It is time to introduce the second of the Poetic Portfolios. This one is named “Against the Sky.” This portfolio will be a more conservative and diversified portfolio with an emphasis on preservation of capital, diversification, income, and finally growth. The hope is that this portfolio will produce at least use a 2% monthly yield based on the initial investment or a 24% annual yield based on the initial investment within 10 years. This will be achieved through investments in bond funds, dividend paying stocks, and growth stocks.
Preservation of Capital
Was it Warren Buffet who said the first rule of investing is don’t lose money, and the second rule of investing is don’t lose money? I’m not sure who to attribute this quote, but it will be the first and second rule of the Against the Sky Portfolio. The Portfolio will achieve this goal by buying companies well below their intrinsic value. Before each company purchase, a value will be derived based on the most probable intrinsic value. Stocks will not be added to the portfolio unless they can be purchased at least 25% below this value.
Initially, the portfolio may rely on mutual funds or ETFs to achieve diversification and gain some returns. These will be phased out over time so that the portfolio will be largely focused on individual stocks. Diversification among various asset classes should help to offset any individual losses that the portfolio incurs. Income from both the bond funds and dividend paying stocks will also help to mitigate any potential losses.
As the portfolio begins, it will have 10% allocated to an investment in a mutual fund focused on international value stocks. This will help to offset what will likely be a concentration of holdings in US companies. An additional 10% of the portfolio will be invested in an international bond mutual fund. The portfolio have 60% of its assets focused on mid-large cap value stocks with prospects of increasing dividends. Not all of these companies will be chosen based on dividends, but the large majority will pay dividends and have the potential for increased dividends in the future. The final 20% will be focused on small-mid cap growth stocks. Each holding will represent a relatively small position within the portfolio. These selections will be made based on purchasing growth at a reasonable value.
Income is the long-term goal of this portfolio, but it will be used to generate cash flow for future investments in the interim. If the portfolio can achieve a 4% yield early on, it will provide for the addition of 1-2 new stocks per year. This will further diversify the portfolio or purchase additional income for the portfolio. All of this is geared toward a 24% annual yield in ten years. Initially, income will come from the international bond fund and some dividend paying stocks. Eventually, a larger portion of this portfolio will be moved toward fixed-income investments.
If this portfolio is to be a success and meet its 10-year goal, it will have to achieve a good deal of growth. To accomplish this, 20% of the portfolio will be focused on my preferred asset class, small cap value stocks. The portfolio will purchase growth at a reasonable price while trying to take advantage of market volatility to capture some gains and purchase stocks well below their intrinsic value.
One of the other considerations I will address with each purchase is whether or not I will be comfortable owning each company for ten years if there is no market for shares. Often times investors focus on the “greater fool” who will pay an even more insane price than they paid. Investors sometimes hope for quick profits from companies that do not have staying power. At other times, investors do not adequately evaluate the risks of a company they purchase. These mistakes tend to distract investors from purchasing strong companies at good prices after evaluating all the risks they can discern.
This portfolio starts as 100% cash. I will try to allocate this money carefully over the next year into the targeted asset allocation of the portfolio.