Investing Strategy

Okay here is my game plan!

As of today, in my brokerage account I have 3 mutual funds, 1 ETF (exchange traded fund), and 5 individual stocks.  At least as regards this account, I do not intend to purchase any more mutual funds.  

Side note:  There is a lot in the press about ETFs and mutual funds and frankly I can't say whether one is better than the other.  At Vanguard you generally need to have a minimum investment of $3,000 to open a mutual fund whereas you can purchase a share in an ETF just like you do with individual stocks.  Right now I don't have $3,000 laying around that I want to use for a new mutual fund (nor do I want to go into savings for it) so ETFs are going to be a main vehicle for me to invest my money.  I will say that ETFs do tend to have lower expenses.  However, Vanguard offers certain mutual funds, called Admiral funds, where the expenses are the same as the ones in the corresponding ETF.  But you need to have an investment of $10,000 to go into the Admiral fund.    

My REIT mutual fund is an Admiral fund so those expenses are low.  (The STAR mutual fund doesn't have an option for an Admiral fund so that's moot.)  However, my Energy mutual fund doesn't have a big enough balance for it to be converted to an Admiral fund.  While I won't be adding any new mutual funds to this account, I do intend to increase my holdings in the Energy mutual fund so as to go above the $10,000 balance and have it convert to an Admiral fund with lower expenses.  (Lower expenses means I keep more of my money!)

I am particularly keen on the energy sector.  Yes it is being beaten up right now with the oil price so low but it is a sector that is extremely important to the world economy (and to just having a nice life!  Heat!  Electricity!  Plastics!).  Since I have a long-term horizon for investing, I will be making investments into the Energy mutual fund (and possibly some stocks) while prices are low.  

[Oil (and gas or let's just call it energy) are commodities. Commodities have cycles.  Well more like roller coasters.  It's down now but it will go back up.  Tomorrow, no.  Next year - possibly.  In 10-15 years - yes probably at some point during that time frame it will go a lot higher.  I don't need the money right now so it is best for me to focus on the far, far away future.]

Moving on....let's talk about what a perfect day looks like!  I've decided to focus a bit (or a lot) on dividends.  I mentioned before that it would be great to get the portfolio to the point where it generates a few hundred a month in dividends.  That's real cash - or income - that could be used for basic living expenses or for something fun.  I've decided to focus on fun :-)

For a lot of the purchase I make, I am going to translate them into how that would impact a future perfect day.  For example if I will receive $20 in dividends from one stock in a month (or $60 in a quarter), well that $20 can buy me...insert something.  This way the investing becomes more tangible.  And the best thing about dividends is that you don't sell the underlying stocks/shares.  So as long as the company doesn't cut the dividend, you'll get the same amount (or more) the next month or quarter.

And the more dividends I receive, the more perfect days I'll have in the future.  Win-win!

With this in mind, I will be investing in Vanguard's High Yield Dividend ETF (VYM) as well as in individual stocks.  VYM's most recent quarterly distribution was $0.60/share or $0.20/share on a monthly basis.  Sticking with the same example above, if I had 100 shares of this ETF I would receive $60 each quarter. Take that and give myself $20 each month and well that dividend would pay for a nice simple lunch.  Not bad although it does take time and a lot of money to get to 100 shares.

I am still looking into additional individual stocks that I want to buy.  I do not want to have too large a portfolio at this point.  I have 5 stocks so I could see myself increasing it to 15.  Not all in the same year since I do not have a lot of cash and I also want to invest more with the current 5 stocks.  

I will also invest in some index-type ETFs namely to have exposure to the total stock and bond markets (U.S. and the rest of the world).  That ends up being 4 additional ETFs.  The money that will go into these ETFs are more "set it and forget it."  They track so many companies/sectors that there is significant diversification.  Of course I won't completely forget it but it will be fairly mindless on my end.

On a final note, I wanted to just mention spending vs. investing.  For a variety of reasons, I am really trying to get myself out of a spending mentality.  (Not that I spend that much....)  There is very little I need and I should be at the point where I am comfortable with what I have.  So instead of seeing a pair of shoes and thinking "oh they're nice!" and whipping out my credit card (paid off in full each month but still...), I want to be transferring little bits of money here and there into the brokerage account.  I believe that if I can do this, I will quickly grow this account.

Not bad, not bad - at least I know have a plan!

Pru