Investment Strategies Of A 30-Year-Old Amateur

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Includes: BBL, BNS, CMI, CVX, GE, GNC, KMI, LYB, MHLD, QCOM, SSI, T, VLO
by: Mike Bruce

Summary

Planning 30 years into the future can seem a daunting task.

Where can one find value when starting out in a historic bull market.

Multi-faceted approach gives you options.

How does one begin a retirement portfolio in the midst of one of the longest bull markets in history, where valuations are high and knowing well that a correction will eventually occur? This is the quandary that I as a 30-year-old find myself in 2017. I first became interested in what to do with my extra money lying around while on my first deployment in 2013. For anyone who knows what ship life is like for Marines, we're treated more as well-fed cargo than we are members of the crew. In between working out and eating chow there can be lots of downtime. Embarked upon the USS Germantown, the first book on investing I ever read was William Bernstein's The Four Pillars of Investing, followed by Ramit Sethi's I Will Teach You to be Rich. As soon as I got off ship, I sat down to re-evaluate what to do with my money. I opened my first Roth IRA with Vanguard and developed a plan to aggressively pay down my car loan and my remaining student loans. This was all well and good; however, the allure of being my own stock broker and making millions was pulling me in. In short time, I opened an account with OptionsHouse and my stock portfolio began with three random $500 purchases in AT&T (NYSE:T), GE (NYSE:GE) and Kinder Morgan Energy Partners. Without even knowing it at the time, I was forming my strategy of dividend growth investing.

Fast forward to today and I am still an active duty Marine who is less than half way to my 20-year retirement obligation. I am married and have no kids. I possess a desire to figure out how things work and I hate paying other people to do something I can do myself, except for plumbing… hire a plumber. All of these factors play a role in how I spread around my paycheck and how I weight my approaches towards building my future income. My main investment goal is to accumulate enough passive income to cover all my bills allowing me to use any additional income in any I wish. I am looking for financial freedom. Over the past two years, my bills have averaged out to approximately $4,000 a month, which is about 44% of my monthly income. These are the normal bills one would pay: cable, phone, utilities, and insurance, along with my two mortgages. In order to cover this, I will need to amass revenue streams which total a minimum of $48,000 a year. I am planning towards $50,000 because I like rounded numbers. I plan to accomplish this by building an overall portfolio which will pay me an average of $50,000 a year in passive income through two primary methods: stock dividends and rent. Finally, my Roth IRA will serve as an emergency fund to fill in any shortfalls or emergency situations.

The final potential source of income is the option of military retirement. Having entered active duty in 2010, I am grandfathered into the government retirement plan that most are familiar with. Using very rough math, I could expect to see $50,000/year or $4,166/month following retirement at age 43. Obviously, this would solve the majority of my problems and allow me to start a new career of my choosing in my early 40s. Currently needing more than thirteen additional years to hit retirement age, I am undecided if that is the path I want to follow. If I were to use the GI Bill instead of continuing on active duty, it would allow me to go back to school and potentially start a new career before hitting age 35. This state of flux will be settled within the next couple years. Agreeing to one additional contract would put me over the halfway point to retirement and you don't quit a marathon once you hit 13.2 miles. Since I am undecided about the ultimate future of my career and because I am not accumulating that retirement benefit through deployment of capital, I am not factoring it into my retirement plans right now. Instead, I want to already have that passive income plan set up, and if I retire with a government pension, then I am playing with house money.

Around a quarter of my monthly paycheck goes into my Savings and Investment fund. As of writing, the weighting of that ~25% is 18% into my Roth IRA, 48% into my rental property account and 34% into my brokerage account. I anticipate these numbers to shift after I reach my short-term goals ending in May 2019. At that point, I foresee the percentages shifting to 23/35/42%, respectively, to reflect my main priority mentioned above. I will talk through my strategies for each.

Vanguard Roth IRA

After reading The Four Pillars of Investing on ship, I realized that my first attempt of investing into an IRA had no real thought behind it, more so because I was getting killed by management fees than the performance of the funds I was putting my money into. In the spring of 2013, I rotated what money I had in my old IRA (~$6,000) into my new Vanguard account and made my initial deposit into an S&P 500 Index Fund. Each month, I drop $455 into a SmartyPig savings account to be used in January of the New Year. The .75% interest rate makes up the difference getting me to a max contribution of $5,500. Making the transaction automated moves the money away from my temptation. Plus, having the money ready to go for the investment from a dedicated account gives me a psychological boost of not seeing a separate account that is accumulating for a different purpose take a hit of over $5,500.

Knowing that I still have 30 years of contributing to this account, I am putting the yearly contribution into the most aggressive funds I can. I am currently spread across six funds, including the S&P 500 index. The others are two high yield dividend funds, one international high yield dividend fund, one REIT fund and one small cap growth fund. Each of the funds has a miniscule operating fee which keeps the majority of my money in funds and not paying my broker. All of the dividends are automatically reinvested into their respective fund. As stated before, I am relying on this account to 'be there' for me when I get older. Understanding that nothing is guaranteed, if I assume nothing more than a 0% return due to market rises and falls, the account should contain approximately $200,000 by the time I turn 60. I can then redeploy this money in another way which will facilitate my needs at that time in my life.

Rental Properties/Housing Fund

I despise paying rent. My wife is happy enough to pay rent and allow the landlord to take care of the issues that pop up with the residence. However, like paying another person to do something I can do myself, I hate building another person's wealth by paying their mortgage. While attending college in Boston, I lived in an apartment for three years. During that time, I saw my parents pay close to $30,000 of someone else's mortgage. I helped where I could, but they took the brunt of this. This fueled my desire to purchase my first home as soon as I could. When I moved to Southern California for my first duty station, I used a VA loan to do just that. Six years later, that home has been refinanced once, more on that in a minute, and has been rented out for 23 of 24 months since we moved out, for a monthly average income of over $250, or 18% on my mortgage.

One of the challenges of military life is the constant location change. When we were moved to Virginia so I could attend school, we knew it would only be for a year. I was forced to suck it up for the year and rent out a townhouse. While it pained me every month when the money left, we loved where we lived. In January of last year, we found out we would be returning to SoCal. While we didn't want to move back into our old house, we did not have the money for a down payment yet. Working through my bank, I was able to refinance my initial mortgage and perform a one-time clearance of my VA Home Loan benefit. Stripped of the burden to provide a down payment we couldn't currently afford, we were able to purchase our second property in July 2017.

While it is a challenge, one of the benefits of moving around the country from military base to military base is that I am one of tens of thousands of people doing the same thing. While the military does provide on base housing at its establishments, oftentimes service members look to live off base where they can take advantage of receiving non-taxed Basic Allowance for Housing (BAH). By looking for and investing in properties in highly desirable areas, I should be able to ensure myself of a consistent string of renters. Specifically looking for military members with families would increase the chance that the lease would not be broken during times of deployment.

Ultimately, we will be forced to move again within a range of 3-5 years, possibly as early as May 2019. At that time, we will seek to rent out our second property and continue on to the next adventure. In order to prepare us for this, I need to accomplish two goals. The first is to accumulate enough cash to cover six months of mortgage payments for each property. The second is to have enough money to use as a down payment on a new property. Right now, I aim to save $50,000 to put towards that down payment. Due to the great (read: lucky) timing of my first purchase, we currently have around $170,000 of built up equity in that property. Depending on the new property we will purchase, I may look to utilize that equity through a home equity line of credit (HELOC) to supplement the down payment, or use it to refurbish the home. For more on understanding HELOCs and Home-Equity Loans, click here.

Military movements tend to occur every 36 months or so. Purchasing a new property every three years is a bit ambitious; however, a new house every six years may be more reasonable. If I am to use the $50,000 cash down payment as a plan, I would need to put aside $8,333 a year over six years. Accelerating my deposits to hit this number by May 2019 has forced me to weight this branch the highest for now. Only having to set aside $694 a month instead of $1,174 will allow me to potentially push more money into the cornerstone of my portfolio, my brokerage account.

NOTE: As I have stated more than once already, I prefer to do things myself instead of paying others to do them. That being said, one of the best investments I have made was finding a great management company to oversee my properties. When my wife and I moved to Virginia, we hired a company run by a former Marine who took a great interest in ensuring that our minds would be at ease while living in a different state. Shortly after finding out we were heading back to California, it was revealed that I would be deploying within six months. Due to this and my wife's lack of desire to actively manage the property, we have kept on the management company. When we are forced to leave SoCal next, I will breathe easy knowing my properties are in good hands.

OptionsHouse Brokerage Account

As long as I can remember, I have loved to gamble. From growing up challenging my dad and any of his friends who would play me in cribbage to the early days of online poker to the lights of Las Vegas, I love the feeling of putting my money down and backing my own decisions.

This is the exact reason I needed to develop a system to screen stocks to help guide my sometimes impulsive reactions.

Since the days of my first random purchases, my stock screener has been thought up, tweaked and molded into its current state. As an active duty member of the military, I don't always have a ton of time to devote to sorting through each stock in the world. Between movements across the country, field exercises and deployments, time at home comes at a premium. Coupled with owning two properties, my personal time is limited. Fortunately, my wife is still interested in spending time with me and much of my free time is devoted to her. Factor in kids in a few years and the time becomes even more stretched. The point behind the screener is to quickly assign an overall score to an individual stock based upon metrics meeting my investing style.

The screener is based on a two-part system. Part I is based on Benjamin Graham's enterprising evaluation criteria. Much like paying someone else to do work for me, it pains me to overpay for a product. This point is undoubtedly the most frustrating aspect as I search for blue-chip stocks in this continued bull market. Part II is a personalized dividend screener based on my goals. I only invest in companies paying a dividend, so my first step is to filter stocks listed in David Fish's list of CCC companies. I then put them through my screener and identify companies deserving more research. Each of the seven metrics used in the Graham portion and the six metrics used in the dividend portion are weighted equally and produce a separate score for each part, which is then combined into a total score. Below is a screen shot of my two most recent purchases, Bank of Nova Scotia (NYSE:BNS) and LyondellBassell Industries (NYSE:LYB). My rule of thumb is to never initiate a new position in a stock that does not rate at least a combined 80%. I will also attempt to purchase through the use of selling puts in order to accumulate premium income as well. I primarily use Morningstar for the 'numbers' of the business and use the analysis from my trading platform OptionsHouse for follow on research.

LYB

BNS

Total Score

81%

93%

Graham Enterprising Criteria

Current Ratio >= 1.5:

2.11

100%

1.07

71%

Long Term Debt/Working Capital:

166%

49%

14%

100%

Positive EPS Streak of 5 Years:

5

100%

5

100%

Dividend >0

3.60

100%

2.14

100%

Current EPS > 5 Years Ago:

4.21

100%

0.9

100%

Price/Book <= 1.2:

5.03

0%

1.70

58%

P/Ettm <10:

9.23

100%

12.62

74%

SCORE:

78%

86%

Dividend Criteria

Higher Dividends > 4 Years Straight

6

100%

7

100%

Yield >= 4%:

4.46%

100%

3.92%

98%

Payout < 50%

36.4%

100%

49.4%

100%

5YR DGR >= 10%

43.40%

100%

8.87%

89%

FCF/Dividend Payout>= 1

1.87

100%

6.00

100%

DGR 3 YR/5YR >= 1

0.43

0%

1.10

100%

SCORE:

83%

98%

Mentioned previously, the goal for my brokerage account is to provide me a portfolio of stocks paying me $50,000 a year in dividends. At this point in my portfolio's development, it is all about accumulation. All of my dividends are poured back into purchasing new stocks along with my monthly contribution. Long term, this portfolio is the number one priority for my future wealth. My goal is to contribute a minimum of $10,000 a year to the portfolio.

As of June 21, 2017, my portfolio consists of 16 stocks paying an estimated $1,600/year in dividends. I intend to own between 20-25 positions in total. When I am buying stocks, I intend to hold them in perpetuity. I plan to only sell my position in a stock if the dividend is cut or unchanged from year to year. Current stocks which I own and am long in include Cummins (NYSE:CMI), Chevron (NYSE:CVX), Maiden Holdings (NASDAQ:MHLD), Qualcomm (NASDAQ:QCOM), T and Valero (NYSE:VLO). Of course, no portfolio is perfect and I am currently formulating plans to exit my positions in BHP Billiton (NYSE:BBL), GNC (NYSE:GNC), Kinder Morgan (NYSE:KMI) and Stage Stores (NYSE:SSI). In the future, I plan to expand on how I use this system to quickly screen through a list of stocks and identify ones which I want to buy or how I have escaped from a position if the dividend were to be cut.

Conclusion

Know yourself and seek self-improvement.

I know I am well behind the power curve in understanding the ins and outs of investing. I am pretty sure I finished with a C+ in AP Economics my senior year of high school and I graduated college with a degree in Criminal Justice. However, I possess the drive to learn how to do things. Whether it is repairing the drainage system in my rental property, to changing brake pads and rotors, to understanding company financial statements, I yearn to know how. At times I drive my wife insane, but I contend life would be much more boring if I didn't. My style of wealth accumulation is definitely not for everyone. I have the luxury of being able to accept a bit more risk at this point in my life than someone who has other life commitments. I am fortunate that the only debt I have is my two mortgages. But this is a choice I made, I have driven the same car for almost seven years (all my adult working life) and purchased houses that I knew I would have no problem making the mortgage payments on. Sure things will change and life events will happen. We'll have kids, or rescue more dogs. Roofs will have to be replaced and markets will tank. However, by having a thought out plan and being flexible, one is able to adjust and make corrective changes. That being said, life balance must be maintained. Some things in life are worth paying extra for, most notably bourbon and toilet paper.

When I initially displayed my goals to one of my close friends, I entitled the excel sheet as my AAF goals: Aggressive as F. Will I fall short on achieving a couple of them? Possibly, but for now I plan on hitting that $50,000 in dividends per year. I bought two houses in my 20s, I plan to buy two more in my 30s. Reaching for lofty dreams and missing sucks, but if you're not always trying to do better then there's no point.

Disclosure: I am/we are long "BNS", "CMI", "CVX", "LYB", "MHLD", "QCOM", "T", "VLO".

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.