Implement a mutual fund strategy yourself – Sarasota Herald-Tribune

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After more than half a century of experience, I know of no investment vehicle that can rival common stocks as a way of accumulating wealth. Yes, investing in equities does entail having to deal with a degree of risk, although that risk can be minimized. What is stomach-churning to many investors is the volatility of the markets, which has been exacerbated of late.

However, market volatility is not synonymous with risk. More specifically, do not confuse risk with daily price fluctuations by either the major equity indexes or the prices of individual shares of stock.

Other than offering you a lower entry point or the opportunity to lower your average cost, daily price fluctuations are meaningless to a long-term investor. Yet, investing for the long term does not mean you ignore your investments. What it means is that you strive to separate the wheat from the chaff. In doing so you learn what a company is worth and why, and therein lies the key to it all.

Keep in mind that if Wall Street is nothing else, it is the world’s greatest equalizer. As a result, over time the price of most any reasonably successful company’s stock manifests a judicious resemblance to its worth. This worth can be estimated in part by a company’s dividend performance. My oft-repeated guideline is 10 years of uninterrupted dividend increases brought about by annual organic revenue and earnings growth.

Meanwhile, I have received dozens of letters asking why I do not recommend a “dividend mutual fund.” For example, a fund whose prospectus states that it adheres only to purchasing stocks found in the Dividend Achievers Handbook or from among the Aristocrats (a group of companies with a long history of paying dividends.)

While there are numerous mutual funds that claim to use dividend-paying stocks as their primary investment strategy, I am not aware of one that strictly adheres to the 10-year rule. As a matter of disclosure, I have not looked all that carefully, since mutual funds are my least-favored or most-disliked investment, you pick.

Moreover, it is so easy to implement such a strategy yourself using Mergent’s Handbook of Dividend Achievers. There are 270 companies, according to Mergent, that have increased their dividends for 10 or more consecutive years. You do not have to, nor should you own shares in all of them. And you certainly do not have to pay a monthly management fee to a mutual fund to buy shares in those companies and simply hold them for you.

Doing so, in my opinion, would simply be an abdication of your investment responsibility. It is also unlikely that such an investment would yield anything but mediocre results. The reason is that by owning all of them, your return would merely regress to the mean of the entire group.

What you should do is to pick between 10 and 15, and certainly no more than 20, dividend achievers that meet your personal investment criteria and goals. Determine the intrinsic value by using an internet site such as ValuePro.net. If the intrinsic value is approximately 10 to 15 percent above the market price, then use those stocks to start a new portfolio or add them to an existing portfolio. In either case, you want to use a deep discount brokerage house.

However, be sure that your selections are diversified. It is possible to show mathematically that once you get beyond 15 diversified stocks in a portfolio, there is very little additional risk left that can be removed via diversification. Putting together a portfolio of 15 to 20 stocks via a deep discount brokerage house should generate a commission total of less than $100.

Furthermore, it does not matter how many shares of each company you buy. It is more important to purchase an equal dollar amount of each. That way each company will receive an equal weighting in your portfolio. Even if your investment budget only allows for a very few shares of each stock and you can only start with two or three stocks, building a portfolio along those guidelines is far ahead of not building one at all.

Lauren Rudd is president of Rudd International, an asset management firm. Neither Lauren Rudd nor his employees have plans to purchase any shares discussed within 30 days, nor is there any intended inducement to buy or sell any security. You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at (941) 706-3449. For back columns go to www.RuddInternational.com. Lauren Rudd offers commentary Thursdays on SNN Local News during the 5:30 p.m. live newscast.