accelerating quickly from a standstill. This can be beneficial if the price moves in your favor but risky if it moves against you. By monitoring gamma, you can anticipate potential shifts in your option's value and adjust your strategy accordingly.

Theta (Θ): The Fuel Gauge

Theta is the rate at which your option loses value over time, similar to a fuel gauge indicating how much gas you have left. As the option's expiration date approaches, theta increases, and the option loses value faster.

It's like a car running out of fuel as it approaches its destination. Understanding theta helps you manage the time decay of your option and make timely decisions before it expires worthless.

Vega (V): The Windsock

Vega measures how sensitive your option is to changes in volatility, much like a windsock indicates changes in wind speed and direction.

High vega means your option's value can fluctuate significantly with changes in volatility, like a sailboat being pushed around by strong gusts of wind. By monitoring vega, you can anticipate how your option might react to market turbulence and adjust your sails accordingly.

Rho (P): The Toll Booth

Rho reflects how changes in interest rates affect your option's value. It's like a toll booth that charges you more or less depending on the prevailing interest rates.

High rho means your option's value is more sensitive to interest rate changes, like a toll road with variable pricing. Understanding rho helps you factor in interest rate fluctuations and make informed decisions based on the economic landscape.

As you’ve just learned, there are a LOT of factor that influence success or failure in options.

Recall that buying a call option gives you the right to purchase a stock at a specific price, known as the strike price, within a certain time frame. If the stock's market price exceeds the strike price, you can profit by buying at the lower strike price and selling at the market price.

Options are purchased for a price called a premium. An option's price (premium) generally combines its intrinsic value (profit if exercised immediately) and time value (potential for future profit).

You often hear advice such as: “Options trading is risky. For buyers at least the risk is limited to the premium paid, but sellers can face bigger risk.”

That is an accurate statement, but it isn’t complete.

While buying an Option makes you the owner of it, and gives you the power to exercise it… it absolutely obliges you to pay for that right.

As I wrote earlier, you start by losing and you hope the price velocity + your Greek friends help you out.

Options selling, sometimes called options writing, is the other side of the equation.

Those Premiums are paid to the Option Seller.

You become the one who is guaranteed to (start) with income and a positive trade.

I’ve written a 5-part series on Options here.

Direct Lending Engine

Purpose: Utilize your capital to lend directly to individuals or businesses, earning interest income.

Basic Implementation:

• Establish a formal lending structure (e.g., peer-to-peer lending platform, private lending notes).

• Carefully assess borrower creditworthiness and establish clear terms and conditions.

• Consider partnering with an experienced lending professional for guidance and risk management.

Direct lending carries a higher risk profile than traditional investments. You are lending out your hard-earned, after-tax, oh-so-precious cash to entrepreneurs and developers.

This demands due diligence of much greater magnitude than purchasing shares in a S&P-500 equity or most other prospective investments. That is because there are dozens of more risks. Operational risks, financial risks, risks risks risks.

If you structure your collateral and other risk-mitigating efforts effectively, you start to close down the surface area for those risks.

Once you have several active loans in the repayment phase suddenly your income schedule begins to fill. Paired with checks from the dividend engine and distributions from your options strategies… some months you can receive 50 or more checks.

I’ve written a 3-part series on direct lending, read more here.

Digital Commerce

Purpose: Create additional income streams through online businesses and recurring subscription revenue.

Basic Implementation:

• Develop and maintain high-quality digital products (e.g., newsletters, online courses, ebooks).

• Build a loyal subscriber base through effective marketing and engagement.

• Scale up by offering premium content or expanding into related niches.

If you’d like to dive a bit deeper on what’s making this such a rapidly developing opportunity, read this piece:

I am working overtime to develop digital properties and other assets.

I’m building out a SaaS company in the revenue intelligence space. Additionally, I am scaling a media company that has three publications with plans for two more launching in the next 6-months.

This strategy requires ongoing content creation and audience engagement. Competition in the digital space is intense, and growing by the minute thanks to the incredible profit and cash flow being generated online.

Monetization strategies need to be adapted to evolving trends. There is no “formula” other than constant refinement mixed with dramatic bursts of evolutionary progress.

What I think is revolutionary is how these engines work together to form a wealth system.

The dividend income engine provides a stable base of income from your stock holdings. The options income engine leverages these same holdings to generate additional income through premiums.

Example: You own shares of XYZ stock paying a 6% dividend yield. By writing covered calls, you might generate an additional 2.5% in annualized premiums, effectively increasing your total return to 8.5%.

Of course this cash flow then amplifies the other engines.

Dividend income provides a reliable cash flow that can be used to fund direct lending activities.

Dividends can be reinvested into new loans, amplifying your lending capacity and potential interest income.

The digital commerce engine (subscriptions, etc.) generates income that can be invested into any of the other three engines. Digital income can be used to smooth out fluctuations in other income streams.

Then there are the network effects.

A successful digital presence can enhance your credibility and attract potential borrowers or partners for your other ventures. These media companies are part of a marketing effort to generate attention and convert it to interest, actions and ultimately, engagement loyalty.

Each engine contributes to a diversified income stream, reducing reliance on any single source.

By strategically combining these four engines, you can create a powerful and adaptable wealth-building system that generates multiple income streams, manages risk effectively, and positions you for long-term financial success.

That’s what we are all about!

👋 Thank you for reading Wealth Systems. I started this in November 2023 to share the systems, technology, and mindsets that I encountered on Wall Street.

💡The BIG IDEA is share practical knowledge that can be applied toward the development and refinement of wealth building systems.

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