Friday, September 3, 2010

Investment Thesis


Saving and investing my money is of the utmost importance to me.  As a mid 20 year old, I plan on slowly, and over a period of years, adding to my positions in numerous securities in order to realize a passive income greater than my cost of living.  The reasons for doing so are

(1) Create a stable and lasting income stream, preferably before reaching retirement age of approximately 65, that can be used for both living expensives and enjoyment

(2) Gain financial independence, before retirement age, so as to be free from the constraints of debt and paycheck to paycheck living, while allowing myself opportunities to change locations, spending habits, and jobs / salaries at will.

(3) To provide for my family both during my lifetime and after I have passed


Reaching these goals will take the better portion of my lifetime, but I am confident that with a disciplined investment technique they can be achieved.  By starting young, in my early 20’s, I am taking an aggressive approach that will be mitigated by my long time horizon, approximately 40 years.

My allocation goals are to be 80% invested in equitys, and 20% invested in fixed income securities


My equity investments will focus on a selective contrarian approach with an emphasis on high quality dividend paying stocks, bought during downtowns where the prices are low.  There are numerous reasons for this strategy.

(1) Dividends account for roughly 40% of average annual returns since the 1920’s

(2) Reinvested dividends have accounted for roughly 90% of total stock market returns since 1871

(3) By focusing on strong companies with durable competitive advantages, I can trade infrequently, rarely selling, saving myself commissions and capital gains taxes.  This will also lower stress levels as I will not be affected by the volatile swings of any market.
(4) This strategy allows me to increase my wealth base in two ways, dividend payouts and capital appreciation.  This is a better strategy than counting solely on capital appreciation for wealth building.

(5) Divident payout will create a stream of income that does not require me to sell off my assets in order to realize my gains.  And if I can reinvest at least a portion of my dividends, this will lead to exponentially ever greater wealth while preserving my investments. 

The second half of my equity investments will be directed towards low-cost indexed mutual funds.  This method has been shown over the years to be one of the best ways to grow your wealth.  I only need to continually investment my set monthly amount, with no worries about prices or fees or diversification.

Fixed Income Investments

By allocating a portion of my portfolio to fixed income investments, I can preserve capital while hedging myself against swings in the market.  My fixed income portfolio will consist of

(1) A MMA or high yield savings account that preserves capital for emergencies

(2) A mixture of municipal, corporate, and treasury bonds, in conjunction with or through low-cost index funds

(3) A CD ladder that will renew yearly


In order to be as tax efficient as possible, I plan on using three separate accounts to hold my investments.

(1) An employer sponsored 401(k) plan, that will be maxed out to gain the highest rate of return from my employer, while also lowering my post-taxable income.

(2) A Roth IRA, composed of a mixture of low-cost index funds (both stocks and bonds) and individual securities.  I will strive to reach the government mandated maximum contribution levels, allowing my investment to grow tax free, and my withdrawls to be taken tax free.

(3) An individual account to be used when both my 401(k) and Roth IRA maximum contributions are reached, or when I feel I would like to have some securities at my disposal before the age of 65.  Since I started investing early and aggressively, I plan on reaching financial freedom earlier than most, and will need to have some wealth I can tap into before retirement, or if an emergency arises the requires substantial capital.


I hope this give you a better idea of who I am financially, and whether this blog will be in line with you and your goals.  If it’s not, I recommend reading anyway, because an alternative point of view is a necessary part of decision making. 

Keep Saving,

The Dividend Pig

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