DGI #3: Why build a portfolio?

With so many ETFs to choose from with <0.05% expense ratios (cost to manage the fund) as well as Mutual Funds – professionally managed by the “pros” why did I decide to commit to creating my own stock picks? It’s more work, involves more research and the most obvious element – time. With this piece, I’ll highlight when and why it’s better to invest in “selected” stocks vs ETFs vs Mutual Funds.

Return vs Costs

If you’ve been saving up money and plan to invest it, there’s many options to choose from – stocks, bonds, ETFs, Mutual Funds – and many others.

The latter two – ETFs and Mutual Funds tend to have Annual fund operating expenses with MFs having the highest “management” cost (generally).

When you buy a stock, you buy it at face value and it’s value may go up or down – but you own it no matter what. There are no costs in simply holding a stock – only taxes on it if you made gains or dividends while it is in your ownership/sell it.

Buy stocks or ETFs

For this bit, I’m going to leave out MFs and focus on only stocks and ETFs. Many people often ask the question – why not just put my money in an ETF which is so diversified that I don’t have to work for it or worry about it everyday?

While that may be true, the answer isn’t as straightforward. Investing is very individualistic. Each person has a unique set of goals with their finances and financial goals. Some want to buy low and sell high in a short amount of time with the aspiration of an immediate return while some will hold shares long term with the hopes that in the long run they will be able to sell them at a massive profit.

Some people invest with the sole purpose of parking their money in a place that “may” give them stable long term returns which they can use to maybe exit and buy a house, fund their kid’s education or use in retirement.

That being said, there is never a blanket formula that says one is better over the other. For the sake of comparison, I’ll highlight my financial goals and how with each goal, I have a different plan of action.

When I choose stocks?

To me, stocks offer flexibility to invest in what I can completely research, follow individually and manage expectations – I undertake the task of knowing whether the company’s stock I put my hard earned money in is good or not.

My financial investing goals are simple: build a portfolio which requires funding now to grow to a point after which it self sustains itself by growing on it’s own gains.

Elaborating further, by holding companies I have selected that earn atleast a 3% dividend payout on my initial investment and grow from there as time goes on, the dividend payouts will reach a large enough amount that I will no longer need to contribute to the portfolio as I am now.

As of writing DGI #3, the portfolio has a net growth yield of 11.17%/year and I am contributing bit by bit to it every week to earn a weighted average return of 3.6% in dividends.

That means by the time the portfolio crosses $25,000 it will start paying out (on average) $80/month. When the portfolio crosses $35,000 that number goes up to over $105/month and with every $10,000 added the number rises exponentially.

This growth is coming from stocks I personally hand-picked based on my research, expectations and risk tolerance – which means it may not be the best for you and vice versa.

Example: Buy a car or let dividends pay for it

Now if I were to buy a new car for $20,000 and enroll in a monthly payment plan for 60 months with a 2.5% interest rate, I’d pay about $342/month on a depreciating asset. What if I invested that same $20,000 let it grow over the same time period assuming a higher 4% dividend yield re-invested into the portfolio, that portfolio would be worth $24333 + whatever the market gain is. In 60 months (or five years), I made a net 21.6% gain while the car probably lost 40% of it’s value.

Imagine if you could effectively payout for a car based on just dividend income – wouldn’t that be so cool!

Now ofcourse, I’m not suggesting you to not buy a car, this is just an example. At this stage in my life, I have a cheaper, older used car which serves my purpose and instead of making monthly payments towards a car, I contribute to my growing portfolio.

I went off on a tangent there but it’s a good way of thinking outside the box. Case in point, this is why I’d invest in stocks.

When I choose ETFs?

Given that I invest in stocks, doesn’t mean that I do not invest in ETFs. There are some ETFs that I hold that are a collection of hundreds of companies I personally cannot manage nor have researched but I know collectively will earn me stable returns over the lifetime of ownership.

Holding these diverse high and consistently growing dividends is my long term plan and one that helps take the stress away from managing a retirement portfolio to be used in either a Roth or 401k.

Needless to say I value ETFs but I value them differently that I value stocks. While my requirement is to hold shares that earn me atleast a 3% consistently growing yield, there are some ETFs that don’t and some that do. Similarly, there are some shares that beat the 3% and some that don’t but the fact that I can choose which ones to keep and weight them accordingly helps me diversify my portfolio.

The goal is to reinvest every cent of earnings to grow the portfolio organically. Whether that be through ETFs or stocks is secondary but the primary goals each have and roles they play are set to my standards and goals.

Quick Portfolio update

Not much has really changed since DGI #2. The portfolio grew a bit and I did get earned dividends – which was less than a dollar – but it’s a start. I will be contributing more each week into the existing stocks I have with no new additions to the overall portfolio.

If you’d like to check out my portfolio, feel free to click the link below:

If you’d like to start investing using the same platform as I am – M1 Finance – feel free to open your free account and fund it to receive $10.