I think it is time to revive my model portfolio. Since it has been about a year since I last posted about the model portfolio let me go over the goals of the model portfolio. The model portfolio is meant to track what would happen to income levels of a static portfolio from year to year. My main investment goal is to build up a portfolio of income generating stocks that increases from year to year at a rate at least equal to my personal rate of inflation.
"Personal rate of inflation" is another post for another day but the basic idea is that it really doesn't matter what the posted rate of inflation is. The posted rate might be accurate, it might not be accurate but it almost certainly isn't the right number for every single person in the country. So if you track your expenses from year to year over the long term you should be able to figure out how much more it costs you every year to maintain your lifestyle. This is your personal rate of inflation.
So getting back to my investment goals. I want to have a portfolio that generates enough income to support my lifestyle and increases that income at a rate at least equal to my personal rate of inflation. The problem is that I don't have a good idea of whether a specific mix of stocks is going to meet this goal. I also don't want to wait until I have collected that specific mix of stocks to figure out if there is a good chance that it will meet that goal or if it needs to be tweaked a little bit. I also want to know what happens to income generated from a model portfolio over at least one economic cycle, hopefully more than one.
So this gives rise to the model portfolio as another piece in the puzzle of financial independence. The model portfolio provides a way to track whether a specific asset mix will provide an income stream that increases at a minimum of our personal rate of inflation. I believe that it is very possible to have a portfolio of income generating stocks that increases the income it generates from year to year at a rate that significantly beats inflation. The hard part is getting to the level of income that will actually support your lifestyle.
Here is a recap of the posts I have already made about the model portfolio. I need to cover a couple more sectors (Health Care, Telecom and Consumer Discretionary) and the stocks in those sectors and hopefully I can have that done around the start of the year as well as provide an update on the income generated by this portfolio (and I need to come up with a better name because I don't want to give the impression that this is my actual target asset allocation because it isn't).
Model Portfolio Introduction
Model Portfolio Rationale
Finance Sector review
REIT Sector review
Pipelines and Utilities Sector review
Energy Sector review
Industrials Sector review
I think my goal in 2008 will be to provide at least quarterly reviews of/updates on the portfolio and maybe even do a little bit of an analysis of the earnings of a few of the companies in the portfolio.