Setting up a portfolio

To take my investing to the next level, I have decided to build a small portfolio using real money. I will gradually add companies to the portfolio, write theses on them, and track their performance and the performance of the portfolio over time.

I do not have a huge amount of experience with portfolio management, as in the past my portfolio has been too small to get too picky about position sizing – it has mainly revolved around making sure I am adequately diversified and not too big in any really risky stocks.

This will be the first time ‘managing’ a portfolio publicly so I have decided to keep it simple (see ‘The Rules’ below). I don’t want to sell my entire existing portfolio to start this experiment, as I feel the companies I already own have good prospects (no sense shooting myself in the foot) and with some of them I relied on other people’s insights to get me started.

This time I will be relying entirely on my own research, although I am perfectly happy to get a tip from a colleague and use that as a starting point.

The Goal:

  • To beat the ASX200 accumulation index, S&P/ASX200 Net Total Return (ASX: XNT), over the next 3-5 years.
  • To beat the ASX Small Ordinaries accumulation index over the next 3-5 years. – if anyone can recommend an easily trackable index for this, id appreciate it.
  • Stretch goal: To earn returns of 8% per annum on average over the next 5 years, excluding franking credits.

My ideal end date is in 5 years time, however by 3 years it should start to become obvious if my selection process is sound (or not!).

I have chosen both the ASX200 and the ASX Small Ordinaries index for the benchmark as I am uncertain what the average size of company in the portfolio will turn out to be. After a while, I may decide that one index is more appropriate and use that as my official benchmark. I will however track both indices over time just for comparison purposes.

I will also track the S&P/ASX200 (ASX: XJO) index and the S&P/ASX SMALL ORDINARIES (ASX: XSO) index. This is the 200 largest stocks, and the ASX300 excluding the 200 largest stocks respectively. This should let me compare my portfolio to the ASX mid-large caps and small caps respectively.

The Rules: 

I will construct a portfolio with $5,000 of seed capital; this will be enough for a maximum of 10 positions at ~$500 apiece.

I will also cover brokerage (~$15 per trade) plus a few extra dollars since it’s usually hard to buy a flat $500 worth of shares.

The portfolio will be built over the next few years, and held for 5 years total from the date of the first investment, ending in 2022.

It will have a maximum of 10 positions when complete, and no less than 7.

I will include brokerage fees in my cost base, but exclude taxes, franking credits, interested earned on cash (probably), and other costs – e.g. this website – from returns.

The start date will be from the day of my first purchase (edit: this was 30.03.2017) . At this point I will record the value of the above benchmark indexes on the portfolio page.

At least 80% of the portfolio must be profitable, at least on an underlying basis, or have very good prospects of becoming so in the next 12 months.

All companies in the portfolio must pay a dividend, or be likely to do so in the next 12-18 months.

Due to the way that my broker rounds amounts, some shares might have a recorded buy price of (just say) $2.0271 per share. When I list the prices I bought at, I will round to 1 decimal place. However, when I track my results and performance over time, I will use the total buy price (E.g. $514.95) not the price per share, for greater accuracy.

I haven’t decided whether to include returns on cash held or not as part of my total returns. It would be fair to do so but since I am accumulating the cash over time (i.e., it is not just sitting there) at the moment I think it would be a waste of time to include.

The Strategy:

I am style agnostic, and will own anything regardless of size or market capitalisation. Generally speaking I want to own profitable companies (see ‘The Rules’ above) with dividends as this gives me a better shot at achieving the type of returns I am looking for over the target period.

Additionally, in between my current direct shareholdings and an investment in a fund, I already own several attractive high-growth stocks (many of them unprofitable or not paying a dividend) on the ASX.

So while I might own anything in the portfolio, I likely won’t be owning too many highly priced growth stocks. I also will not own companies that I already hold in my personal portfolio (which is not a part of this experiment).

I don’t mind a spot of value investing, and the first couple of companies I have in mind as possible buys are value-type investments.

I will update this page as necessary to add further clarification.

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