A portfolio that pays you from one source lives and dies with that source. A portfolio that pays you from many sources that behave differently is steadier. That is the whole idea behind diversification, and it matters even more when you are living on the income.
Correlation in one paragraph
Correlation measures how much two investments move together. Two funds with high correlation rise and fall at the same time, so owning both adds little protection. Two funds with low correlation often move independently, so when one has a bad month, the other may not.
Why the number of streams matters
Adding a second, independent stream reduces risk a lot. Adding a third helps a bit less, and so on. Past a certain point, each new holding adds almost nothing. Investor Ray Dalio calls 15 to 20 good, uncorrelated return streams the “Holy Grail” of investing, because, in his analysis, a mix like that can cut risk dramatically without giving up expected return.
For an income portfolio, 10 to 15 genuinely different streams is a practical target: enough to steady the monthly total, few enough to understand each one.
Examples of different income sources
These are categories for learning, not recommendations:
- Covered-call income on large-cap stock indexes
- Covered-call income on small-cap stocks
- Dividend growth stocks
- Real estate investment trusts (REITs)
- Energy infrastructure partnerships (MLPs)
- Gold and silver income strategies
- Bitcoin-linked income strategies
- Preferred shares
- Private credit
- Treasury bills
Notice that several covered-call funds on similar indexes are really one stream, not several. Counting tickers is not the same as counting independent sources.
Where diversification stops helping
In a sharp market crisis, many assets fall together for a while. Correlations that looked low in calm years can jump. That is one reason SnowX Income includes steadier, lower-yielding streams such as Treasury bills, rather than relying on diversification alone.
Diversification does not ensure a profit or protect against loss. Source: Ray Dalio, Principles (Simon & Schuster, 2017).
Many independent income streams steady the monthly total. Count streams that behave differently, not tickers.