Building a Core Portfolio
What I wish I had known 18 years ago plus my favorite stock research tools
Happy Equinox!
It’s definitely spring and about time! My garden is budding out, and the spring peepers are out in force every evening now. I actually like the sound and open the window at night so they can sing me to sleep.
Welcome to all the new subscribers! I appreciate all of you being here and encourage you to send me your questions. Seriously.
One common question that has come up several times recently is “Can you recommend what stocks I should buy?” so I thought I would address that today.
As an accredited financial counselor, I am a fiduciary, meaning it’s my duty to act in my clients’ best interests. And while I’ve learned a thing or two about investing from my own experience as a DIYer which I am sharing here, I am not a registered investment advisor. Neither am I an attorney or accountant/enrolled agent. For that reason, I do not give specific investment, legal or tax advice to individuals. I only share general information and education so that you can make your own well-informed decisions.
That’s another reason why I’m such a fan of writing down your own investment policy statement, to help you keep your goals and priorities top of mind. Your goals may be and likely are different than mine. When I write about my own portfolio, that is not a recommendation to go out and buy or sell what I did.
How to go about constructing a portfolio
My portfolio has evolved over the past 18 years. I had no clue what I was doing when I started—I just wanted to buy dividend stocks that would pay me to own them. Today I’m sharing what I wish I had known then. The good news is that you can start where you are and it will always be a work in progress.
If you have a workplace retirement plan, you’ve already started
Think of any workplace retirement plan as part of your total portfolio. It offers pretty conservative investment choices by design, which is a good thing. If your employer offers any match, take advantage and contribute enough to get the free money. These types of accounts are tax-deferred, which means you don’t pay income tax on the money you contribute now. You pay the tax later when you take it out.
You do need to actually invest the money into something—you’d be surprised how many people contribute money but then it just sits in the account doing northing because they didn’t invest the money into any of the funds available to them. If your investment choices include an ETF that tracks the S&P 500, that is probably a good place to put the bulk of your money.
A lot of workplace plans now include a a target date fund as the default option. Target date funds are based on your estimated retirement timeframe and gradually increase the proportion of money invested in bonds (and not stocks) as you get closer to your target retirement age. I personally am not a fan, but it can be a solid choice for people who prefer less risk. And of course you can invest in some of both. Put the % of money you’re comfortable with into an S&P 500 fund and then some into the target date fund.
What if I don’t?
If you don’t have a retirement plan through your job, you can create your own. Open a Roth IRA, a taxable brokerage account, or both. Both accounts allow you to contribute money you’ve already paid tax on. Roths have a ceiling on how much you can contribute in a given year, while a taxable account has none. In the taxable account you only pay tax on the money you make through dividend payments, or the profit you make (If any) from selling shares. If you meet the requirements of the Roth account, the money you take out is tax-free. You can take money out of a taxable account any time, and in a Roth account you can always withdraw the money you’ve contributed.
Total return versus income
I don’t understand why a lot of people seem to take sides on this issue. Again, you can choose to hold both kinds of investments. Just decide what percentage of each you are comfortable with, and invest accordingly. Be mindful of taxes if you can however. I have a few higher yielding stocks and funds in the taxable account just because there’s where I had the money to buy with at the time. It’s not the end of the world, since qualified dividends are taxed at a lower rate, as are capital gains on stocks held longer than a year.
With both a Roth account and a taxable account, I now tend to have more of the large cap individual stocks and funds with dividends under 5% in the taxable account, and more of the higher yielding CEFs, BDCs, and REITs in the Roth. I’m much more conscious now of trying to minimize future taxes as I get older, so I want the higher yielders in the tax-free account. I also have a few total return type stocks in the IRA in case I ever need to sell shares to meet future required minimum distributions in that account.
Diversification
Some investments will do well one year and not so well the next. You can diversify according to stocks or bonds, market sectors like healthcare or technology, growth or value, or allocate a certain % to types of stocks like large caps, CEFs, BDCs, or REITs.
Getting started
OK, you’ve got a draft investment policy statement (that you’ll revise periodically), and opened at least one account. Now what?
Start with just one investment that you are comfortable with, plan to hold for a long time, and don’t mind buying more of if the share price drops (which seems likely in the current environment). It could be an S&P 500 ETF or a dividend fund, or something else. Decide how much you want to invest and how often. You can dollar cost average as you build a position. Decide if you want to drip any dividends or keep them as cash.
In the meantime, make a watch list, a list of possible purchases you are considering, and do your homework on each company. How does it fit your IPS and timeframe? What do the company’s financials look like? How close is it to its fair value, and at what price are you willing to buy?
I find that valuation and future earnings growth are the most important factors that I use now to make buy or sell decisions. I don’t mind paying for quality but I don’t want to overpay.
My favorite stock research tools
Most of the big brokerage platforms offer research tools, where you can find information and analyst ratings for stocks on your watch list. These can be a good starting point and well worth the time to learn how to use them.