Our contributing writer, Tim Parker, is a stock picker who’s built a basic stock portfolio. Here, he explains his stock investing strategy. If you’re interested in The Digerati Life’s take on stock market investing, you can review this post on how to beat the average investor’s returns.
Have you noticed what I have noticed? Maybe I’m in the minority but it seems that all the websites, financial news networks, and other financial media are quick to say that they cater to the part time or “retail” investor. In my experience they don’t.
I don’t know about you but I have a full time job outside of the investing world and if I were to sit at my desk and watch the stock tickers all day, I would quickly be unemployed. If I were to spend hours each day researching stock picks and P/E ratios rather than finding ways to increase my value as an employee, I would, again, be quickly unemployed.
While it is true that a good investor is always working hard to learn something new, I’m a teacher and in the world of education, if you aren’t improving your skills, you’re losing relevance in your field. If you have a full time job, you’re probably thinking the same thing.
Turn on the news and what do you see? People talking about Libor, futures markets, commodities, and day trading. How many “retail” investors have time to keep up with that? First, it’s important to remember that us “retail” folks can’t realistically expect to make thousands of dollars per week like the pros can. We don’t have the time nor the money.
Rules To Build A Basic Stock Portfolio
With the right expectations, we can still make money in the stock market but often, our expectations need to change. Here are some rules I follow when I buy stocks:
- We need to take at least a medium term approach. Hold stocks for a minimum of a year if possible.
- Buy stocks that have dividends so you’re sure to make money simply by holding a stock.
- Buy stock in large, solid companies or blue chip companies, so that if you don’t have to time to watch your investment during a given week, you won’t have to worry about these companies going out of business.
- Or for those who want to get immediate diversification, then mutual funds and index funds may be the much better approach.
My Stock Portfolio and Latest Investment Returns
While average investors should make sure their money is diversified adequately into various asset classes, there may be room in their investment arsenal for an individual stock portfolio (which should be a small part of a larger, diversified core portfolio). For those who subscribe to this philosophy, I’d like to introduce you to something that I put together using my aforementioned rules. My “No Hassle Stock Portfolio” is a small collection of stocks that uses these rules. Currently, there are only 5 stocks in this particular portfolio. They were all picked when they were undervalued. Some have made a lot of money and some remain undervalued. I did my research on these stocks and thus far, they’ve performed reasonably well (yes, and so has the DJIA 
). Here are the particulars:
- GE (General Electric Company) – 200 Shares @ $11.75
- HD (The Home Depot, Inc.) – 100 Shares @ $22.81
- BAC (Bank of America Corporation) – 200 Shares @12.89
- WEN (Wendy’s Arby’s Group Inc.) – 400 Shares @$5.38
- MRO (Marathon Oil Corporation) – 100 Shares @$33.48
The No Hassle Portfolio is something I’ve developed for myself, a retail investor. You don’t have to log onto your online broker to watch your stocks every day. You don’t have to try to make the impossible predictions of day to day market moves, and with dividends being paid on each stock, you are getting paid to hold the stocks. I expect to hold these stocks for 1 to 5 years.
While I recommend a 1 to 5 year holding period (at least), I also personally advocate taking some of the money out of a stock when it runs up in value, then buying it back when it dips. This will be noted as stock market timing — which has its critics — but it’s certainly one approach an experienced investor can take. I don’t sell the whole investment. As an example, if I own 500 shares that have gone up 25%, I would typically sell 200 shares and buy those 200 back when it goes down in value. This is as fancy as I’d get. Other than that, I hold on to the stocks.
The good news is that this portfolio has gained more than 20% in less than two months! Now there’s one other thing I try to do — and that’s to give back. I donate a portion of my profits to charity and I’ve encouraged anyone who develops their own portfolio to think about doing the same — perhaps to give at least 10% of their returns to a charity or worthy cause of their choice.
Copyright © 2009 The Digerati Life. All Rights Reserved.
{ 5 comments… read them below or add one }
@Tim – Is this the entire portfolio? Owning a portfolio with only five issues means you are taking on a scary level of risk. Also, have you considered tracking this portfolio using Mint or an equivalent service that will measure performance relative to a benchmark index? I’d be interested to see how you fare over the course of the next business cycle.
By the way, I have seen a large cap portfolio (one) built in a similar fashion that had delivered solid returns at significantly less risk than the S&P 500. It had about 30 issues and was well diversified among blue chips with some of the standouts being in the ‘sin’ industries – alcohol, tobacco, and energy. Of course, this was just the large cap stock portion of the portfolio, but its risk/return characteristics were solid.
I get that this is a kind of no-frills approach, but it seems to be a good idea to expand the number of holdings and include other asset classes and categories.
I read the above blog with great interest: going bottom up, I agree with the author’s comments on giving back: this is what life is supposed to be about – give much, and give often without the expectation of getting anything back.
As a Certified Financial Planner(tm) and financial professional for over 25 years, I find it both dangerous and faulty for those that are untrained in any area of expertise to be giving advice to others, especially an educator. You clearly state that you don’t follow the market daily as you are in your “regular job” focusing on being a better employee, not a better financial professional. Espousing that you “don’t have to watch your stocks every day” is a recipe for disaster – feel free to do it with your money, but don’t preach it to others. Recommending a generic holding period or designing a portfolio without the proper financial planning analytical tools is both foolhardy and dangerous. Would you teach your students part time after your regular job without the proper education and continuing education and accreditation? Do the world a favor…keep your day job and leave the financial planning and investment advisory services to the professionals…
@Neal,
Thanks for your feedback. You are right that we have to be more careful about making “recommendations” to readers. And Tim has cleared up the wording on this article to make sure that this is properly stated. I am very emphatic about saying that this site is used only for information and education (and many times to share my opinions, views and ideas), but ultimately, everyone who visits here should really do their own due diligence and make their own decisions themselves.
I also accept many guest posts on this site as a way to provide fresh perspectives on certain matters. But it doesn’t mean that I agree or endorse those ideas either. The ideas and statements made by guest posters are theirs alone and The Digerati Life may or may not necessarily agree with those statements.
As for “keeping one’s day job” — well, I believe that many investors and financial writers can properly do the same or even better job as many financial professionals if they so chose to get the accreditation for it. I don’t think that there’s any “rocket science” in finance. But I wholeheartedly believe that taking on a purely advisory role should certainly be done only after one acquires the appropriate qualifications for such a position (e.g. take the necessary tests, secure the proper paperwork, etc).
Again — personal financial blogs are really just a way for fans of personal finance to get together and discuss the topics of the day. We don’t tell you what to do, just “what’s out there”.
I’d like to speak more to what Michael is saying in his comment above. The individual portfolio SHOULD BE part of a larger, more diversified long term investment portfolio, in my opinion. At least, that’s what I have done. My personal philosophy is to have a “core and explore” portfolio, where the core portfolio is made up of mutual funds, index funds and such that represent all the major asset classes such as
- domestic equities (stocks)
- foreign equities (stocks)
- bonds
- cash
- real estate
- commodities/precious metals
- foreign currencies (maybe)
And beyond this, I *may* have an “explore” portion of my portfolio, which I simply designate as the place where my “play” money goes. If I have any bucks left over and I want to have some fun and take a gamble or so, I budget for it. Those funds may go to an individual stock portfolio (such as Tim has described above), where I can practice some stock picking. Or they may go to fund some stock trading or option trading endeavors, or perhaps a wild lead on an IPO here in Silicon Valley.
If the “No Hassle Portfolio” is one’s main portfolio, it is not well diversified and is something that could be quite risky to hold, even with dividends earned. I would think this portfolio is used to demonstrate some principles and rules that one investor follows in order to build their individual stock portfolio — but it would be wise to have this individual portfolio as part of a bigger, diversified one that addresses one’s financial plans as a whole.
For more information on my thoughts on portfolios, check out these articles:
On Stock Market Diversification
The Optimal Foreign Investment Allocation
When Beating The Stock Market Is Really An Illusion
It is true a small number of stocks can increase the risk. But, often individual stocks are a fairly small percentage of someones portfolio. If that is the case some concentration is not too risky. Often 401k’s don’t provide the option for individual stocks – I know mine is that way. Even though people are down on real estate now, many people have large net worth in real estate (which is part of their investment portfolio).
I agree 5 stocks is not a good idea for a substantial portion of someones net worth (say over 20%). I have a portfolio of 12 stocks tracked by marketocracy for over 5 years and the beta is lower than the S&P 500 while the annual return exceeds the S&P 500 by over 500 basis points. But I also would not suggest this for a large portion of my (or someone else’s) total net worth.
A huge factor is also your time frame. If you have only 2 years until you need to use the money. Then stocks is not the right place for that money (individual stocks or mutual funds).