10 Rules For Your Own 'Perfect Investment Portfolio'

by: David Crosetti


Recently, I wrote two articles (I, II) that shared what I call "The Perfect Investment Portfolio."

What I enjoyed the most with those two articles was the commentary that various readers shared. The discussion was lively, entertaining, and most of all, educational.

The portfolio that I created as "The Perfect Investment Portfolio" consisted of a number of Dividend Growth stocks. Dividend Growth stocks are those that meet a very specific set of requirements. If for any reason, these standards are not met, then the company will not be considered a Dividend Growth stock.

The Dividend Growth requirement is that a company has paid dividends for a minimum of 5 years and that those dividends have been increased annually over that 5 year period. Now, that's a pretty simple metric. If a company does not increase dividends on an annual basis for 5 straight years, it does NOT mean that the company is not worthy of your investment dollars. All it means is that this particular company is NOT a Dividend Growth stock.

Let me give you a perfect example. General Electric (NYSE:GE) is a stock that I own. General Electric was a Dividend Growth stock a few years back. It is no longer a member of the Dividend Growth club.

That does not mean that GE is a bad company. It does not mean that GE is not worthy of your investment dollars. It does not mean that GE has no upside potential-that is a potential for capital gains.

All it means is that you will not find GE on a list of Dividend Growth stocks at this particular point in time. There may very well come a time in the not so distant future that GE will earn a place on the Dividend Growth list. Again, just because it may make that list, does not mean that it should or should not be in your portfolio of stocks.

Why I Call This The Perfect Investment Portfolio:

Every investor should have a reason to be investing in the stock market. Why are you putting your money at risk in the market and what do you hope to accomplish by doing so?

For this portfolio of stocks, it was about replacing an income stream from CD deposits that were earning 4% yields, because the CD rates that were available in 2009 were nowhere close to that. There were many investments we could have made. We chose stocks. Nothing fancy, nothing brilliant. We chose what we knew.

There were 4 objectives to creating this portfolio:

1. Provide an income stream that would return a rate of 4% or more.

2. Create an income stream that would increase on an annual basis.

3. Create an income stream that would grow faster than inflation.

4. Minimize risk to capital invested.

Those goals have been met and exceeded and that is why I call it a "Perfect Investment Portfolio."

What You Need To Know:

Every investor needs to ask himself this question. "What do I want to accomplish with my investment?" For some people, that goal may be increasing wealth. For others, it may be increasing income. Still, for others, it may be a combination of the two. What are your goals?

Only you can determine what your goals are. I can't tell you and I don't intend to suggest what your goals should be. I can only tell you about mine and how I plan to accomplish them. No writer here at Seeking Alpha can tell you what your goals should be.

I know. There are many authors and commentators who want to tell you what your goals should be, why your goals are silly, why you could achieve your goals faster by using a different strategy etc. etc. That's what I call "noise." Instead focus on what it is you want to accomplish and then put together a plan of attack to help you reach the specific goal that you have in mind!

What I Know:

Before I started thinking about my investment goals and the strategy that I was going to employ, in order to achieve those goals, I had no chance of success. I owned a little bit of everything. I owned stocks, bonds, mutual funds, REITs, MLPs, and CDs. There was no rhyme or reason to my portfolio. All I knew was that I wanted to own the next best thing and the hottest investment at the moment. As a result, I had a mess on my hands, with a portfolio that was going nowhere. My investments were many -- but they were small. It was not unusual to have $500-$1000 stakes in individual holdings. No critical mass, no direction, no plan.

It was when I took the time to ask myself what I wanted to accomplish and then investigated the strategy that I would employ to achieve my goals that I began to have success in my investments. That was not the case, before I had clearly defined what I wanted and how I was going to get there.

Summary and Conclusions:

1. Never invest without first having a goal.

Why are you putting your money at risk? What do you want to accomplish with this particular investment? Why are you entering into this game?

2. Always determine what the best strategy is for accomplishing your goal.

You may be wanting to grow wealth. How do you plan on doing that? Are you going to buy and sell (trade) growth stocks? Are you going to use puts and calls? Are you seeking income? What is the best plan of attack for that goal?

3. Because every investor has his or her own goals, each of us can create a Perfect Portfolio that is unique only to ourselves.

My Perfect Portfolio may not be your perfect portfolio. You may have a completely different list of stocks than I do. That's ok! As long as the companies you own are consistent with your goal, then it's "perfect." What you choose to invest in is your decision. By the same token, what I choose to invest in is mine.

4. Not having a goal is a recipe for disaster.

If you do not have a goal, then you are going to end up owning a lot of different investments. Diversity is not all that it's cracked up to be. Besides, you really can't own everything.

5. Continuously ask if your investments are still consistent with your goals.

Things change. A DG stock may cut its dividend. Should you continue to hold it or not? A growth stock might suddenly begin to focus on paying dividends. Cliff's Natural Resources (NYSE:CLF) comes to mind.

6. Be aware of the economy and how that relates to your investment goals.

There has been a lot of discussion about cyclical stocks lately. I'm not saying that they are good or bad investments, but you should determine if now is the time to invest in cyclicals or should you wait a little longer. Besides, being a DG investor, I have to determine if the yield of any stock is consistent with my income goal and strategy.

7. Be willing to make changes to your strategy.

Things are changing all the time. Perhaps you have been a dedicated buy and hold investor. Something has changed with a stock you own. Does it make sense to sell and invest in something else? Perhaps you realize that you have no exposure to financials, for example. Is there anything new that would make an investment in financials a good one for your Perfect Portfolio, today?

8. Never stop learning about different investment ideas.

All to often there is a tendency among investors to close their minds to alternative ideas. Why? Perhaps a different approach to your investment strategy is something that you need to know about. Read articles with a critical eye and don't dismiss the author's ideas just because they are different than your own.

9. There are no stupid questions, only questions that don't get asked.

Take the opportunity to use the e-mail section of Seeking Alpha to contact a favorite author or a regular commentator. Also make comments in the articles you read and pose questions that you would like to have a discussion with. If you ask, you will get a response.

10. Remember, you won't beat the market. Have fun and beat your own personal goals instead.

Don't become obsessive about investing. It is easy to do. I have friends that check their portfolio three times a day. Why? I don't know. There are other things to do besides watching your stocks. Enjoy life. Have fun.

Disclosure: I am long GE, CLF.