Building an investment portfolio is something easily done yourself. True, there is a requirement for ongoing reading, reflection and planning so we understand what we are investing in, however the most potent factor for success is simply taking action.
Fear stops many people from investing - fear of ignorance, fear of loss of money, fear of failing, fear of not being smart enough, fear of thinking about money, fear of talking about money. Stop running scared I say to us all!
I have put together a simple way to build an investment portfolio step by step - it is just a suggestion only. Always do your own research because I am not a qualified financial adviser, I'm just writing all this to encourage people to educate themselves and to smash that stupid taboo of not talking about money.
I have structured this for Australia, because that's where I live and it is what I understand. However the principles are similar world wide.
|A simple home made morning tea for two.|
Step 1. Buy Some Income
Buying stocks (another word as shares or securities) in big companies that pay nice juicy, regular, fully franked dividends (franking means that the business tax has already been paid on the shares so you don't need to pay it again in Australia - cool!) is a prudent place to start. Dividends are income paid to you from these shares.
Even better is to buy shares in an old-school LIC (Licensed Investment Company) which will own huge bundles of shares in these healthy Australian companies and passes on the benefits of all its share holdings to us viz: diversification, full franking, dividend smoothing, share growth and share yield to its shareholders.
I can assure you that it is one of the most satisfying feelings seeing dividends getting paid into my account twice a year.
AFIC and Argo are two such old and wise LIC's that are worth considering. They pay dividends twice a year, the dividends are fully franked (30% tax already paid for us) and we get some growth in share value over time too. Owning these sort of LIC shares in turn gives us part ownership in scores of healthy high-profit Australian businesses.
While ever we are accumulating our portfolio (not retired) we would religiously reinvest all the dividends we earn by buying more LIC shares with the dividend money we receive every six months. Many companies and LIC's offer a DRP (Dividend Reinvestment Plan) where they will (with our approval) automatically reinvest dividends for us thus buying us more of their shares. This will save us brokerage costs as the company foots the bill for DRP share purchases.
Australia truly is the lucky country in that our laws state that if a company has paid tax on dividends (franking) then individuals do not have to repay this tax. This is why dividend investing is still highly achievable in Australia. Even if the stock market 'tanks' then dividends are still getting paid by LICs (I think some of the very old LICs only missed paying dividends in the dead of the great depression from memory). I use LIC's like Argo, AFIC and Milton in the same way our US folk here would use bonds in their portfolios .... as a stable, reliable income source within my portfolio that chugs along through thick and thin.
|Murder the enemy .....with scissors.|
Step 2. Squirrel At-Call Money
Always having money to cover six months worth of basic expenses is prudent. Without this 'stash', dipping into our investment portfolio would be necessary for survival if we lost our job or other source of income. Having enough money to cover the basics for six months means in the event of a significant life event, that every thing is covered. Dipping into an investment portfolio to cover basic costs is neither prudent or fiscally responsible.
As your portfolio grows, the percentage of at-call cash allocated should not exceed 10%. At-call money rarely does better than inflation and is a necessary evil rather than a true investment. It's power is that it will prevent us dipping into our investment holdings. There is rarely an excuse good enough to dip into our investment portfolio.
This at-call money needs to be held somewhere that we can quickly access it without compromising the principle lump sum, so a HIBA (High Interest Bank Account) or similar would be ideal. As long as we can get this money released in three working days, all will be well. Tying this money up in Term Deposits and the like defeats the purpose.
|A buffet-style breakfast for the family.|
Step 3: Pause And Automate
We could stop at this point and have a very respectable investment portfolio of 90% fully franked dividend yielding stocks and a 10% allocation to on-call cash. This truly is a respectable conservative portfolio for Australians. Just keep adding to it, let it grow and allow DRP to tick over.
At this point, making sure our money is automated is essential. Regular repetitive investing is the key to success (doing it - not just talking about it). Aiming for a minimum of 20% of our net income to be sent automatically via our pay office or as an auto transfer from our bank directly into our trading bank account is ideal. We would check our trading bank account balance monthly and as soon as it has a minimum of $5000, buy another parcel of stocks for our portfolio. Buying regularly smooths out the cost we are paying for our shares over the years and is know as Dollar Cost Averaging.
The next steps in building our portfolio will be how to expand it easily by adding a percentage of growth assets to our existing income (yield) assets.
To be continued............
Take care folks and stay nice.
Mr HM (Phil)