Thursday, July 23, 2015

Portfolio Building - part 1

Dividend Growth Stock Blog Hello,

We invest because we want to make money. Either capital appreciation or dividends income. I prefer dividend income myself though I started investing a long time ago via 401k at work. 

In any case, you need to build an investment portfolio. 

There are many ways to build a portfolio. If you have the money, and the guts, you can just put all your money equally into 30 or so high quality Dividend Growth Stocks in one go and then collect and reinvest the dividends (either selectively or DRIP).

Read my experiments on lump sum investing. 

However, not many if us have a big lump sum to invest. Moreover, the possibility of the market dropping significantly soon after your investment can be especially disheartening. 

Therefore, most of us will add a small piece at a time (with some larger than others - eg MyDividendPipeline). 

What should you do?

I see lots of methods out there. You may be familiar with asset allocation especially with tax deferred investment programs from work. Some build out core holdings, with riskier non core holdings. Some build up massive portfolios with more than 50 companies.
The truly brave ones will pick the most undervalued, and stressed Dividend Growth Stocks out there to build up their portfolio. 

All of these methods are viable. Ultimately, it depends on the style of the investor. 

My Investment Style for DGI

The method for me is to add regularly one investment at a time, build up the portfolio evenly and then add to the positions after I completed the first round. 

Think of it as a brick wall. Each column of brick represents one good quality company. I try to build out my rows evenly. 

However, I do find opportunities in some cases to double or triple a position (a column) before the row is complete. 

However, if any single column of bricks gets too tall, it is obviously not very stable. I usually will back off further investments until I build up other positions. 

The sizes if my bricks are also important. I typically invest around ~$1,500 to keep the fees less than 0.5%. 

Now, occasionally, I find opportunities to add a new position also ie make a new column. 

I guess what I am saying is - I am not too strict with portfolio building. The goal is to make sure that the brick wall is strong. You will naturally see if you overbuilding in one company. 

There are considerations for sector allocations and other good stuff which I will write about in upcoming posts.

Lastly, remember to choose the style that you are most comfortable with. Don't follow my method just because it works for me. 

What is your portfolio building method?


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