In May, I published Master Stock List Revisited that further refined my potential stocks. Remember, these are stocks I might want to own to meet my goals. Today, we discuss more refinement to not just the stocks but the potential structure of the portfolio.
Since I’ve got my list and have 11 stocks worth nearly $100,000, I needed more structure about where to go next. It was then that I remembered what I tell my kids as they build their career resumes. I tell them your early career is a blank canvas and you need to be intentional in its design. They need to visualize the end game and map out their resume with experiences and education.
Similarly, I need to visualize what I want my portfolio to look like when it’s done too. Which stocks will be Core (Level 1) to my portfolio and get a heavier weighting? I also need to figure out which stocks would be next-level down from my core stocks. These next level down stocks (Level 2) will get a lower weighting even though they are excellent companies. And finally, the remainder of the list would be Level 3 stocks. These are decisions I need to figure out based on my goals, risk tolerance, and research.
My Next Level Needs
With $100,000 invested in my taxable portfolio, its become important to understand portfolio structure. In the beginning, it was “easy.” When a stock hit a certain price you buy … very simple. But I wanted more structure as my portfolio grew in size. Without the focus of a plan, it could easily become a 100 stock portfolio of total chaos.
I certainly don’t want a bunch of high-yielding stocks to dominate my Top 10 positions either. The income would be great but I’d be taking on too much risk. It would be easy to load up today on AT&T and their 7% yield and just rake in the dividends. But what happens if their cashflow stumbles and then their debt becomes too much of a burden? Regardless what AT&T says about the sanctity of their dividend, it would be on the table for a potential cut.
I wanted a core group of solid stocks (Level 1) that would be anchors in my portfolio. These would be mature, high quality companies that have paid dividends for decades. And there would be an extremely high probability that they’d still be around in 30 years. If there is one thing for sure, I will own each of these five Level 1 stocks.
Like they say in life or sports, winning becomes a game of inches. To me, this meant that it would be tough determining Level 1 from Level 2. These companies would be so close that only a few things (including personal choice) would differentiate. It was acceptable to own both Coca-Cola and Pepsi was easy but which is a Level 1? Same holds true for Hershey and Nestle.
With 5 years until retirement and finite dollars to contribute, choices need to be made. My risk tolerance and personal goals became my decision points. It’s why I chose Coca-Cola or Pepsi and Nestle over Hershey as Level 1 stocks. You might make the opposite or a completely different decision.
The List And Its Levels (1-3)
If you follow this blog, you’ll know why most of the stocks are on this list and they will be familiar to you. You won’t find the next Google or Apple on the list that’s for sure.
Here are some observations of my Master Stock List:
- I will own at least 23 stocks. If you add up the Level 1 and Level 2 stock weightings, you get to around 100%. Since I already own some Level 3 stocks, it means I’ll likely own around 30-35 stocks.
- A Level 2 stock could get moved into a Level 3 and vice versa. For example, if AT&T (Level 3) continues paying down its debt, get their revenue growing, and start raising their annual dividend more than 2% then it could move to a Level 2.
- Identifying a maximum percentage doesn’t mean that’s how much I’ll own. This doesn’t mean Johnson & Johnson will become 6% of my portfolio. It means I’m willing to own UP TO 6% of the stock. The maximum percentages will keep me from bringing too much risk into my portfolio.
- The stock list is conservative and built for a 57 year old near retiree. I’m not 25, therefore, I need to take less risk. I’d still recommend many of these stocks to a 25 year old though but I’d add more growth.
- Maximum percentages are considered against the expected future value of my portfolio in 5 years. Overweighting today is not such a concern since I’m continuing to add funds to my account. Exxon Mobil has a significant presence in my portfolio today at 21%. But as I add money to the portfolio, that stock will come back in line to around 6%.
- Unlike some retiree portfolios, you won’t find mine loaded up on high yielding stocks. Sure, I’ve got Altria, Phillip Morris, AT&T, and a handful of others on the list but that’s it. And most high-yielders have a 2% maximum in my portfolio. I want to buy stocks that yield in the 3-5% range.
- The risk for bankruptcy or organization failure is pretty low with the list. As stated before, my basic need for individual stock ownership are stocks and dividends that survive. There is no guarantee that these stocks will provide that security but I feel good about it’s chances. Only time will tell.
Summary
Now that my portfolio has reached a certain size, it was only logical that it needed more structure. To be honest, I should have started off investing with this list. But let’s not forget that my Watch List will continue to evolve. Stock on the list today might not be there next year for whatever reason. And new stocks my have earned there way onto the list.
My recommendation is to create your own list (with levels and weights) based on your risk and personal goals. One thing you’ll have to trust me on though … it will be difficult. Choosing between certain stocks is hard. The smallest of differences can mean your list might look completely different than mine.
To be fully transparent, it’s taken me this long to refine my process and it gets better each time. You may look at my list and laugh or think I’m crazy to have Exxon Mobil as Level 1 versus Pepsi or Apple. That’s the beauty of building your own plan. Use mine for ideas so that you can hopefully make your plan even better.
Thanks for reading!
Mr. TLR