Long term portfolio

[jjtrader]

Hi there,
I posted a couple of weeks ago on this forum titled "advice on diversifying a portfolio"
After tiresome work reading company annual reports imhave come to the conclusion that I am getting some companies ticking most of the boxes but then another meets different criteria. So I have decided to simplify the search. I plan to reinvest dividends to compound and also make a monthly contribution of 1k. Given that this is a long term investment I have come to realise that the most important thing to me is not doing my dough. Therefore, first criteria will be has the company survived the last 2 crashes? I am aware that this is not the only factor that kills my investment but I figure satisfying this tells me that it is a strong company not likely to go broke. Next will be dividend yield above 3% and the increase of more than 4% div payment for 10 consecutive years. This also speaks for the strength of the company ie even through tough times ie 2008, they have enough fcf to pay divs to investors. I will then look at the shortlist and diversify as best I can by sector. I am not concerned with share price as I will be cost price averaging over many months/years with my monthly contributions alternating between (hopefully) 7 or so companies. How do you guys think I am doing with this. There are so many metrics to consider, it can get very complicated very quickly so I have decided to focus on what is important to me. Is there anything crucial that I am overlooking. I would appreciate help with this as I am almost ready to put it into action.

 

[tech/a]

If your averaging down on losing positions
How are you limiting risk?
Sure your ticking many boxes but if a stock
Is dropping --- doesn't matter what The metrics point to
---- they can and do change.

If you trying to at least " not do your dough "
I'm interested in your trade/risk management.

 

[Trembling Hand]

Well for a start you cannot invest in any company that didn't survive something because they no longer exist!!

 

[pixel]

Well for a start you cannot invest in any company that didn't survive something because they no longer exist!!

I took that to simply mean. the company should have been around for a number of years; that also tallies with the dividend condition.

yes, jjtrader, I get your intention; and I reckon it's a reasonable start: simple enough conditions; fairly easy to monitor and administer. But I'm also with tech/a as far as limiting downside is concerned. "Cost averaging" is only for really Big funds that can't jump off a sinking ship, or for retailers too stupid to know when to cut their losses. Seeing you want to add a Grand a month, I can't imagine you fit either of those two categories.

On the subject of that one Grand a month: You're probably aware of minimum brokerage and position sizes per trade. What I'm getting at: If I had $1,000 to spend on some shares, I would wait 2,3, or even 5 months before I'd pick a share that met my criteria; then I'd buy a reasonable number - $2,000's worth at a minimum - of a suitable share that happened to be at the suitable Low in its life cycle and offered at the right price.
I applaud your selection of sound fundamentals - it takes years to really "get" Technical Analysis. But try at least to follow your shares with a basic charting package - even if you only look at price and volume. It won't take any special skill to recognise whether a share has been falling for months, rising to a significant High, or tracking sideways.

Good luck with your investments.

 

[Value Hunter]

I don't think the strategy you are proposing is worth the hassle and don't think it will outperform the market. If your just going to buy dollar cost average into a number of 'blue chip' companies you may as well buy an index etf fund as you will save on brokerage (buying 1 etf each time instead of 7 different shares) and it will be easier for your accountant to sort out (it can get time consuming admin wise when your constantly adding to many positions which mostly have drps as well).

You could just buy $3000 of an index etf once every quarter this way you still dollar cost average effectively and save on brokerage (4 purchases instead of 12).

 

[jjtrader]

I don't think the strategy you are proposing is worth the hassle and don't think it will outperform the market. If your just going to buy dollar cost average into a number of 'blue chip' companies you may as well buy an index etf fund as you will save on brokerage (buying 1 etf each time instead of 7 different shares) and it will be easier for your accountant to sort out (it can get time consuming admin wise when your constantly adding to many positions which mostly have drps as well).

You could just buy $3000 of an index etf once every quarter this way you still dollar cost average effectively and save on brokerage (4 purchases instead of 12).

Thanks Value Hunter,
If I was to do the above, would that not be the opposite of diversification ie putting everything in one etf. Are etf's generally safer, I dont actually know a lot about them. Also, thanks for the feedback pixel, maybe I will rethink the averaging, seems like it could limit opportunity.

 

[Value Hunter]

In regards to diversification, you could invest in an ASX200 ETF which buys the top 200 companies on the ASX, therefore it is more diversified than buying 7 blue chips.

 

[DeepState]

Hi jjtrader, you have tweaked onto some very interesting ideas. Can I please expand.

On defensive and quality screens, it turns out that companies exhibiting these types of characteristics outperform the market over time in an economically significant way and statistically significant levels in wide ranging markets globally. Since you are into a tick-list of screens, please look-up the Piotroski screen. It looks at (non-financial) companies from more perspectives. Another candidate, which is less arguable from an equity investor's perspective is Altman-Z. There are many other concept in this arena, but that should serve as a start for ideas.

On dollar-cost averaging, that's totally fine if you admit to having no market timing ability. Even Warren Buffett recommends it in his latest Annual Letter. The stats for attempting market timing are woeful (Source: Morningstar and Vanguard). But, please consider the variation of rebalancing your portfolio at regular intervals. This variation is to invest such that you keep your portfolio close to whatever the originally chosen weights were (or whatever the non-price based target weights are). This process of regular rebalancing against the market moves is a form of buying low and selling high without prediction. It's part of the reason why monkey's with dartboards beat most fund managers. Refer Arnott et al (2013), "The Surprising Alpha from Malkiel's Monkey and Upside Down Strategies", SSRN Working Paper, Accessible at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2165563. It is known also as volatility harvesting or volatility pumping.

You asked about diversification.....buying 100% equities carries a lot of common factor risk. But you can take material steps to diversify an ASX universe portfolio. It is arguable that an ETF tracking on ASX 200 is diversified. Number of stocks held is not an adequate measure of diversity at all. It is, however, simple. It is believed that the ideas above should add value to portfolios. Feel free to make your own judgments. Perhaps only the Piortroski screening ideas may be of relevance. But any gains relative to the ETF would need to be weighed against tax and trade frictions. These are not small.

ATB