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06 September

Setting Up a Model Portfolio

A little while ago I made a post about tracking income per 'unit' of a portfolio. My reason for that was that I wanted to be able to track the growth rate of income generated by my portfolio. Using this information and using the growth rate of our expenses I should be able to tell if the growth in our investment income is exceeding the growth in our expenses. If we can have that happen consistently for a few years and if we can build our total investment income to exceed our expenses we will have reached the state of financial independence which is our ultimate goal.

I think I found a problem with the way that I proposed tracking investment income growth. The problem stems from the mix of investments in our portfolio. I have had my discount brokerage account open since March, 2003. It wasn't until about a year ago that I changed my investment goals to focus on income rather than simply beating the index and my managed account. Since I didn't want to sell the stocks I already had (which did include some banks) so that I could buy stocks that paid dividends or distributions I have been using any new money to either add to positions that I already had or to buy some new stocks. So this has meant that our asset allocation has been changing over the last year or so. If I strictly look at the income per unit our portfolio is generating and if I try to follow the growth in income per unit per year I am not going to get an accurate picture because a higher and higher percentage of the portfolio is generating income.

I think the only way to get an accurate picture of what to expect is to come up with a model portfolio. The model portfolio will be a collection of stocks that pay dividends or distributions. This model portfolio will basically be the template or the goal portfolio that I want to eventually get to. It will contain the stocks that I want to own in the amounts that I want to own them. So for example if I wanted to get $160 dollars a year from Royal Bank in my goal portfolio since Royal Bank pays out 40 cents a quarter (or $1.60 a year) in dividends currently I would want to own 100 shares of Royal Bank in my model portfolio. I currently have a rough outline of a model portfolio but I haven't been using it to really track income, I have been using it to mostly look for entry points on the stocks that I want to own. I need to clean that stock list up a little bit and post it as my 'model portfolio'. I think I will even go to the point of calculating taxes on my model portfolio since it probably isn't going to be as straight-forward as just having dividend income, there will be some interest income as well as capital gains in the portfolio.

Next week I will try to post a first attempt at a model portfolio. This model portfolio will attempt to provide income of around $3500 a year through a combination of dividends and distributions. I hope to pick stocks that will grow the income generation by between 5% and 10% a year. That may be a little optimistic but if the last year is any indication it should be possible.

posted at 20:56:59 on 09/06/06 by 0xCC - Category: Model Portfolio


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