TDO Investment Process STEP 1 – Goal Setting

A conceptual look at life or business goals, with similar concepts.

This is the first in a series of articles elaborating on The Dividend Observer Investment Process.

The first step in developing an investment plan is to realize what your goals are. As the saying goes, “You’ll never get to where you want if you don’t know where you are going.” The same is true in investing. Investing is mainly about reaching your goals, so it is really important to make sure GOALS are known from the very beginning.

A conceptual look at life or business goals, with similar concepts.

A conceptual look at life or business goals, with similar concepts.

Determine Your Goals

The first thing to do is determine your Risk tolerance, the type of portfolio you want and define the rate of return you desire. These are essential to successfully reach your goals.

What is my risk tolerance?

Risk tolerance is an important component in investing. Every investor should KNOW and understand his/her ability and willingness to embrace big fluctuations in the value of his investments.

Let’s take a look on different risk profiles that I have seen on the web.

  • Conservative: Your Primary goal is capital preservation. Your tolerance for volatility is low and you want for a predictable flow of income.
  • Moderate: You seek a regular flow of income and stability, while generating some capital growth over time. Your tolerance for volatility is moderate and your primary goal is capital preservation with some income.
  • Balanced: You’re looking for long-term capital growth and a stream of regular income. You’re seeking relatively stable returns, but will accept some volatility. You understand that you can’t achieve capital growth without some element of risk.
  • Growth: You can tolerate relatively high volatility. You realize that over time, equity markets usually outperform other investments. However, you’re not comfortable having all your investments in equities. You’re looking for long-term capital growth with some income.
  • Aggressive: You can tolerate volatility and significant fluctuations in the value of your investment because you realize that historically, equities perform better than other types of investments. You’re looking for long-term capital growth and are less concerned with shorter term volatility.

Given the definition of risk profiles above, my risk profile is best suited to BALANCED which means: You’re looking for long-term capital growth and a stream of regular income. You’re seeking relatively stable returns, but will accept some volatility. You understand that you can’t achieve capital growth without some element of risk.”

What type of Portfolio am I looking for?

There are over 250 listed companies to be chosen in the Philippine Stock Exchange (PSE). These companies are classified in such a way similar businesses are grouped together, making it easier for the investor to compare listed company and make prudent decisions. There are six sectors in the PSE namely, FINANCIALS, INDUSTRIALS, HOLDING FIRMS, PROPERTY, SERVICES and MINING-OIL.

To reduce the investment risk, oftentimes we heard the proverb Don’t put all your eggs in one basket. Dropping the basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg, but less risk of losing all of them.

In view of this, I am looking for a stock dividend portfolio selected from different sectors that consistently provides a passive dividend income for the last three years (minimum requirement).

What kind of rate of return am I looking for?

Since my debut in the world of stock market, the Philippine Stock Exchange Index (PSEi) has a CAGR of approximately 25.50% while the top 5 dividend stock for the same period (as shown in my research published previously) has an average CAGR of 49.48%. Though, this is not a guarantee that for the next few years a similar return will be realized. It’s difficult to predict what kind of returns will be available over the next generation.

 I decided that my rate of return MUST be 15%. At this rate, when compounded annually, I will be able to double my investments in five years. The CAGR of 25.50% and 49.48% mentioned above is likewise on a five-year period; hence my target rate of return seems to be reasonable.

 

THE DIVIDEND OBSERVER GOAL

 One of my Goals is to build a FREEDOM FUND portfolio.

 What I mean by a freedom fund portfolio is a portfolio that provides me and my family with more dividend income than our expenses. With the freedom fund portfolio, it does not ONLY supply the needs of my family but also to support my dream MAKISABAY FOUNDATION – a foundation that will help improve the lives of the poorest of the poor Filipino.

To achieve this, I will:

  1. Only invest in companies I understand
  2. Only invest in companies that are leading in their sector
  3. Only invest in companies that have strong fundamentals
  4. Buy only companies that are selling at a discount
  5. Buy only companies that will generate a reliable and growing stream of income from dividend
  6. If a company cuts its dividend, then immediately sell that stock and move money to another dividend growth stock

 In the next post in the series (STEP 2), I am going to talk about on how I do an initial screen for my dividend stock FREEDOM FUND portfolio.

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