The Purpose Of My Permanent Portfolio

On the first month of the year, I determine which of the Dow 30 stocks are the cheapest and highest yield-paying stocks. For those that are interested, here’s how you do it.

Take the the 30 stocks of the DJIA and order it by its Yield from highest to lowest. The top 10 are called your Dow 10. Then take those 10 stocks and order it by its trading price from lowest to highest. I prefer to do it by the December 31st previous year last trade amount, so I’ll know what to go into for the new year. Once this is done, the top 5 are called the Dow Low 5 since they are trading at the lower prices and the lower 5 is called the Dow High 5 since they are trading at the higher prices. The winner of the contest will get to learn more about this when you win the book. However, others can visit The Dogs Of The Dow to learn more about this specific system.

The system I use is slightly different than the rest. Normally, when investing into the Dow Low 5, you put in $1,000 on the first month and at least a minimum of $100 every month afterwards. There is talks of how this system of dollar cost averaging beats the market, but that’s furthest from my mind. My goal is to purchase the cheapest companies at the best price. My intention isn’t to beat the market, but to own great stocks at low costs!

So here is the system I use. I purchase $1,000 of the Dow Low 5 each month, meaning each stock receives $200 in January. Every month afterwards, the stock with the highest year-to-date loss, receives the $100 contribution. So for example, right now General Motors (GM) getting , so lately, this is the stock that has been receiving the $100 per month contribution so far with an astonishing -4.45% overall portfolio loss. So I’m picking up more shares each month. Last year in 2007, Pfizer was the company receiving the $100 per month contribution, and because of that, their dividends along have repaid me the commissions spent to purchase these stocks. As of this month, I have doubled the contributions to $200 from $100.

There’s another reason why I love this system. It seriously saves on commission costs. I am currently with ShareBuilder’s automatic purchase plan which charges $4 per trade. If I were to purchase all 5 stocks accordingly, I would spend $20 per month and $240 per year. With my system, I spend only $20 for the first month and $4 every month afterwards, bringing my total to only $64 per year in commission costs and a savings of $176 per year! As more stocks are purchased and dividends are reinvested, commissions for the entire are repaid with dividend within few months.

Purpose Of The Permanent Portfolio
It helps with my savings as I am to never cash out of these stocks as opposed to active portfolio. Since, I am looking to purchase my first home in 2009, I am looking to cash out of my permanent portfolio as well as other portfolios and savings, and use that money towards my first down payment. I understand that I will have to one day start from $0 again when it comes to my permanent portfolio, but I will be making an even grander investment into my first piece of property.

Also remember my previous post on how I may consider my permanent portfolio as part of my IRA?

Since my home is my only major purchase I expect, I hope to convert future savings to an IRA and possibly increasing the contributions yet again.

The Pros
Also, I ran some numbers on the differences between the significant differences on the contributions. If I expect to make 7% annually off of the market and contribute only $100 per month ($2,200 annually with the $1,000 beginning contribution), after 40 years my permanent portfolio will hold $469,941.05. That’s a pretty penny. Now considering if I contribute increase that contribution from $100 to $200 per month ($3,400 annually), I can see $726,272.54 by the time I am ready to cash out. That penny is even prettier. They are not adjusted by inflation. These numbers are not nearly accurate. In fact, they are seriously deflated. They do not include future companies that will be purchased as the Dow Low 5 changes and do not include the dividend payments and reinvestments of the companies. So with an expected 7% annual market return, I can expect much larger numbers than the numbers presented above.

The Cons
With any investment you have to realize the cons and the risks involved. Companies can go bankrupt, go out of business, then you’re left with nothing. Though some of these companies have been around for more than 100 years, you never know what the future holds. Plus the system I use, though I purchase more than one company, my monthly contributions places my faith and more risk towards the most beaten up company. I recognize these risks and want you to recognize them as well if you are considering following my system or the system of the Dow Low 5 as well. Make sure you make the most comfortable decision for yourself and not based off of what others do.

After explaining the purpose of my permanent portfolio and how it is and will be beneficial to me in the long run, maybe this is one step in your own financial progress that you would like to take. To help increase your long-term savings consider a permanent portfolio or even a lazy portfolio, which is very similar to the permanent portfolio but mainly surrounded around investing in index and mutual funds where someone else handles your investments. Either way, long-term rewards are due your way if you take advantage of simple opportunities such as this.

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