Building a Portfolio for Beginners

[David in MN]

But what would you do, Dave? OK, here's portfolio management for beginners. I'm going to say this isn't financial advice, rather explaining what I do.

A lot of people get turned away because they are nervous about stock picking. The cheat sheet is to look at an existing fund you really like. I'm going to use Vanguard's Dividend Growth Fund as an example. I'm not endorsing it, it's closed anyway. But, if I'm honest it's the basic outline of my IRA.  We go visit the nice people at Vanguard to look at the portfolio..

https://personal.vanguard.com/us/funds/snapshot?FundId=0057&FundIntExt=INT

And we get the top ten holdings list...

1         Microsoft Corp.
2         NIKE Inc.
3         Accenture plc
4         Lockheed Martin Corp.
5         Visa Inc.
6         Chubb Ltd.
7         Diageo plc
8         Coca-Cola Co.
9         United Parcel Service Inc.
10         PepsiCo Inc.

Not a bad start. Several sectors, a reasonably diverse set of securities considering they're all large cap and American. So we check in on each using Google and compare to competitors and check what analysts think. Takes 2 minutes for each. I'll set up an Excel spreadsheet with a basic checklist.. Income good, analysts like, favorable to competition, good management, and the last column I will admit is 'gives me a boner'. Some companies just give you that feeling. If a company gets all the boxes checked or comes pretty close, I'm in. Very Easy.

Now, why do we want to do this? Why not just buy Vanguard? Well, Vanguard does great work and I am stealing their homework but I'm greedy. Vanguard charges .3% to manage the fund. Lower than most but I don't believe in letting anyone skim off me. And we've introduced a strategy. These are dividend growth companies. They should continue to grow and increase the dividend. That's power. I bought Diageo in 2006 and am getting a near 6% dividend based on my 2006 money. I hope I die still invested in Diageo getting 20-30% of my initial investment annually. That's a strategy.

Now rinse and repeat with another 2-3 funds that match your goals and you've just created a portfolio. Easy. And the beauty is that it works for everyone by picking based on risk tolerance.

Not to put all the eggs in one basket, I reserve about 35% of my portfolio for REITs, bonds, foreign, metals, etc. This is where I'm willing to pay the manager. As good as I think I am I have no idea how to put together an Asian small cap fund. I just don't know the companies. And I worry that my "American" view of a company like Samsung isn't what it is in Asia. The good news is that this is pretty close to standard 401 style investing. A little less control but again, we pick on strategy. We're looking to get away from the dollar, really pack in some diversity and some safe havens.

Now I will add that I am more active. I also follow a "dogs of the Dow" strategy where I look for wrongly beaten up companies. Recently, Verizon dropped to $45 per share and I bought like Audrey Hepburn at a little black dress shop. Again, the strategy is to get the best dividend possible from a company in a slump that will likely recover.

http://www.dogsofthedow.com/

You might notice that these are generally 'buy and hold'. Well, in a retirement account that seems to work better. This isn't active trading. And my strategies don't always work. But I'm young so being aggressive is right.

Now for the hard part. You need to manage. Once per quarter (maybe when your companies release numbers) poke your head in and look around. Go back to that Google page and check in. Ask yourself if your strategy is working. If not, look up similar funds and consider changes. I have an ironclad rule that any stock I buy for growth (not dividends) I sell half if it doubles. Nobody ever gets hurt by taking profits and playing with the house's money.

If you start doing this and looking at a few different funds from a few different companies you'll start to get a feel for what companies fit your strategy. The whole nut is to get the strategy right.

The empowering force that this has will change your investing. You'll do better because you care. I think a lot of damage has been done as the average worker just funnels money into a meaningless fund. I'll try to help with questions.

[FreeLancer]

Or, because you knew this was coming......

If that seems so complicated that know you won't even try, get your share of the stock market return by buying and holding the Vanguard Total Stock Market Index Fund. 



It ain't sexy, and doesn't impress anyone at cocktail parties, but the returns are respectable, and you could do worse.  Actually, the vast majority of investors do a hell of a lot worse.

[Smurf Hunter]

Is it possible to elaborate on the criteria you use in the spreadsheet?

For example, how do you choose coke vs Pepsi assuming each has good fundamentals?

Also when you emulate a fund, are you concerned with the mix as well?

[David in MN]

Is it possible to elaborate on the criteria you use in the spreadsheet?

For example, how do you choose coke vs Pepsi assuming each has good fundamentals?

Also when you emulate a fund, are you concerned with the mix as well?

I actually try to keep things simple. I want to know the key metric. For autos it might be inventory. For retail it could be same store sales. If it comes down to Coke/Pepsi I generally buy both. I might think one has better management and one has better brands but at the end of the day they could both be winners.

It gets hard with weirdos like Amazon. A lot of tech/biotech comes down to customer sentiment or FDA acceptance. I don't play in that sandbox too much. When I do it's usually highly speculative.

[David in MN]

Or, because you knew this was coming......

If that seems so complicated that know you won't even try, get your share of the stock market return by buying and holding the Vanguard Total Stock Market Index Fund. 



It ain't sexy, and doesn't impress anyone at cocktail parties, but the returns are respectable, and you could do worse.  Actually, the vast majority of investors do a hell of a lot worse.

True. But I still sneak past those numbers because of the ability to work within the fund rather than taking it as a macro. I also put myself in a better dividend position than either fund, which was my strategy in the first place.

I move a little quicker and I hit one or two dogs every year and I beat indexes. Frankly you could mix methods buying funds and looking for dogs and still come out ahead.

There are more than one way to skin this cat. I'm trying to provide an example of how a self-managed portfolio works. It's not right for everyone.

[theBINKYhunter]

What platform do you use to manage your funds/trades? Something like Scott-Trade (or am i thinking of something else?). What is the minimum amount you should have to make it 'worth' it? What I mean is that if I invest $1,000 and $10,000 the exact same way (and hypothetically get a return) my $10k is earning me more money. At what point is the amount available to invest considered too small to be worth the time/effort/energy/fees of trading/investing?

[David in MN]

I currently have accounts at Socttrade, ETrade, TDAmeritrade, Schwab... I think that's it. They're all kinda the same. You might save a buck on a trade here or there but that's it. I'm also of the belief that the "tools" they offer are largely worthless.

Minimum to invest... As an example, let's say you wanted to invest $100. You're going to pay ~$6 to buy and sell. So you're out 12% just for doing the work. 

I like what Jim Cramer promoted in his first book. $2500 buys $500 each of 5 stocks. Not enough to bet the farm but enough to get your feet wet and gain experience. I know will look at that as too little as a 10% gain only nets $250 minus fees but it's not about massive gains, it's about skill building. Trading scales. So once you do a few $500 investments you'll likely be ready to move up.

Obviously, don't gamble with a rainy day fund.

[Smurf Hunter]

Sounds like this is a "buy and hold" pattern for the most part.  Maybe not retirement duration, but longer than a few weeks.

I look at my IRA frequently, and occasionally make trades.  I probably would do well to apply some rules, but if I approach a 20% gain, I'm very tempted to sell ASAP.
My brain sees ripe fruit that's about to hit the dirt.  Maybe I'm fooling myself.

Also, when I've had mediocre turds that I've held for 9 months and are down 3%, sometimes I want to sell and put that money someplace smarter.

I don't believe I have a trader's brain, but I'm applying household principals such as cleaning out the closet, selling stuff I no longer use/like/etc.

[bigbear]

Great thread Dave!  It's not for everyone, but achievable by anyone (if they want). 

This is a pretty common "portfolio management" strategy.  Investors don't buy/sell on a regular basis. 

Ignore buy/sell/hold recommendations.

I like seeing growth in earnings/FCF (duh), steady/decreasing debt levels, steady/increase divs and ROE year over year.

Investment ideas can come from anywhere.  The mall, grocery store, spouse, children, hobbies, area of expertise...  There's a story about Peter Lynch (old school Fidelity guy) buying a stock because his daughter bought 100% of her back to school clothes from one retailer.  If you're into RC cars, you may know the best battery maker.  If you're into guns, then you know whether Ruger (RGR) or S&W (AOBC) is making the better product.  If you're an IT guy, you understand what type of voodoo/cloud magic Amazon has to offer beyond online retailing. 

[Smurf Hunter]

If you're into guns, then you know whether Ruger (RGR) or S&W (AOBC) is making the better product.  If you're an IT guy, you understand what type of voodoo/cloud magic Amazon has to offer beyond online retailing.

I've been trading RGR for years.  Ever since Sandy Hook and the massive gun grab scare in 2012, I've learned the solidly predictable cycle.  It might as well be seasonal.

I bought a decent amount of RGR in Oct. in anticipation of a Clinton victory.  Until yesterday, I was underwater.  It's messed up, but the more anti-gun rhetoric, the hotter gun stocks.  In my opinion, RGR has some of the best operational practices, and pays a dividend.

The IT stuff is my day job, but unfortunately the giants like Amazon and Google are into so many things, it's difficult to apply logic.  For amazon, if the general retail market is down, so would amazon, but due to their efficiency and margins, they will generally suffer less than competitors (I'm looking at you Toys R Us).

I also like Dave's "dogs of the dow" pattern.  I feel like I'm buying quality equity at an irrational discount.

[David in MN]

I'm digging through data on pharma grade isolator manufacturers. Puerto Rico was a major center for drug manufacture because of some tax incentives. I think some new plants will be built soon...

I traded S&W during the second Obama election. Gun stocks are weird things. Vote democrat and they go up but surely a new ban would be bad. Shootings also tend to increase price. Very odd stuff. Ironically I used my money from S&W to buy a S&W.

Nothing else it's a hobby that throws a little coin your way. When I had a legit "job" (I work for the world's biggest jerk now) it was great to see a little extra income from a fairly passive method. As a fellow trader put it to me, "when I get a great return in my retirement account it's like... I'll enjoy that in 30 years. When I do it my brokerage I'm all f*** yeah, I'm getting a new car!"

People also forget that the little guy has some advantages over the pros. We move quicker, we can take a losing quarter without losing clients, and don't answer to anyone. It came natural to me as dad was a CFO so I grew up with the Wall Street Journal and CNBC/Bloomberg. But it's not that hard to learn.

[Smurf Hunter]

I'm digging through data on pharma grade isolator manufacturers. Puerto Rico was a major center for drug manufacture because of some tax incentives. I think some new plants will be built soon...

While I follow the "dogs" opportunity with PR based pharma, it's still pharma.  If that's your speculative "vegas" money play, cool.  But often depending on FDA approval (or not) it's feast or famine.
It's not like other consumer products where the product lacks market appeal, and the company can make design or marketing changes.  If the FDA says "don't pass go", that new drug with billions in R&D is a turd.

[David in MN]

While I follow the "dogs" opportunity with PR based pharma, it's still pharma.  If that's your speculative "vegas" money play, cool.  But often depending on FDA approval (or not) it's feast or famine.
It's not like other consumer products where the product lacks market appeal, and the company can make design or marketing changes.  If the FDA says "don't pass go", that new drug with billions in R&D is a turd.

I used to speculate on medicine and medical devices pending approval. In a nutshell you do the venture capital thing. 3 of your picks hit a trailing stop but one breaks out. It's tough. Like trying to buy a stock in hopes it gets bought by a larger competitor. Real long shots.

[Smurf Hunter]

I might be spread too thin.  RGR reinvests the dividends so it's grown considerably over the years.  Should probably re-tune this mess...

RGR   17.6%
AGNC   9.2%
LSI   8.7%
XOM   8.7%
IVV   6.8%
SPY   6.7%
UPS   6.2%
SNH   6.2%
DIS   5.3%
VZ   4.9%
HD   3.5%
MAT   3.3%
CAT   2.7%
APTI   2.0%
UAA   1.8%
AOBC   1.7%
DEO   1.4%
KMB   1.2%
CE   1.1%
ED   0.9%

[theBINKYhunter]

I think this thread has given me the kick in the pants I need to dip my toes in the investment waters (outside of the 401k). I get a bonus check for Christmas. I think I may take that and use it to start my investment fund. It'll be enough to do something and make me work, but if it crashes and burns it's not the end of the world.

[David in MN]

I might be spread too thin.  RGR reinvests the dividends so it's grown considerably over the years.  Should probably re-tune this mess...

RGR   17.6%
AGNC   9.2%
LSI   8.7%
XOM   8.7%
IVV   6.8%
SPY   6.7%
UPS   6.2%
SNH   6.2%
DIS   5.3%
VZ   4.9%
HD   3.5%
MAT   3.3%
CAT   2.7%
APTI   2.0%
UAA   1.8%
AOBC   1.7%
DEO   1.4%
KMB   1.2%
CE   1.1%
ED   0.9%

I've had that happen before with Abiomed and Chalco (Chinese aluminum). Not fun when your risky play dominates. You want it to break out but when it does you have a different problem.  I just sold off a crapton of SQM the other day for a similar reason. If you really want something nutty, ZTR is about 10% of my active portfolio. I've been watching it like a hawk for 6 years now.

I think this thread has given me the kick in the pants I need to dip my toes in the investment waters (outside of the 401k). I get a bonus check for Christmas. I think I may take that and use it to start my investment fund. It'll be enough to do something and make me work, but if it crashes and burns it's not the end of the world.

Good on you. Start small and slow. Before you know it you'll be whining about the 18.2544% Chilean dividend tax. Don't panic when your initial amount drops by 5% in the first month (happened to me) and keep to a strategy. I remember the first time I got a dividend payment. A few bucks from Altria. But I was shocked. You mean money just shows up in my account? I felt like a mafioso taking a payment.

[RitaRose1945]

Okay, so NO LAUGHING!

Yes, I have the standard mutual fund (Vanguard, which I highly recommend) but I also started using Stash back at the end of February.  It's mobile based investing for clueless clods like me.  Yes, it costs me $1 per month (or 0.25% if you have more than $5,000 in it), and I started out using it as a way for me to just not spend money.  I put in $20 at a time automatically and so far have put in $470.00.  My balance is $514.08.

I mean, I know that the whole thing is silly, and $44.08 isn't a big deal, but I actually didn't lose or spend money, so I'm happy.

In a nutshell, you choose where you want to invest and then let it go.  Mine are:
   Moderate mix (normal moderate mix of stocks and bonds)
   On Cloud Nine (cloud tech companies)
   Defending America (aerospace and defense manufacturers)

You can also choose them based on ethical considerations (Clean and Green, Water the World), business type (American Innovators, Small But Mighty), or something else (Roll With Buffett, Blue Chips).

I know it's not up there with what a lot of you guys are doing, and once I get a decent amount built up I'll likely transfer it to the Vanguard account, but it works for me.

[David in MN]

Okay, so NO LAUGHING!

Yes, I have the standard mutual fund (Vanguard, which I highly recommend) but I also started using Stash back at the end of February.  It's mobile based investing for clueless clods like me.  Yes, it costs me $1 per month (or 0.25% if you have more than $5,000 in it), and I started out using it as a way for me to just not spend money.  I put in $20 at a time automatically and so far have put in $470.00.  My balance is $514.08.

I mean, I know that the whole thing is silly, and $44.08 isn't a big deal, but I actually didn't lose or spend money, so I'm happy.

In a nutshell, you choose where you want to invest and then let it go.  Mine are:
   Moderate mix (normal moderate mix of stocks and bonds)
   On Cloud Nine (cloud tech companies)
   Defending America (aerospace and defense manufacturers)

You can also choose them based on ethical considerations (Clean and Green, Water the World), business type (American Innovators, Small But Mighty), or something else (Roll With Buffett, Blue Chips).

I know it's not up there with what a lot of you guys are doing, and once I get a decent amount built up I'll likely transfer it to the Vanguard account, but it works for me.

I'd never laugh at anyone who has a plan, saves money, enacts a strategy, and makes money. Plenty of hedge funds have gone bust and they're the pros.

Is that .25% per month?  That'd be (I know my math's not perfect but I'm not doing the right math) 3% per year. Yeah, $1 is fine but I'd move it quick if I got close to $5k. But if it works for you, go with it.

I also agree with Vanguard. For decades it has been a good choice for people who don't want to be active. I'm happy to see Fidelity stepping up their game of late and trying to cut costs as well. Fully honest, I do look at the holdings in their Contrafund for ideas. But Vanguard is the choice of both my mother and father (who have different strategies) and I own several Vanguard ETFs to get exposure to non-stock investments.

[RitaRose1945]

I'd never laugh at anyone who has a plan, saves money, enacts a strategy, and makes money. Plenty of hedge funds have gone bust and they're the pros.

Is that .25% per month?  That'd be (I know my math's not perfect but I'm not doing the right math) 3% per year. Yeah, $1 is fine but I'd move it quick if I got close to $5k. But if it works for you, go with it.

I think that's annual, not monthly.  But if I got even remotely close to $5,000 I'd move it anyway.

I also agree with Vanguard. For decades it has been a good choice for people who don't want to be active. I'm happy to see Fidelity stepping up their game of late and trying to cut costs as well. Fully honest, I do look at the holdings in their Contrafund for ideas. But Vanguard is the choice of both my mother and father (who have different strategies) and I own several Vanguard ETFs to get exposure to non-stock investments.

I've been very happy with Vanguard, and a friend of mine who used to work for them said they tend to be more ethical in their business model than some.

I won't deal with Fidelity, even if the returns were double everyone else's.  They were the parent company for a former employer that laid off literally about 2/3 of the staff in my state when the bubble burst.  And the day I got the notice that I was getting laid off because they couldn't pay their staff anymore, that very same day the CFO was listed as the 4th highest paid CFO in the nation.  Nope.

[FreeLancer]

I've been very happy with Vanguard, and a friend of mine who used to work for them said they tend to be more ethical in their business model than some.

I won't deal with Fidelity, even if the returns were double everyone else's.  They were the parent company for a former employer that laid off literally about 2/3 of the staff in my state when the bubble burst.  And the day I got the notice that I was getting laid off because they couldn't pay their staff anymore, that very same day the CFO was listed as the 4th highest paid CFO in the nation.  Nope.

I’ve had accounts at both Fidelity and Vanguard, but now put everything I can into Vanguard accounts, or Vanguard funds if I’m stuck with an employer who uses someone else to manage the retirement program. I’ve dealt with Vanguard, Fidelity, Charles Schwab, and some lesser known ones over the last 25 years. Vanguard and Fidelity are definitely my preference, in that order.

My mom’s in Fidelity, which I help her manage online. In her case it’s probably a better choice because she can drive across town to a branch and talk to a human if there’s an issue. Those branches add cost and the fees are higher than Vanguard, but if that’s what it takes to help mom sleep at night, so be it.  She also doesn’t want to give up her Contrafund, which has produced great returns for her over the years.

[theBINKYhunter]

The last couple posts make me feel good that my employer's 401k is through Fidelity.

[David in MN]

The last couple posts make me feel good that my employer's 401k is through Fidelity.

You probably can buy funds external to your brokerage. 401s can be set up differently. Some are very restrictive while others are fairly open. I have Vanguard products in my Schwab account. Most people don't fiddle around that much in 401s though. It's kind of a pain to manage it yourself when you're adding constantly. Rebalancing is challenging.

Most people like me have multiple funds for this reason. The 401 is pretty boilerplate. The Roth IRA and IRA get most of the trading because you can be strategic as to when and how much you add so you don't deal with small additions every 2 weeks. Those are retirement vehicles. Then you have an independent brokerage account for higher risk, higher reward. So you kind of have tiers of management. If it helps, think of it like zones in permaculture.

It might sound crazy but I like to dedicate accounts to strategies. New strategy, new brokerage. I like to know which I look at daily and which I come back to quarterly.

[Sailor]

If you can, structure your Vanguard funds so that each fund has over 10k in it so it will qualify as admiral shares, with greatly reduced expenses. 

[FreeLancer]

If you can, structure your Vanguard funds so that each fund has over 10k in it so it will qualify as admiral shares, with greatly reduced expenses.

Yep. In the case of the Total Stock Market Index fund, the expense ratio goes from 0.14 to 0.04%.  It doesn’t seem like much, but it adds up to serious money over a lifetime.

And Vaguard is good about automatically rolling your investments into the lower cost Admiral shares as soon as you are eligible. They’re kind of unique that way in the investment world.

[David in MN]

John Bogle was a very honorable man. He wrote the forward to my copy of Ben Graham's Intelligent Investor. Not only did he make fund investing easy and fair priced but he advocated education for those who do it on their own.

He deserved a Nobel prize in economics. Very few recognize the power of pennies that compound. I believe Einstein said the most powerful force in the world was compounding interest.

[Smurf Hunter]

Let's bump this a little.

I've done a little studying and moved around things in my IRA account.
I managed to pick a small handful of winners, and reduced some previous positions to fund them.

The problem was I was too cautious, and the original positions have dipped, offsetting my wins.
I guess on the bright side I'm down 2% when I might have been down 5%.

While I'm mature enough to avoid panic, I also think I'm too chicken-sh!t to bet the farm.

Will this keep me from being successful long term?

[David in MN]

No, it's not a problem. Suffering a loss is just an opportunity to reassess. Has something changed? Typically after a 10% fall I decide if it's time to jump ship or double down. Heck, I've been holding Exxon Mobil for years and they're down 7% this year. But I can eat the dividend for now. A lot of really good companies take dips.

Choosing risk is very tough and even more so if you're not on it daily.

[Tyler Durden]

What is the rationale for pulling out your profits rather than initial investment? I read through this whole thread a week ago but didn't feel like doing it again, and I think I read that somewhere in here.  It seems to me you would pull your invested money so you've gotten your money back, and then let the profits do the work.  Not asking as an argument, but because I honestly don't know.

Personal example; I bought $500 worth of Centerpoint Energy about 18 months ago. It was my first dabble into buying stock. I've made about a 55% return so far. The stock eeked its way up little by little and has kind of hit a ceiling at $29 and change per share. I was thinking of selling $500 worth and reinvesting it, but I thought I have heard/read that the common thing to do on a gain is cash out the profit and not the original amount. 

[osubuckeye4]

John Bogle was a very honorable man. He wrote the forward to my copy of Ben Graham's Intelligent Investor. Not only did he make fund investing easy and fair priced but he advocated education for those who do it on their own.

He deserved a Nobel prize in economics. Very few recognize the power of pennies that compound. I believe Einstein said the most powerful force in the world was compounding interest.

And here I thought the most powerful force in the world was hyperinflation 

[David in MN]

What is the rationale for pulling out your profits rather than initial investment? I read through this whole thread a week ago but didn't feel like doing it again, and I think I read that somewhere in here.  It seems to me you would pull your invested money so you've gotten your money back, and then let the profits do the work.  Not asking as an argument, but because I honestly don't know.

Personal example; I bought $500 worth of Centerpoint Energy about 18 months ago. It was my first dabble into buying stock. I've made about a 55% return so far. The stock eeked its way up little by little and has kind of hit a ceiling at $29 and change per share. I was thinking of selling $500 worth and reinvesting it, but I thought I have heard/read that the common thing to do on a gain is cash out the profit and not the original amount.

My rule is to sell half of anything that doubles. That's just my rule. Early on I had a number of high risk stocks double only to fall back and end up a loss. So I imposed this rule on myself to prevent future disasters. Truth be told, I've broken it a couple times when the doubling stock is one that I like for dividends rather than growth.

Most investors have some kind of rule. Trailing stops of 25% are common and many like to use them to prevent loss. Basically any self imposed rule is there to either prevent loss or secure gains.

There's a crapton of psychology in trading. The Big Short was a great window into the mind of a trader. We really are nerdy and somewhat introverted focusing on boring numbers put out by agencies we know are lying and yelling at each other in our secret language in a vain effort to avoid a real job.