In a recent article about my stock portfolio philosophy, there were brief mentions of my goals and approach. What you didn’t see was a detailed and formal explanation of approach that described the why and how. In other words, my rules of engagement.
You’ve probably heard of Investment Policy Statements (IPS) that people use to describe objectives, asset allocation, etc… for all their investments. To provide us with some guard rails, I thought it would be best to create a Stock Policy Statement (SPS).
The SPS will differ from the IPS in that it’s focused only on stocks. It will describe my reason/purpose in using stocks, philosophy, approach, objectives, and any other considerations that are important.
This will be a living document, which means I’ll edit it as my portfolio grows, needs change, and whether I’m in pre/post-retirement. Remember, this is only focused on individual stocks so you won’t see anything describing cash, 401(k), bonds, or any other part of my portfolio.
Stock Portfolio Goals (2019-2025)
- Create a stock portfolio valued at over $425,000 by 12/31/25
- Generate forward dividend income of over $15,000 annually by 12/31/25. This means by 1/1/26, my forecasted 12-month dividend income should be over $15,000 annually.
Stock Portfolio Guiding Principles
- Generate dependable and growing dividend income
- Minimize capital loss
- Effectively manage expenses and taxes by minimizing portfolio turnover
- Growing dividend income is critical to meet portfolio income goals but total return should always be considered
- Don’t chase yield
- Don’t overpay for growth; valuation and purchase price is critical for the stocks on the Master Stock List
Stock Philosophy/Approach
- Invest in individual stocks and exchange traded funds (ETFs)
- 90% or more of the stock portfolio will be invested in companies from the Master Stock List
- Though most of the stocks will be invested in U.S.A. companies we remain open to international companies too
- Other than the ETF, 5% is the target maximum for an individual security in this portfolio. No single security (other than the ETF) should have a weighting over 10% of the total equity portfolio.
Dividend Strategy – Pre-Retirement
- Dividends will be placed in the Taxable Joint Account at Vanguard in the Federal Money Market Fund (Settlement Fund).
- The dollars in the Federal Money Market Settlement Fund will be used to purchase additional stocks
Selling Strategy
Though highly unlikely, it’s possible that a Master Stock List security might need to be sold. Remember, these are my “sleep well at night” stocks so it would have to be extraordinary conditions for me to sell a Master Stock List security.
To remove emotions and market volatility from decisions, here are some situations that could (or might) necessitate selling an individual stock(s):
- Declining multiple year financials that did (or could) lead to a dividend cut
- If there are events surrounding the company that could jeopardize the future of the company
- Extended and significant global events that could jeopardize the future of the company
- Though unlikely in my taxable account, rebalancing my entire portfolio due to asset allocation purposes
- I’ve chosen to sell a stock position for personal reasons a specific. The Vanguard High Dividend Yield (VYM) will be the first position sold in this scenario
Summary
This document represents my taxable account stock policy and it will very likely evolve – it’s a living document. I’ll think of new items to include or something just might not make sense after further review. But this is a start and I’m happy to have some guidelines.
I hope this was helpful!
Thanks for reading!
Mr. TLR