There are two questions that will always haunt any long term investor. One is about what is a right asset allocation, and second is how many stocks one needs in a long term portfolio. I do not think there is any boiler plate type of answer to these questions. I believe while it is absolutely necessary to have an optimum asset allocation and multiple number of stocks, the actual percentage allocation or number of stocks will depend upon individuals risk profile, willing to learn, willing to spend time reading about companies, etc. In addition, these two aspects cannot be generalized and it cannot be a static numbers. These have to be dynamic and should change with the investing time period. Having said that following is my thought process for my long term portfolio.
Number of Stocks in Long Term Portfolio
Risk Analysis of TIP Portfolio – 1H09
Any long term investor will know that they need to manage risk in their portfolio. The way individuals should manage their risk is asset allocation and diversification. Today, I am discussing how I manage risk in our income portfolio. The objective of this risk analysis is to make sure that TIP portfolio is not exposed to any particular event, or company, or any other aspect that will affect portfolio performance.
My portfolio management process has a risk management process in which I try to:
- Maintain pre-determined asset class allocation;
- Maintain pre-determined diversification, any sector should not exceed 10%;
- Any single stock should not exceed 7% of the portfolio;
- Dividends from a single stock should not exceed 5% of total dividend cash flow.
When to Start Investing ?
Few days back, I received a very interesting email, snippet is as follows “…. I am developing a keen interest in your dividend investing philosophy. The more I read the more I get excited about. The earlier one starts, the better it is and I want to start now……. I am 24 years old and have a full time job for last two years. The earlier I start the better it will be for dividend investing. Can you advise 5 companies where I can invest and forget them…..”.
After exchanging few emails I observed his (I don’t know whether it was his or her, for the sake of this post I will use “his”) parents had taken a low six figure educational loan for him to complete this MBA education. After he started working, in his quest to quickly earn few bucks, he started investing in equity markets and is now under water. Now this reader wants to put his financial house in order.
On a personal note, I have gone through the student debt phase. I can very well understand what it means to be under student loan debt.
I am not a personal finance advisor. So I could not give him any specific advice per se. However, I shared my personal experience and discussed with him a very high level frame which I had followed. This discussion was not directly related to dividend investing. But I think it followed the essence of dividends investing (i.e. strong foundation and small building blocks). I thought of sharing this framework with readers of my blog. Continue reading rest of this article…
My Investment Buckets – An Overview
Many times on this blog, I have mentioned that my investing style is very much objective driven. I tend to follow the systemic approach. Whenever I think about my investments, I tend to look at from the full portfolio investments perspective. In addition, I also believe in continuous evolution, and hence I make changes as I learn more about any aspects of investing. Readers of this blog will find that I do not talk about mutual funds. That’s because I am not a fan a mutual funds.
In this post, I am providing an overview of my investment buckets. These buckets address my long term investment risk profile for 10+ years and beyond. This description is not related to asset allocation or diversification. The graphic below provides an schematic for overall perspective. Continue reading rest of this article…
Measuring Progress – Yield on Cost or Dividend Yield
Individuals need to set a goal in order to succeed at anything, including our individual investments. Logically, the next step is to determine how we are going to measure our progress. In the realm of investments, most the individual investors (if not all investors) look at annualized returns and compare it with benchmark index. Here in India investors either use BSE’s Sensex Index or NSE’s Nifty Index. In addition, based on multiple discussions I have with individual investors, many investors use percentage based capital appreciation or depreciation which is devoid of time concept i.e. no time scale is involved.
For example, investors love to say “I made 150%, 200%, or 2x or 3x, or 0.5x times my money”. I cannot comments whether this progress measurement is right or wrong because I do not know individual’s objective and/or risk profile.
Ironically, of the many folks I have talked to in last ten years, more than 95% of them have always increased their original capital. Well if that’s the case then who is loosing it? If nobody is loosing, then why the market is more than 50% down from its peak. I am digressing from the subject, so coming back to the topic of measuring our progress…… Continue reading rest of this article…
My Investment Risk Profile
Attempting to determine our own investment risk profile is very subjective aspect. This is because of personal bias creeping into our analysis, natural tendency to be perennial optimistic, and biasing due to business media projections. I believe that risk profiling is very much individualistic (i.e. one individual or one family). Every individual will have a unique risk definition. Now it is possible that qualitatively, the risk profile could be classified in similar groups. However, quantitatively it would be different for each individual. Continue reading rest of this article…
Commodity Asset Class in Dividend Portfolio
One of basic tenets of portfolio construction is following the principles of asset allocation. This is much more applicable and valid for do-it-yourself individual investors. In this context, at a minimum, I need to look at and at least consider evaluating all possible asset classes. While doing this, I also have to keep in mind that my portfolio is based on dividend growth philosophy. Among others, a commodity is also one asset class which I believe I should be investing. The next question is what should be my investing vehicle?
In recent years, commodity has been in news due to continuous increase in market price. This price increase was not restricted to any one particular commodity, but just manifested itself to all types of commodities. Commodities include agriculture products (grains, oil seeds, fertilizers, pesticides), bullion (gold, silver, platinum), Oil and related products (crude oil, natural gas), chemicals and petrochemicals (additives, fibers, yarns, paints, polymers), Metals (iron, steel, aluminum, zinc, etc). So you see it is indeed a very large domain. Now what does it really mean to trade or invest in commodities? It does not mean we buy or sell or invest in real physical commodity. Continue reading rest of this article…