Summary

Many investors make the fatal error of not properly diversifying their portfolios. An equity portfolio invested across different sectors (utilities, financials and staples, etc.) is not a true diversified portfolio. We can see this from the sector's individual performances over the last 10 years; XLF, XLU and KXI. Ok, the financial sector may have not returned to the pre-2008 levels, but the chart shows the sectors are correlated, which is something we don't want in our elevation portfolio. Investing in sectors such as bonds (NYSEARCA:TLT), precious metals (NYSEARCA:GLD), energy (NYSEARCA:XLE), small-cap US stocks (NYSEARCA:IWM) and emerging markets (NYSEARCA:EWW) can give us a better diversification over time, which reduces risk. It's all about protecting the downside and not loading up too much on one sector (which we may be doing at present with respect to US equities).

With respect to our next underlying stock for the elevation portfolio, I wrote about Falcon Oil & Gas (OTCPK:FOLGF) last year where I discussed the farm out deal it did with Origin Energy (OTCPK:OGFGY) and Sasol Limited (NYSE:SSL). The deal agreed was a nine-well drilling program over three years worth $200 million. One year's drilling is now complete, but what is very encouraging is that results from the first horizontal well drilled in the Beetaloo basin have illustrated excellent gas shows, which have resulted in an acceleration of the exploration program.

2016 should end up being a defining year for Falcon and particularly its Beetaloo basin asset. Shareholders will do extremely well if the asset is commercially viable because the resources and acreage compare very well with the US shale assets such as the Bakken and the Barnett. Once we get fracking and testing wells out of the way (which should happen in 2016), we will know for sure what type of an asset we are dealing with here. Falcon's objective is to sell the asset. It does not want to take this asset into production, which would indicate why there could be a substantial move in the share price if a sale does indeed take place in the next 12 to 24 months.

At the moment, the stock is trading at $0.08 a share, which gives the company a market cap of $68 million (never been lower). It presently has over $10 million in the bank and is being fully carried across the nine-well drilling program in Australia. Now here is how it differentiates from producing companies, which minimizes the risk in my opinion, especially when you consider where the share price is at the moment.

• The company has no debt. It doesn't need to go into debt to keep its capex budgets elevated or return cash to shareholders. Asset evaluation has all been done currently off the back of its partners.
• Falcon has no production. All upstream companies or integrated companies with upstream divisions are hemorrhaging cash at the moment. Falcon doesn't have this problem.
• No funding requirements mean the company won't have to dilute the float for the foreseeable future, which is crucial for penny stock investors.

Furthermore, with respect to the Beetaloo basin and its 4.6 million acres, the recoverable resources are actually bigger than some of the major shale plays in the US. Studies have shown that there is a 21 billion barrel oil equivalent potential and 162 "TCFG" (trillion cubic feet of gas). Nevertheless, getting all this energy above ground in a commercial way is another task in itself. Producing unconventional plays normally have 4% to 5% total organic carbon (TOC) (Beetaloo has 4%). Average shale thickness also is a predetermined requisite where usually 30 meters is the minimum for unconventional plays. Well, the Beetaloo passes initial results here once again with ample thickness throughout the asset (see below).

I've been watching this stock closely over the last 24 months, and it has more or less followed oil down since the summer of 2014 with the exception of a spike in the share price last May that didn't materialize into anything. The reward definitely outweighs the risk here in my opinion. With strict money management, we are going to buy $2,000 of Falcon Oil & Gas which is currently around 25,000 shares. No stops at the moment.

This portfolio will be all about increasing the trade activity among some overvalued dividend growth stocks like McDonald's (NYSE:MCD), so that over time we can pump more capital into our lower-valued stocks, which, by nature, should be paying higher dividends - IBM (NYSE:IBM). We need to do this to keep the portfolio diversified as this increases our reward potential going forward as income portfolios are all about share count, which we will increase substantially over time.

I'm going to be adding a few good dividend and growth stocks to the elevation portfolio over the next several weeks when I see value. It's imperative that they are not correlated and all don't have similar valuations to ensure that income is brought in every month, which, over time, will increase our share count. Follow along by pressing the "Follow" button above. Let's see how quick we can get this to $20k in annual income.

Disclosure: I am/we are long FOLGF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.