My Rules of Prudent Investing

  1. Diversify widely. Limit single stock to 5% of my portfolio and single sector to 25% of my portfolio.
  2. Buy with plan to hold forever.
  3. Avoid options, excessive margins, shorting stocks, forex, futures, commodities, hedge funds, actively managed mutual funds, penny stocks, and leveraged and inverse ETFs.
  4. Max out my tax-deferred retirement account contribution annually.
  5. Max out my Roth IRA contribution annually.
  6. Stay the course in no-fee direct share purchase plans (DSPP) and loyal3 monthly dollar cost averaging program, currently $3500/month spread over 24 stocks. Overweight higher quality stocks and plans offering discount (NNN, YORW).
  7. For index funds such as VWO, time the market using Shiller PE Buy at 15, Sell at 24 with 6% retraction rule.
  8. Keep cash below 5%, to minimize cash drag, unless all markets are vastly overvalued.
  9. For potential new buys, focus on downside risk. Look at the historic price chart. Look at 10-year ratios and EPS. Does the company consistently have return on equity at least 15%, low debt, increasing earnings-per-share and dividends? Read its recent 10-K and other filings. Is it better than just adding to DSP/loyal3 or to a low-cost index fund?
  10. If a potential new buy passes all criteria above, start low and go slow.
  11. Keep costs low. Favor low or no yield stocks, foreign (non-UK or German) dividend stocks, and index funds in taxable accounts.
  12. Keep alternative investments, such as P2P loans, gold, private equity, under 5% of my portfolio, for such will underperform stocks over the long term.
  13. Only buy bonds when treasury bond yield is at least double stocks' earnings yield. For example, if stocks have PE = 20, buy bonds if the interest rate is at least 10%. Use PE of lowest among US, EAFE, and EM.
  14. Sell to harvest losses, to admit my mistake due to lack of research or deteriorated fundamentals, or as part of value averaging.

Last Updated: 1 Jan 2017

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