As a brief overview again of how my trust funds work:
- I set up individual trust funds for my nieces and nephews when they are around 11-12
- Every year I contribute $500 / each, they contribute $500 each, and then I match $500 more, for a total of $1500 / year
- I select 6 stocks a year and each niece or nephew selects 2 of them from that list (for about $750 / each)
- We make the stock purchase around September of each year; this gives them the summertime to earn enough money doing work or odd jobs to get the $500 for the additional match
- I watch the funds and if certain events occur and I think it is time to buy or sell a particular stock I will let them know and we can discuss and then I execute the trade. When this money is reinvested then sometimes we purchase more than 2 stocks at a time or we increase the purchase amount of each above $750
From a portfolio perspective, once you get to 10 or so stocks (assuming that they aren’t in the same industry) you have a reasonably diversified portfolio. Portfolio One (the longest term portfolio, at about 9 years) is at that state; the other portfolios may swing significantly in value based upon the performance of a single stock.
So it is now time for me to begin researching the stocks that I want to consider for my list of 6 stocks. Dan, our newest contributor here, asked in semi-jest if I just threw a dart at the dartboard. We are a little bit more sophisticated than that, although we realize that selecting individual stocks is a difficult business and not recommended fora large portion of your total portfolio.
Here is a mix of the principles that I use and what I look for in a stock:
- Value not Momentum – given that these are long term investments and I don’t want to terrify the kids with wide, gyrating swings I tend to look more at value type stocks and not chase faddish or momentum stocks
- Stocks I understand – I don’t expect them to fully understand everything (or I’d be forced to just let them pick from consumer products, which is a bad plan) but I want a stock that I understand. Sometimes when I understand an industry (like the financial industry) it is strongly tied to me NOT recommending stocks from that industry. I do try to explain every stock to them, what it does, and why it is on the list, because I want them to inspire to investing in this manner as they gain more experience over the years
- Seek international diversification – through ADR’s there are a large number of individual foreign stocks that can be purchased and I try to have half or so (all else being equal) of the stocks on the list as non US stocks
- Try to have a mix of large and smaller market cap stocks – there is nothing on the list that is typically less than $1B or so in market value but I want to have a mix of large and small stocks, especially since smaller stocks generally have more room to “run” than a behemoth
- Dividends are preferred – I don’t want a stock whose entire value is dependent upon a dividend stream but I think that paying some sort of reasonably large, regular dividend is associated with better management and dividends do make up a significant percentage of the return in the long term. On the other hand, high dividend paying stocks are likely to be hit hard should the tax laws on dividends be significantly impacted
Since Dan has joined and he is a pretty sophisticated guy (and I have some other friends whom ultimately I will try to twist their arms to join, too) I will put up some of the stock ideas I have in an earlier, less-final manner and see what I get in terms of comments and suggested alternatives.
I generally keep up to date on companies through the Wall Street Journal, Barrons (although I don’t subscribe to the paper version anymore because it got expensive), Investors’ Business Daily (which I periodically pick up, although their stock selections are usually too small and fast-moving for my purposes), Financial Times, and then the large general business magazines like Forbes, Fortune and Business Week.