Brick Upon Brick Redux

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

 

It’s not how much you have at the end; it’s how much you could have made.

 

Portfolio Building, Part V: Brick Upon Brick

After significant deliberation, I decided to re-post this from weeks ago with some key additions to the post to better explain the caveats and even pitfalls with certain aspects of portfolio building.

 My apologies for not thinking this through fully to have it in the first time, but I hope the additions are worth your time the second time around or for new guests, consider this the Greatest Post in Investing Blog History.

So here we go (again)… 

We talked about various fund only portfolios, but not one with stocks mixed in which is a good way to help increase your returns above what the S&P 500 as long as you understand there is at least a commensurate (nice SAT word, nerd!) increase in risk if not more.

An easy way to set up a retirement portfolio is to do the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

There it is.

That’s it.

That’s all there it is to do to retire on Easy Street.

That simple.

Well, I guess I should close down the blog now.

 

What?

Wait, you want to know more?

OK then.

Let’s get started.

Let me introduce you to the brilliant David Fish  (RIP to the recently departed King of Dividend Investing) who spent the past decade plus compiling publicly traded companies who kept increasing the dividend yearly for a string of consecutive years while you were learning about the difference between Golgi apparati and mitochondria and the finer points of the brachial plexus. Fish has categorized these companies that have increased their dividends to their shareholders year after year by the number of years that the dividend increases have taken place.

Dividend Challengers: the last consecutive 5-9 years

Dividend Contenders: the last consecutive 10-24 years

Dividend Champions: the last consecutive 25+ years

Then, to add to the confusion, there’s another overlapping category:

Dividend Aristocrats: the last consecutive 25+ years

SR: Umm…that’s the same thing there, Captain.

To explain, the Standard and Poor’s (remember them?) put together the Dividend Aristocrat Index with the principal difference between the David Fish’s Dividend Champions and the S&P’s DIvidend Aristocrats is the latter, not surprisingly, only contains companies in the S&P 500..

SR: The fix is in…

Dr. Scared: This is it!! This is how they screw you!!

PWT: Uuh..yeah..so anyway…

…whereas the Dividend Champions are any publicly traded companies on any index that fulfill the criteria as stated above (ie, increasing their dividend each consecutive for 25 years or greater). Therefore with this difference, there is a sizable difference between the Champions (115) and Aristocrats (53).

This “CCC” list is updated at the end of each month  by David Fish to ensure if a company has not increased their dividend in consecutive years or, even better, if a company has increased its dividend in enough consecutive years to be listed in any of the above categories.

To be able to not just maintain the same dividend, but actually increase it year after year, especially after a quarter of a century or even longer is beyond remarkable, In fact, it’s stunning when you think about it. These companies would have not just survived, but actually thrived, in all sorts of conditions including recessions, wars, new competitors, changing technology, etc.

Let’s take a look at the dividend aristocrats in particular.

These 53 are large companies (multi-billion dollars in market capitalization) that have survived and even thrived through all the gyrations of the market and nation since their respective inceptions. These companies have few opportunities for significant growth because of how massive they are already, but make you lots of money in the long term even if their share price barely budge over the years. (One way to think of it is like this: ideally, the company whose stock you own keeps jacking up their dividend year after year with the stock price barely moving     allowing you to buy more and more stock, and then three months before you retire it triples in value. This would be epically awesome AKA The Unattainable Dream.)

As noted before, the beauty of dividend investing is getting paid to buy a company’s stock and then be patient to continue to get paid during which time the more stock you buy, the more dividend it generates thus leading to more cash to buy even more stock leading to an upward spiral of stock/dividend/cash which is a beautiful thing to behold.

Here is an example of ten Dividend Champions along with the number of consecutive years that dividends were raised (and placed in descending order of those number of years) :

3M–59

Coca-Cola–55

Johnson & Johnson–55

Colgate Palmolive–54

*Altria (Tobacco company; formerly Phillip Morris)–48

McDonald’s–42

RLI (Insurance Company)–42

Clorox–40

ExxonMobil–35

AT&T–34

*Altria is the one company above that is not in the S&P 500 thus making this a list of DIvidend Champions, not Aristocrats, to be technically correct.

It’s a pretty well diversified group that virtually every American purchases from at one point or another throughout any given year. If most or all of these companies go down, then you don’t have a portfolio problem, you have a national/global economic crisis (see 2008-2009).

So, in a portfolio sense, it would break down as the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks with each of the ten above stocks receiving 2.5% each (also make sure all dividends in these stocks and even the funds above are set up to automatically be reinvested back into whatever stock or fund they came from)

Just make sure you regularly invest into the above four categories or thirteen discrete securities consistently (ie, monthly or even more frequently, not any less frequently than monthly however—more on the mechanics and logistics of stock/fund purchasing in a later post).

Then just sit back and watch the returns roll in.

Several caveats:

1,) Realize that the above percentages (25% for each category with 2.5% of each stock) is how it will start, but not likely how it will be in 2, 5, 10, or a greater number of years. Stocks and funds will fluctuate and will also generate dividends in varying amounts at varying times which should then be purchasing those same stocks and funds at varying prices.WIth differences like that, it’s inevitable that some equities will race ahead of others over years to decades.

2.) This inequity in your equities (HA! I’m here all week folks!) may be perfectly fine and isn’t dangerous or problematic in of its own though some people rebalance their investments by shifting how much they pay into each equity to keep them the same as much  as possible (OCD much?). Rebalancing these equities will take constant monitoring and not an insignificant amount of calculating/effort to do so which is totally contrary to what any of us would like and certainly not the whole point of the “build it and feed it and otherwise leave it alone” system of retirement investing.

The one thing to note as equities separate out from one another is to realize that the inequity is blunted by the fact that the most expensive ones will wind up gaining fewer and fewer shares with each purchase due to their share prices relative to the other cheaper ones.

3.) Do NOT fall into the trap of changing your equal contribution towards the best performing equities and away from others. The point of having equal contributions is to have your savings spread out throughout the US or even global economy in case of fluctuations and especially in case of downturns. What is well performing one quarter or year or even decade may stall or even recede suddenly at the exact time where you keep putting in more and more money into that very equity. Don’t let market fluctuations in the short term distract you from a solid-great plan that will thrive over 25-35 years, not 25-35  days or even 25-35 months.

4.) A good argument against the above portfolio is that owning shares of mega cap companies in addition to a S&P 500 fund is that they are both representative of large cap companies which is now 50% of the portfolio with mid caps and small caps at 25% each. In addition, some people are just not comfortable with owning stocks of individual companies which I think is personally fine. Do what you’re comfortable with and not what you think you should be doing. None of this is worth having reflux or insomnia over. That is an absolute certitude.     

Before we finish, it’s time for a little shouting however.

THE DIVIDEND CHAMPIONS I CHOSE ARE PURELY ARBITRARY OTHER THAN BEING WELL KNOWN COMPANIES AND DO NOT AT ALL REFLECT MY CHOICES OF WHAT A GOOD INVESTMENT CONSTITUTE. DO NOT THINK IN ANY WAY, SHAPE, OR FORM THAT I AM PROMOTING ANY ONE OF THESE COMPANIES FOR ANY PERSON TO BUY.

END OF YELLING DISCLAIMER…

Thanks for tolerating my CYA tirade!

We will discuss evaluating individual stocks in a future post however.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Beyond The Foundation, Beyond The Nation

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part IV B

I said posting would be sparse, but the last few weeks was the reductio ad absurdum of that notion and for that I  am profoundly sorry.

Lot of things happened—some good, some bad—in the interval.

In short, life happened.

Once again, I’m truly sorry.

Anyway…

Let’s pick up where we left off.

You’ve decided you’ve wanted to have a small portion of your retirement portfolio invested in international funds.

One point before we move on:

Given how well diversified and well covered the US would be by a trio of S&P 500 fund, mid cap fund, and small cap fund, your international investing should be comprised only of countries that are based out of the US as to not overlap investments of the US based trio with your “international” fund (which if you’re not careful could be a “global fund” where 50% of the fund is actually invested in US companies all over again).

So now what?

Here are a few options for international investing:

1.) Pick what is known as “ex US” fund (which means any country “ex”cept the US) all for one simple fee (the lower, the better as always). This leaves tens of thousands of companies over dozens of countries, so someone or many people will need to do the research on where to put the money and to continue to follow if that remains a good investment. Therefore, these funds usually (but not always) will necessarily be actively managed, so mind those fees and make sure that the returns of the fund are rock solid in terms of how good they are and how consistent they are even after the fees are subtracted out.

Examples (but not suggestions): Vanguard FTSE All World ex US Index Fund, iShares MSCI ACWI ex US ETF (Yeah, even the names of these funds are intimidating.)

2.) Pick a regional fund which focuses on one geographic area such as Europe, Asia, the Middle East, Latin America, or even sole countries such as Japan or Turkey. It’s completely fine to do this, but there are several caveats to be noted here.

A,) You MUST have some general knowledge of the region or country. Vacations or a semester abroad fifteen years ago which was composed of mostly boozing is not field research and does not constitute deep understanding of international geopolitics. If you don’t understand the area/country, don’t invest in it solely. What makes it attractive now may be annihilated by  civil war, political strife, a trade war, sanctions, or just plain mismanagement among many other variables.

B.) You MUST know who the managers of these funds are that you are so enchanted with. You must know who they are, what their expertise in this region/country is, how long they have been managing the fund, how long they have been managing other funds or in the mutual fund business altogether, and, likely, most importantly, the fund managers’ performance (minus fees as always) at the fund you plan to invest in for the time he/she was the manager. If their performance is great/stellar and everything else checks out, then go ahead…but one last caveat—you need to ensure that you keep track of the fund manager himself/herself. If the manager retires/dies/move on, then you might have to do the same.

Examples (but not suggestions): VanEck Vectors Egypt Index ETF, iShares MSCI Chile Index Fund, WisdomTree India Earnings, Fidelity Nordic Fund

3.) A hybrid fund worth mentioning is the regional funds that mix and match geographic regions such as Middle East/Africa, Africa/Asia, or Europe/Middle East. All of the above caveats for regional/country funds still hold true even though (in theory only) the risk should be less with a wider geographic distribution to draw from.

Examples (but not suggestions): T. Rowe Price Africa & Middle East Fund, Commonwealth Australia/New Zealand Fund

4.) There are funds that group together disparate countries that may or may not have anything in common like the oft-mentioned BRIC (Brazil, Russia, India, China) nations which were rapidly developing with huge growth rates in their economies (not so much as it turns out especially since these countries have absolutely nothing to do with one another) or the lesser known CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa) which were touted to be emerging or frontier markets (which also didn’t quite work out…at least so far).

Examples (but not suggestions): The less said here, the better…

If this isn’t already confusing or daunting enough, then consider this: Not only are there country or region funds like the ones above, but then each country or region could also have large cap, mid cap, or small cap funds and then each of those could be value or growth or a blend between the two in investing style terms therefore each country/region could have at least nine types of funds to compare and contrast with one another.

5.) The potentially riskiest of all international investing for the average retail investor is the stocks of non-US based companies. If you aren’t already experienced in individual stock investing in the US or even the largest non-US based companies, then you shouldn’t think of putting your hard earned money into individual stock of lesser known companies that aren’t based in the US.

Examples (but not suggestions): Shell, BP. LVMH, Nestle; the lesser known companies are ones like WalMart of Mexico, Arcos Dorados (you already know what this is if you know Spanish), and Infosys which are all multi-billion dollar companies even though you may have never heard of them  

6.) International bonds, commodities, or even real estate are potential investments, but are the riskiest of the listed securities. These are neither for the faint of heart nor for the novice investor. If you haven’t been heavily invested and experienced with the above securities domestically first, then you shouldn’t even consider an international version.

Examples (but not suggestions): If you don’t already know, you don’t need to know.

Enough for one post…

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…