Introduction to our Fantasy Portfolio

January 13, 2015 |

Here at Stock Rover we’ve decided to undertake a new and exciting blog-based project: we’re going to build a fantasy portfolio, from scratch, and then track it over time. We’re going to treat it just as if it were our own portfolio full of our own dollars, instead off full of Stock Rover fantasy money. That means we’re going to start with a specific investing goal, find companies to fit that goal, do in-depth research on the companies, and then monitor them over time.

There are many considerations to take into account before beginning a portfolio, including:

  • Will it be in a pure style or a mix?
  • What’s the risk tolerance?
  • What size market caps will it contain?
  • What’s the timeline for the portfolio?
  • How much money are we putting in?
  • How many stocks do we want to buy?
  • How much sector diversity do we want?

The answers to these questions depend on each investor’s personal goals. Here is what we decided to do:

Style

A pure-style portfolio sticks to one type of investment strategy or style, like growth or value, whereas a mixed style would combine different investing theories. We’ll be creating a pure style portfolio, for a couple of reasons. First, for educational purposes, we wanted to supply our readers with a strong sense of the basics of a few different styles. Second, this isolates the strategy so we can measure it against the market, and thus better judge the effectiveness of the strategy. With a mixed-style portfolio we would lose this ability.

Type

There are many different types of strategies to choose from, including dividend growth, dividend yield, general growth, value, etc. At Stock Rover we are fans of the dividend growth strategy (note this is different from a dividend yield strategy), because historically it has done well and it offers growth in the form of both price appreciation and increasing dividends. And, like many investors, we like that the dividends provide some intermittent income along the way. We’ll discuss all of these points in greater detail in a later post.

Risk Tolerance

As this is mainly a learning portfolio, we are going for a risk tolerance at the lower end of the scale. While we want to assume some risk (i.e. we won’t just be buying bonds), we will shy away from high-risk companies. Our aim is to build a strong portfolio over the long term and gain wealth in a slow and sustained way, not to strike it rich with, say, penny stocks.

Market Cap

While we could technically choose anything from nano-cap to mega cap, we decided on large caps, because we’d like to go for companies that are well-known, that analysts follow, and for which there is adequate news coverage. Additionally, looking for dividend companies that are not high risk means that small caps will be all but excluded from our portfolio. If you are interested in small caps, we offer tips for finding the good ones in our Finding Great Small Cap Stocks webinar.

What’s the timeline for the portfolio?

As I mentioned before, we want to build a portfolio that’s strong over the long term, where you can put away a good chunk of change and build for retirement, provided that retirement is at least 10 years away. If you are closer to retirement, the general recommendation is that you put more in bonds, and less in stocks, but this could still be used as the portion of the retirement portfolio that is allocated towards stocks.

How much money are we putting in?

We’re going to start with $100,000, a nice round number that’s easy to remember.

How many stocks do we want to buy?

With our $100,000, we’ll be buying around five to eight stocks, putting around $12,500 to $20,000 into each stock.

How much sector diversity do we want?

Given we’re looking at five to eight stocks, we’ll aim to have around three to five sectors. Our primary focus is going to be to find strong companies, without searching from specific sectors. Once we have a good set of candidates, then we’ll choose a few in each sector for a little bit of diversification. If we pulled all our stocks from the same sector, then we’d leave ourselves open to risk if that one sector goes down. To hedge against this, we’ll spread it out, and aim to have no more than three stocks in any one sector.

Our New Fantasy Portfolio

So, given everything above, we’re going to start looking for large cap dividend growers across three to five sectors. We’ll start with $100,000 in cash, though the value of the portfolio will hopefully grow over time.

In the next installment, we’ll look at the category of dividend growth more carefully so we can fully understand our selected style before proceeding to finding stocks.





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