What strategy should I follow for buying stocks?
Now that I have some positions open, how do I balance them?
How to think about growing my portfolio with a coherent strategy?
Those were the right questions I had in mind before setting the standards that became Core <> Satellite. C&S for briefness.
Means to an end
I hear the S-word a lot as I navigate the world of Product Growth.
Sometimes I feel the word lost its true meaning, so here's a refresher.
Strategy is the means to an end.
With a clear objective, the what, strategy is the set of actions and constraints on a timeline that we believe will get us there, the how.
Ok PJ, so what's the goal?
Financial Freedom.
What does that mean, can you be specific?
Instead of articulating a magic number, I'll give you the wisdom of the Oracle of Omaha.
What appealed to you about being rich?
I like to be independent, I want to be able to do what I want to do every day, and money let's you do that.
How much net income do you need per year to feel that way?
$40,000? Then you have to be 1M invested.
The rule of thumb here is to multiply the yearly withdrawal by 25, and you’ll have your V1.0 Financial Freedom goal based on the 4% rule.
It's not perfect, it's a great starting point.
For the life I'm designing, I want my passive income engine to match that number.
Will it come 100% out of the investment portfolio?
Probably not, and that's why I'm structuring a Product Ecosystem to support that mission.
Investing is just one initiative toward Financial Freedom, not the silver bullet.
I consider the next 35 years as my investment horizon, this is the long-term game I play.
Risk profile
Investors must go through a risk profile assessment before starting their journey in the markets.
My risk appetite is wild when running product growth experiments. It's going big or going home.
On the other hand, I'm quite risk-averse when it comes to money.
The investing habit
You will find a lot of arguments questioning the effectiveness of dividends for long-term investing, like this in-depth analysis by one of my favorite analysts Ben Felix.
I remember when I first received a cash payment from Apple, 0.04 cents.
Peanuts, yes, and it felt like magic. That reward was vital for my investing habit.
The goal is not to buy some stocks, the goal is to become an investor.
Once I started seeing myself as an investor, the habit of putting money aside became natural and the monthly dividend income is the reward that reinforce the habit loop.
Behind every system of actions is a system of beliefs.
Allow the strategy to shape your identity.
Now let's get into the specifics.
65% Core and 35% Satellite
Before you continue, check my portfolio structure for context.
Two simple rules for Core
1. High dividend yield
2. Varied asset classes
The Core is about ETFs, boring and stable. I love it.
You will see I'm into the broader market, the international market, REITs, and high-yield dividend ETFs.
Three simple rules for Satellite
1. Buy good companies
2. Don't overpay
3. Do nothing
— Terry Smith, Founder and CEO of Fundsmith
For me, this is the basis of Satellite exposure.
And what does that mean?
Well, sometimes a month will pass, and I didn't open my portfolio at all.
Daily volatility doesn't matter because I'll do nothing anyways.
It's hands-off and stress-free. As simple as it gets.
PJ, what makes you say those companies are good companies?
Right question that deserves a complete post. Not a discussion for now.
Satellite also pay dividends
ENB, JPM, VICI are high-yield companies with wide moats that are part of Satellite.
Those positions help increase the overall portfolio yield.
Crypto exposure
Yes, I got into crypto too.
Not gonna lie, I'm deep red and I regret. It is what it is.
5% of the Satellite portfolio for crypto is what I'm comfortable with.
Enough to keep my FOMO under control.
What to expect from this system?
I primed you with my end goal, risk aversion, and dividend passion for a reason.
Core <> Stellite is designed for reduced volatility and steady passive income.
This is reflected in the leading metrics I monitor quarterly.
Metrics I look at
Note that all metrics in this section relate to the Core portfolio, and that is because as I follow the three simple rules of Satellite, I don't care much about what happens there.
1. Dividend Yield — Lead indicator
This is the foundation of the strategy. Your yield is how much you get back.
I use Joseph Carlson's Qualtrim tool to monitor the aggregate number.
My target is between 3.2 and 3.8% yield. I'm currently at 3.71%.
2. Dividend Growth — Lag indicator
Dividend growth YoY is my favorite metric because it shows the compound effect in action. Q2 2022 closed at 204% YoY growth.
3. Total Invested per month — Lead indicator
Tracks the commitment to the investing habit.
Some people will track portfolio size only to be frustrated when a downturn happens.
Measure backwards and live on the gain.
I use this metric to set quarterly targets during Think Weeks.
4. Total Gross Dividend — Lag indicator
The sum of dividends received is the north star metric that goes up and to the right.
I track pre-taxes fro simplicity. Keep in mind you will pay taxes on dividends. Check how it works in your country.
In Poland, while the nominal tax for a sole trader company ranges around 19 to 23%, dividend taxes are kept at 13%. I won't complain.
This is not financial advice
I am sharing this with the wider community after countless conversations where I didn't have the proper language and visuals to articulate my strategy.
Now I have it, and it's my gift to others next time the topic comes up.
After all, I'm just a fool dreaming about financial freedom.
This is by no means financial advice.
My money where my mouth is
Bookmark my portfolio, it's automatically updated.
As always, I'm a couple of clicks away available on LinkedIn and GrowthMentor.
Feel free to challenge and ask.