One Thing Every Self-Directed Investor Must Do - Part Two

by: Bob Wells

In my last article I discussed why every self-directed investor needed a portfolio business plan.

As we age, the plan needs to age with us.

Many of us have family disinterested in being responsible for active portfolio management.

Presented is the simple passive management that can serve my wife and family.

My last article generated some of the best conversations since I began writing for Seeking Alpha. Topics included Roth conversions and transfer of stocks from IRAs to taxable accounts. It seems many of the readers represented in these discussions have families that didn't share their interest in active investing.

Most agreed as to the importance of having plans in place should they not be able to actively manage. For many that will mean defining a Passive Portfolio Management Plan including composing step by step instructions on how that plan needs to be executed within their brokerage website.

The plan that I developed for our family contained guidelines for both active and passive Management and narratives describing why each step was important.

Feedback seemed to suggest that frankly, as originally presented, it overwhelmed many readers.

What follows this time is a much simpler set of passive management guidelines, which I believe can serve as an outline for a plan that may assist others in adopting a plan tied to their brokerage account pages and designed to meet your families' needs .

I strongly believe a foundation needs to be in place before such a plan can be executed, particularly if you chose to execute a plan supporting primarily or exclusively individual equities. For us that foundation includes:

  • Positions that have investment grade credit of BBB or higher.
  • 50% or more exposure to Defensive sectors including Utilities, Consumer Staples and Health Care.
  • Caps on percentages invested in each of the remaining Sectors with 10% being the norm.
  • Positions that are "recession proven" continuing to pay dividends without reduction as a result of the last major recession.

We have elected to set instructions with our broker that on the 1st of each month an amount will be transferred automatically from our IRA cash account((s)) to our personal checking account much like our pensions and Social Security.

Since we are subject to Required Minimum Distribution((s)), this amount will equal 1/12 of the amount required to be taxed and withdrawn from the account.

We have also opened a tax account in order to re-invest income from dividends not spent. This account will no doubt play a more important role in the future as amounts required to be withdrawn increase. That's a story best described at another time.

With the foundation just described in place I am confident our portfolio can be passively managed should the need ever arise by members of the family with little interest in investing.

In most months using our plan, only two short steps will need to be followed to insure all is well with our investments. These short steps can likely be completed in less than 30 minutes.

In rare occasions, additional steps outlined below will need to be taken only if it appears there has been a reduction in the amount of dividends/distributions received. These additional steps should add no more than an additional 30 minutes to the process.

Finally our Passive Management Plan requires a comprehensive annual review again following the steps outlined below:

Wells Family Passive Portfolio Management Guidelines

As a passively management portfolio, great thought has gone into what follows. Every effort has been made to make management as simple as possible. It is expected that a simple once monthly review will be sufficient in most cases.

Minimum Monthly Account Management Instructions

Our portfolio account((s)) have been set up with our broker to automatically transfer income from dividends received to our primary bank checking account on the first day of business for each month. This income is in an amount equal to 1/12th of each of our after-tax Required Minimum Distributions for the year.

Each year income received each month may change but will always be made in an amount equal to 1/12th the Required Minimum Distribution rate for the upcoming year. A call may need to be made to the broker to complete this action.


To assess the opening page of each of our accounts, simply sign into the Investment Account with Username and Password.

On the Opening Page, place your cursor over "Accounts" located on the top grey bar.

From there, you will see in bold the subsection: "Account Details".

Under "Account Details" you will find "Balances". When you click on "Balances," you will find this important subsection:

"Cash Available to Invest"

The cash account amount revealed should be thought of in the same way as the balance indicated in a checkbook. There needs to be enough in this account each month to cover the income payment set to be sent to our checking account the first of the month. Think of it like looking at your checkbook balance to make sure you have the funds necessary before making a withdrawal.

Once a month a review of this account should be scheduled on your calendar and conducted two days before the end of each month.

When the account is reviewed, as long as the amount of "cash available to invest" is greater than the amount of the income payment to be deposited a few days/week later on the 1st of the month, no further action is needed.

In the unlikely event that additional cash is required, Advanced Portfolio Management will be required.


It is strongly recommended there be a simple review of each dividend or distribution paid during the month.

On the Opening Page, place your cursor over "Accounts" located on the top grey bar. From there, you will see Bold the subsection: "Account Details".

Under "Account Details," you will find "Activities". This page records stock by stock the dividends paid over the past 30 days.

This list of no more than 20 holdings is a record of every dividend or distribution including both the date and dollar amount deposited for the month. The dollar amount deposited for each holding should then be compared to the amount of the printed "Estimated Income List" for that month prepared as a part of the annual review.

If the amount of the dividend/distribution is larger than what is displayed on the list, notes should be made in pencil on the list. Most of the time this simply reflects that the company has increased the amount of their dividend.

If the amount of the dividend is lower than the amount on the "Estimated Income List", the amount of the reduction will need to be recorded.

Advanced Portfolio Management Instructions

The following instructions ONLY apply when your monthly review has indicated a reduction in the amount of a dividend or distribution.

Selling a Position or Purchasing a New One


It is unlikely you will need to sell a position unless there is a dividend cut or reduction.

Should you need to sell, open the "Accounts Holdings" page.

Find the stock ticker on the left of the company you need to sell.

Place your cursor over the ticker and a box will appear.

In the lower right hand corner of the box, you will see the grey button "trade," which you will then click on.

Under the word "action," you will find the word "select" with an arrow pointing down.

Click on "select" and the words "buy" and "sell" will appear.

After clicking on "sell," you will notice the stock ticker for the company you are selling.

To the right, you will notice the word "Quantity".

Since you are selling the company completely, simply check the box "sell all".

On the next line down, you will see the words "order type."

Click the arrow under the word "select." Scroll down to and then click on the word "market."

Next scroll down to the blue button "Preview order."

Just above the blue button "submit order," you will find the estimated cash that will be available to re-invest following the sale.

Click the blue button "submit order."


Every time you sell a position because of a dividend cut, the dollars received from that sell needs to be re-invested into one of the two positions established for that purpose: the utility fund - XLU - or the U.S. Treasury Fund - TLT.

Open the "Accounts Holdings" page, see instructions above.

Find the stock tickers XLU and TLT on the left.

Place your cursor over each of the ticker and a box will appear. In the box is the dividend yield for each.

After checking both, pick the one with the highest yield.

In the lower right hand corner of the box, you will see the grey button "trade," which you will then click on.

Under the word "action," you will find the word "select" with an arrow pointing down.

Click on "select" and the words "buy" and "sell" will appear.

After clicking on "sell," you will notice the stock ticker for the company you are buying.

To the right, you will notice the word "Quantity".

To the right, you will find another box, which contains the name of the company and the price of each share of the same company.

Divide that amount into the number of dollars you are re-investing.

Round to the number before the period.

Place this number in the "Quantity" box. This is the number of shares you are purchasing.

On the next line down, you will see the words "order type."

Click the arrow under the word "select."

Scroll down to and then click on the word "market."

Next scroll down to the blue button "Preview order."

After reviewing the order is correct, click blue button "submit order."

Annual Portfolio Cash Flow Assessment - One to Two Hours

At the end of each year, an assessment needs to be made regarding income generated by the portfolio during the year past. Since this assessment will guide the amount of dividend income you will receive each month in the upcoming year, I recommend it be done in tandem. This assessment is an important part of a larger annual budget assessment. In general, your assessment will examine the following:

  • How much the portfolio income from dividends has grown or dropped.
  • Any loss of income after sells and repurchases from dividend cuts or mergers.
  • The amount of Required Minimum Distributions directed by the IRS to be paid during the upcoming calendar year. Remember, it is important that expected dividend income for the next year exceed this amount. In the unlikely event of this not happening, further action will be necessary. According to current projections, this is not likely to occur until at least the year 2020.

There remains one final end-of-the-year management action: Ensure that the Portfolio Cash Account a.k.a. "Cash Available to Invest" begins every calendar year with an amount of $3,000 or above.

I hope we added both simplicity and clarity to our approach in what we just presented.

Once again, it's time to hear from you. How many of you with Dividend Growth portfolios have comprised such plans? How many of you with ETF Portfolios have constructed passive management plans?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.