A direct stock set-and-forget portfolio can create a fantastic passive income stream as part of your retirement strategy. You aren't looking for aggressive outperformance compared to the market, just solid returns and strong dividends to create a relatively passive portfolio.
Here are my six rules to select set-and-forget investments.
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1. How will this business win?
The first question you should ask yourself about any potential investment is why can this business win? It's not about why it's popular or what's trending now, it's about how it can keep competitors at bay over the long run.
Look for what is driving its defensive moat, such as:
- Scale/cost advantage
- Regulatory barriers
- Network effects
- High switching costs
- Brand strength
If you don't understand how it can win, you can't have true conviction that it will. Knowing how a company protects its profits is a must as quality set-and-forget investing is built on companies that have a strong line of defence.
2. Do I understand what I'm investing in?
Another simple filter is to ask yourself whether you understand how the company makes money. Observing the products and services you use in real life can help in investment decisions as you understand the customer and can explain the value proposition. Understanding where a company's money comes from – and is likely to continue coming from – is key to set-and-forget investing.
3. Can I see a growth runway?
Set-and-forget investing is less about what's happening today and more about what's going to happen. So, ask yourself how will the company continue to grow? You want companies with a credible pathway to expand earnings and adapt as the industry evolves.
If growth relies on a single project, commodity price or regulatory outcome, it's too narrow for a set-and-forget portfolio.
4. What will happen if things go wrong?
Of course, you don't have a crystal ball, so you can never entirely answer this one. What you can do, however, is look for companies with solid cash holdings and low debt or a history of using debt to successfully grow the business as they are in the best position to weather changing circumstances.
A strong balance sheet is critical to dividend sustainability and optionality when external shocks and unexpected challenges arise. For me, companies that generate predictable cash flows, can fund growth internally and don't rely on regular capital raisings are non-negotiable in set-and-forget investing.
5. Does management have 'skin in the game'?
Much like I don't like the idea of flying in a plane with a remote pilot, I feel the same way about investing in a company when management hasn't invested. If they don't believe in the outcomes enough to invest, why should I?
When management is invested, I think incentives are more aligned, decision making improves and long-term thinking is more likely, because people behave differently when their own money is on the line.
6. Am I paying a fair price relative to the opportunity?
Valuation matters, of course. But conviction matters more in set-and-forget investing, in my view. A quality business can justify a higher multiple if it offers a solid defensive moat, robust cash flows, visible growth and a strong runway. That said, this comes with a disclaimer. Nothing is a buy at any price. Growth can only cover valuation sins to a point.
But in this type of investing, I care less about squeezing the last 5% of upside and more about investing in quality businesses and avoiding long-term mistakes.
The bottom line
Of course, a direct stock portfolio will never be truly set-and-forget as you'll need to review your investments periodically to make sure they still fit your criteria. But investing in quality businesses with good defensive moats, strong cash flows and good dividends can create a relatively passive portfolio – as long as you set and stick to a well-considered investment framework.
