During this series I have been working my way through the process of becoming a Drip investor. We initially determined that the Drip was a proper strategy for us, we rid ourselves of bad debt, and we decided how many companies would be in our final portfolio. The only thing between us and the selection of companies is the development of a strategy.
With so many Drips available, it is overwhelming when one wants to begin looking for companies. Developing a strategy not only narrows the possibilities, but ensures that you are headed in the right direction. If done properly, the company will find you.
If I were to blindly walk into a grocery store looking to purchase food without knowing what I was looking for, I would have no idea where to begin. With aisles and aisles of products, I could fill my cart before getting out of the dairy section. A better idea would be to decide what I want to eat, figure out what ingredients I'll need, and make a list. Then it would be a simple matter of going to the appropriate sections of the supermarket and make my choice from the offerings.
Developing a Drip portfolio strategy is pretty much the same thing. One gets a general idea as to the nature of the portfolio, then looks for companies that fit the description.
I will explain how I formulated the strategy I am using. This path should be followed by no one, but should only be viewed merely as an example. As will be seen below, my situation is certainly not universal.
With my age at 45 when I started to focus on Drips, I determined the useful timeline for this investment to be about 20 years. After that time I expect to begin dollar cost averaging mysales, rather than my purchases.
Now, as a baby boomer, I foresee that in 20 years society will have the need for greater medical assistance. Catering to this giant generation of people will be a profitable endeavor upon which many companies will place great focus.
Having already determined that my final portfolio would contain about six companies, I concluded that two healthcare companies would make for proper weighting. My insensitivity to "portfolio diversity" will be covered in another article.
I also view technology as an important sector over the next 20 years. With many companies being forced to make their offerings through the Internet, and with this medium at the beginning of its growth stages, it made sense for me to select a company that worked within this realm.
A constant throughout this timeframe will certainly be energy, so I decided that I should select a company within this sector. Of course, my intention was not to select one of the older utilities, but to find a company with the vision to innovate and possibly change the industry (more about this next week).
This is where I started, with the four company selections (two focused on healthcare, one on technology, and one on energy) comprising two-thirds of my Drip portfolio. The unifying factor in the decision of each company was dependent upon looking to the future to see what I expected during the life of the Drip. I foresee companies scrambling to accommodate the healthcare needs of the boomers, technology continuing to change our world in ways that we have yet to imagine, and energy having a hand in all aspects of our life. These sectors should outperform others -- that is my view.
I intended the final third of my portfolio to consist of "floater" companies -- ones that I felt had superb prospects in the future. These could come from the food and beverage industry, banking, or whatever happened to look good. Strategies do not need to be rigid.
So, now that we have developed a strategy, it is time to start looking at companies. I will not be examining individual companies, as some very competent Fools are already doing that. However, I will go through the example of some thinking done in the selection process, as well as consider a handful of guidelines.