Monday, August 29, 2011

Refined Rules in Investing

As I go about investing, I'm slowly setting and refining rules for myself in how I go about managing my portfolio. These rules help in forming a quick first cut in the selection of stocks to include in my portfolio. The rules will also ultimately determine my portfolio performance and returns in the long run.

Recently, I've refined the rules for myself to reflect the greater weightage I've placed on dividend returns from a stock. These rules are meant as a rough gauge for myself, and by no means will I be following them very strictly, as there are many other factors that come into play in evaluating a stock or performance of a company. The general market conditions and sentiments will also determine how strictly I can apply these rules. During market downturns, I can probably afford to tighten the rules further as stock prices fall and intrinsic value increases.

Stocks
- 3% - 5% dividend yield
- Decent earnings growth over 5 years
- Generally PE < 15 (Blue Chip)
- PE < 10 (Small/Mid Caps)

Reits
- Sustainable 8% dividend yield
- Debt ratio of <35%

I expect a higher dividend yield from reits as they pay out most of their operating income and hence have little potential for self-funded growth in the long term. While they can take up more debt or issue rights to fund acquisitions, these either dilute the earnings or are not self-sustainable in the long run in the case of debt.

By having these quick and fast rules, it helps to prevent myself from overpaying for certain stocks. It also helps to give some certainty of return for my portfolio. I will continue to refine my investment rules as I continue down my investment journey. I will also be looking at defining some rules for selling of stocks.

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