In my first post, I went through the process of choosing the type of investments that fit this style of portfolio. While this can get you a great team, championships are won by superior management with great teams. Many collections of great players can underperform if not put in the proper environment or organized efficiently. The same goes for investments. It’s not enough to blindly enter solid investments, we need to have a plan that helps grow the entire portfolio while still managing risk. This leads us in to step #2 in our portfolio process…
Step 2 - Organizing your winning team
If we followed step 1 properly, we should have a collection of 13-17 investments that we fell have potential for income growth. So what now? Do we just start with equal full positions in every investment? Do we put more in 3-4 we really like and just a small % in the others? Should we play it safe and wait for each to drop 5%? Maybe we just say screw it and consult a magic 8-ball?
This process can be overwhelming and that’s why having a plan is key. Here are my four steps for setting up a Portfolio when starting at zero.
Figure out your initial investment. For some people, that could be $1,000 total. For others, it could be $100,000. This should be an amount of money that you can set aside for 5+ years and still be able to handle your day-to-day expenses. I would also shy away from doing this with your first line savings as you may need to use that for unforseen expenses (car trouble, home repairs, etc). Essentially, treat this like an IRA or 401K that you are saving for retirement. For the purposes of this substack, I will be starting with an investment of $10,000.
Setup initial percentages for each investment. If you start with 13 investments, this can be as simple a allocating 7.7% for each. I prefer to have a plan that balances risk with maximizing my yield. If I have a position I like that has a high yield in the energy sector, I might choose to look to balance that out with smaller positions in finance or real estate. I like to pick 5-7 higher dividend sector leaders to start at 10% of the portfolio and then balance out the rest at around 5% each. I call these “goal” percentages for the portfolio. This allows the ones I think we be leaders to get initial exposure. But…
As we get more info and move forward, we can adjust the “goal” percentages. I may think some Real Estate Investment Trusts (REITs) are a main area to invest in to start. However, what if we hit another oil crisis? Then, I could pivot and add more to the energy positions. Also, as time moves forwards, a few of our top choices could really grow and end up being 15%. At that point, we can decide whether we adjust the goal percentage or trim back to 10%. Another thing to look for is investments that increase or growth their dividend yield. If we have a 5% position in an ETF and they announce they are massively growthing their yield for the next quarter, we may decide to invest more in that position to collect that high yield.
Determine how much you plan to add to the investments over the next year. If I decide that I want to add $2,000 to this portfolion in 2023, I should setup a plan to invest that additional income. Same goes with my initial investment - maybe I only invest 50-60% up front and add more to the existing positions over time. My preference is to use historical information and the current price of the investment to determine a plan to reach your goal percentage. I usually start by investing 60% of my initial allocation at the start, then leave the remaining 40% as “dry power” to add to positions if the price lowers. One of the key concepts for income investing is called “dollar cost averaging” (or DCA). DCA means we add to positions over time and often can target purchases for lower price than our current average cost. I will go through this concept more in future posts - but DCA is key to maximizing your dividend yield.
I know this can be a lot to take in at once. That’s why I am breaking up the total plan over a series of posts to help you guys bite off small pieces and try to understand each one. The key takewaways here are to figure out your initial investment and then determine your goal percentages for each investment. In my case, my initial investment is $10,000 and I plan on having my top 7 each get 10% while the remaining 6 get a 5% initial allocation.
Finally, don’t forget the goal of this type of portfolio. We aren’t investing in high growth tech or emerging industries that aren’t in profit and have large risk. We are growing our portfolio primarily through the collection and reinvestment of dividends. The beauty of this portfolio is that you can let the income compound and grow to a point where you can use a portion of the dividends to pay for things like vacations without the need to sell your investments