Is this investment strategy good: allocate 75% in savings account with high APY(~2%), 20% in long term re-investing dividend stocks and 5% in short to mid term high risk stocks (kind of a swing trade)?

How old are you? If you are close to retirement or retired, and inherited a large sum of money, this may be acceptable (although not for me either). If you had saved enough throughout your life, it still would be a bad idea.

If you are young, let’s say 20’s then this is an incredibly bad idea. If you can invest money for the next 40 years then there is no better allocation than stocks. On top of that, if you have really 40 years time frame, you should go extremely aggressive (use leverage and as you age start deleveraging your account). A good book on this topic is Lifecycle investing by Ayres & Nalebuff.

So, if you have time, invest 100% in high quality dividend growth stocks, reinvest dividends, and use options to leverage your investments (as described in the book for example, or use a “Wheel strategy” – sell puts as long as you get assigned, then hold the stock, collect dividends, and sell covered calls as long as you get assigned).

Just look at the 40 years S&P performance and compare it to a 40 years savings account performance and try to convince me again why would you waste 75% of your money in savings accounts for the next 40 years.

I bet many people will tell you that you can’t because of diversification and other myths and misconceptions what all sorts of advisers tell general public to cover their backs and lack of deeper knowledge.

I started like that myself and built up a nice portfolio. It is difficult at first but doable, mainly today when you can trade commission free. That is a key. You must choose a broker which will allow you to buy a single share and charge you nothing for it.

The next thing is to choose a high quality dividend growth stocks (dividend aristocrats) to boost your income from your holdings, and reinvest that income. At first, use DRIP, later on I would recommend buying more stocks different than those which generated the income.

At first, choose only about 5 to 10 stocks and start buying them and accumulate.

Here is my portfolio I opened in April 2019 to do exactly what I preach. As you can see, even though the portfolio is small and generates small income, but it is growing. And given the size of the portfolio it is still sufficiently diversified as the point is not in owning hundreds and thousands of stocks but stocks which can hedge each other. So you can have only 5 stocks and achieve the exact same or even better diversification than someone who is buying hundreds of stocks.

Note, the stocks above are my holdings and not a recommendation or solicitation. If you decide to buy them, do so on your own risk and you must do your own due diligence and be aware that you may lose money.

Also, my broker charges me zero commissions so I can buy a single share and it cost me nothing. Before, when the brokers charged commissions I first had to save at least $600 dollars to buy a few shares to mitigate impact of the commissions so I was buying shares every 6 months. Today, you do not have to wait and you can start buying a few shares every month and slowly accumulate.

Not at all. However, your strategy will depend on a few important factors. For example, are you starting at retirement from scratch, meaning you have nothing saved? Or you have a significant amount saved and invested elsewhere and just thinking or re-allocating it?

Generally, it is never late to start in the stock market but as in investor a young person starting investing has a lot of time on his/her side and time is your friend. If you are already in retirement, you do not have much time – but that also depends where are you ate retirement – just retired or in mid retirement? If you just retired, it is still good as you may have another 10 to 20 years in front of you. And that is a good time to start and invest. However, I personally would look for safe but aggressive methods to boost your income from your investment and reinvest it unless you need it to pay your bills.

A good way is to use cash secured puts and covered calls to generate additional income on your holdings. Do not listen to people telling you that options are risky. It is not true. The risk is in underlying stock, not options. So whether you use options or not, you still have the same risk but options offer you a better protection compared to holding just stocks.

For example, when you sell cash secured puts, you always have money to buy the stock. And if you sell puts against a stock you want to buy anyway, then you have nothing to lose but buy cheaper than when buying a stock out right.

Example: Trade A and B want to buy a stock ABC at $30 a share. A trader A buys 100 shares of the stock immediately at $30 a share. Trader B sells 1 contract of cash secured put with 28 strike price and collects $40 income from selling the put.

The stock dipped to 26 a share at expiration.

The trader A is sitting on a loss $400 dollars ($30 – $26 = $4 * 100 = $400) , while trader B just bought in 100 shares by being assigned at 28 a share. His loss is only $160 a share ($28 assignment – 0.40 received premium = $27.60 cost base – $26 = $1.60 * 100 shares = $160). And once you get assigned, you can start selling covered calls and generate more income.

So, as you can see, it is not the options which carry the risk, it is the stock. Options can actually help you to lower that risk.
And if you choose high quality dividend growth stocks, you can achieve triple income from your investments: dividends, puts premiums, and calls premiums.
And it is never late for this to implement.

A study was made (sorry no longer remember who did it and link to the source, but I may try to find it if I have time), indicating that investing smaller portions but regularly outperforms a lump sump investment long term.

So, if you have a large sump, identify stocks you want to invest the money to and then divide the sum by number of the stocks. Then divide each number by at least 3 payments (if your sum is large to divide by more, do so). Then invest those amounts in monthly intervals, usually on drops of the price.

If you want, you may use put options to buy those stocks. In that case, make sure, you divide the amount for each individual stock in a way that each purchase will allow buying 100 shares. The sell at the money cash secured put. If the stock moves away from you, the put become worthless (you can roll it higher to trail the stock price while collecting premiums). If the stock dips below the put strike, you will buy 100 shares at a lower price. Then sell another put for the next cycle.

So, for example, you have $500,000 lump sum and you want to invest to 10 stocks. That means, you can invest $50,000 to each stock. Then let’s say one of your selected stock is Apple (AAPL). Currently it trades at $298.54. In order to buy 100 shares in a cash account (not margin), you will need $29,854 sum. That means, you can sell 1 put to buy in the first 100 shares (for the rest, you will not have enough cash, so you will be buying out right.

Then you can sell 1 AAPL January 17, 2020, 295 strike put and collect 4.35 or $435 dollars premium. If the stock stays above 295 by January 17, 2020, the option expires worthless, you keep the premium (you can immediately reinvest it), and you can sell new February 21, 2020 put. If the stock dips below 295, you will be forced to buy 100 shares of Apple at 295 a share.
Do this with all other stocks until you are fully invested. Then you can start selling covered calls to collect even more premiums. I recommend investing in high quality dividend stocks as with them you can afford to sit on them through any market, collect dividends which are increased every year, collect premiums from covered calls and cash secured puts, so in fact, you will hit triple income with one stock. If you have 30 years (for example) in front of you till retirement, you do not have to worry about any risk in stocks whatsoever. No bear market or recession takes longer than 2 years and it always recover. Just look at previous recessions and today’s market. The 2008 recovered in 3 or 4 years and from there we just rallied and rallied, and rallied. And during that 30 years, you will be collecting dividends (note that many high quality dividend growth stocks increased dividends in 2008 when everybody was panicking, selling everything, screaming, running for cover, and predicting end of the world).

If you stick to the plan, you will never be forced to sell a single share of your holdings and just live off of the income it will generate. As of today, per my own personal experience, you can expect 30% annual return +/- on this triple income strategy. Note, this may vary based on selected stocks and other market factors. But over the long run, you will not lose (unless you foolishly sell in the next bear market worried about your money like many investors out there end up doing and they ultimately end up selling low and buying back high, losing money.

There is no straight answer to your question. It all depends on many factors:
 

1. How much money you have
2. What is your risk tolerance
3. How much time you have to stay invested
4. What is your knowledge about investing in the stock market
5. What is your “profit” expectations
6. What would you do if your investment loses 50% of its value during your investment holding period?
7. What do you expect from your holdings – regular income? Growth? Or some speculative swing trade income?
    

Based on these answers and many more you can set up a strategy. Many will recommend you mutual funds. I do not like mutual funds as these outperform the overall market grossly (most of them). I am a strong believer in individual stocks. However, overall, in the stock market, there is no easy way to make money. It would be similar as to asking what is the easiest way to perform a brain surgery.

First you need to answer and set a goal. You want to invest – why? What do you expect? What do you want to achieve?

Once you know answers to it, you can start learning what investing or trading strategy can get you there and focus on that. If you do not know what you want from your investments, it will be difficult to figure out where to start and what to learn. There is tons of information out there but not everything is suitable for everyone.

Another question you need to know answer to is how much time you have to dedicate to your investing management (there are types of investments where you can pay a very little attention to over time – but also expect lesser returns, and investment which may need daily monitoring – more aggressive and profitable). So you need to choose this too before you commit money.

Then you need to see how much money you have to invest as your strategy will be different if you can invest $50 a month or $2000 a month.

Next, what if your age and time horizon. If you are in 20’s and have 40 years in front of you, then your strategy should be very aggressive than if you are in 50’s.

Once you know these answers, you can set a strategy, pick the right books, read, save money, ans start slowly allocating your cash into the selected stocks.

Here is an example I did myself:

I wanted an investment strategy which would generate income no matter what the stocks are doing – in other words, generating income even though we are in a recession and panic, so I do not have to sell the stocks in order to pay my bills and thus incur a loss (when selling assets in a recession). What kind of stock can do this? Well, dividend stocks. But not all dividend stocks are being created equal. Some are good and some bad and actually lose you money. So how do you find out which dividend stocks are good stocks and which are trash? To find out, I recommend you one of the best books ever written on this topic – The Single Best Investment by Lowell Miller. Read it if you are interested. It tells you you need about dividend investing.

Later on, once you gain some confidence, you may adopt a more aggressive strategy (yet still extremely safe and in my opinion safer than buying stocks out right) – options. Options will help you to boost your income which can be reinvested. You will be collecting dividends AND premiums from the option and you will be effectively lowering your cost basis. For example: you want to buy 100 shares of a stock which currently trades at $30 a share. Instead, you sell a cash secured put (or if you are in a margin account you can do a partially secured put – meaning securing it only by a margin requirement). You sell a put with 26 strike price and receive 0.40 or $40 premium. If the stock stays above $26, the option expires worthless and you keep the premium and do the same again. If the stocks drops to $26 or below, you buy 100 shares of the stock at $26 a share. If you bought a stock out right at $30 a share, you will be sitting on a $4 a share loss by now. If you bought via a put option, your cost basis is $26 minus premium received – total $25.6 a share in lieu of $30 a share. Now you have 100 shares, start collecting dividends, reinvest dividends, and start selling covered calls for more premium (overwriting the account). For this strategy I recommend you reading books by Alan Ellman. With this strategy, some call it a “Wheel strategy” you can boost your revenue to 30% annually.

But, this is what I do and learned to do. you need to define first what you want to do. It all starts there.