While reviewing comments and suggestions from our Cabot Wealth
Advisory readers, I found several excellent ideas in one of our
recent surveys. I am always looking for new topics to write
about, and several of your suggestions not only piqued my
interest, but also offer lessons for all investors.
One reader remarked:
I am interested in step-by-step instructions on stock
I think that request goes well with this question:
How should I develop my portfolio for retirement?
Rather than give you my own opinions, I decided to consult expert
advice, and no one is better than the American Association of
Individual Investors. AAII, as it is called, is an independent
nonprofit organization founded in 1978. AAII's goal is to assist
individuals in becoming "effective managers of their own assets
through programs of education, information and research."
AAII offers a lot of unbiased educational material online and in
a monthly magazine. The organization offers a lot of free
information, and a host of additional instruction is available
for just $29 per year. Go to
for further details.
AAII divides the investment life of an individual investor into
begins as soon as you become employed for the first time. (My
first job was long, long ago in Boston as a stockbroker trainee
at Paine, Webber, Jackson & Curtis.) As soon as your income
begins to exceed expenses, establish a cushion for emergencies.
Your cushion will need to grow to the equivalent of six months of
your income. You can fund your cushion by investing in no-risk
investments such as savings accounts at your bank or money market
funds at a brokerage firm.
One of the cornerstones of wealth building is being frugal. You
should set reasonable savings goals and live below your means.
Individuals gain financial independence by budgeting, controlling
expenses, and saving a reasonable portion of their income.
When you have accumulated the equivalent of six months of your
income and if you haven't piled up a lot of debt, you are ready
to move on to Phase 2. If your debts from college loans, car
loans, credit cards, etc., are excessive, you will need to reduce
your debt before moving on to Phase 2.
gets exciting. Any savings above your cushion can now be invested
in mutual funds, exchange-traded funds (ETFs), stocks or bonds.
Some advisors encourage investors to invest in mutual funds and
ETFs first, and then stocks when your portfolio reaches certain
levels. I recommend investing in whatever interests you the most,
because you will probably be more motivated to learn about what
appeals to you.
Phase 2 is the most important step in your investment career. You
need to establish a solid foundation of investments that you can
build on in future years. I do not study mutual funds, so I am
not qualified to offer advice on a mutual fund strategy. Rather,
I believe investing in a combination of ETFs and common stocks is
a prudent approach for many new investors.
Your initial investments should be growth oriented, but
conservative. I recommend low-risk companies with reasonably good
growth prospects for the next five years. Each and every month, I
recommend undervalued, high-quality companies in my Cabot
Benjamin Graham Value Letter. Recommending high-quality value
stocks is my specialty. I scan thousands of companies every month
and pick stocks selling at modest prices with expected earnings
growth of at least 10% per year. I want companies that pay
dividends, although I will recommend non-dividend paying
companies if I think the company will start paying dividends
within the next couple of years.
The best route to financial independence is slowly accumulating
wealth. Don't expect to double your money every year. According
to AAII, the average annual return for common stocks is 10% to
12% per year during the past 85 years. Nevertheless, an
individual who invests $10,000 at the age of 27, adds $2,000
every year to his or her account for 35 years, and can average
11% annual returns including dividends, will end up with a cool
$1,069,000 at age 62.
The following list includes a dozen companies that I believe will
get you started in the right direction and provide a solid
foundation for your investment portfolio. Invest approximately
the same dollar amount in each stock.
Barrick Gold (
Research in Motion (RIMM)
Teva Pharmaceuticals (TEVA)
TJX Companies (TJX)
All of these companies pay dividends with the exception of
Research in Motion and Google, which offer exceptional growth
potential. The list includes a diversified cross section of
industry leaders, which is important because you will want to
keep your risk low while you build for the future. Buying stocks
in many different industries will reduce your risk.
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Put the Margin of Safety in Your Wallet
Benjamin Graham is credited as being the father of value
investing. His investing system brought him an average annual
return of 20% per year for 30 years. If you'd been one of his
clients, you could have turned every $50,000 into a robust
$445,805 in just over a decade.
His most famous disciple is Warren Buffett, who he took under his
wing at Columbia. And a less-well-known devotee is our very own
Roy Ward, who employs Graham's system to put the margin of safety
in your wallet.
Protect your wealth and earn double-digit returns
begins after your initial investments start to show noticeable
profits. Your initial stocks should be held for the long haul,
unless the industry or the company falters badly. Sell a stock if
it has risen to its Minimum Sell Price or the long-term outlook
has deteriorated and replace the stock with a better one. All of
the Cabot advisory services notify subscribers when to sell a
previously recommended stock.
Assuming you haven't accumulated a lot of debt, you are ready to
start adding investments to your core portfolio. Stocks and ETFs
are a good way to go, but mutual funds are also appropriate.
Rather than staying conservative, now is the time to start
investing according to your personal preferences. If you are a
gambler, invest aggressively, but not foolishly. If you are
conservative, then stay with low-risk stocks and mutual funds.
I advise adding stocks that are grossly undervalued and stocks
with exceptional growth prospects. In addition, you might want to
add to some of your smallest core holdings, but be sure that each
company's outlook remains robust. I also recommend offsetting
your aggressive investments with bonds or defensive ETFs. You
should be prepared to jettison risky stocks that underperform and
sell stocks that become overvalued.
The following list includes three stocks selling at bargain
prices, followed by three stocks with great growth potential and
one defensive choice to hedge against unforeseen market declines.
Selling at bargain prices:
Computer Sciences (CSC)
Reinsurance Group (RGA)
Great growth potential:
Gildan Activewear (GIL)
LKQ Corp. (LKQX)
TAL International (TAL)
Templeton Global Income Fund (GIM)
As your investment funds grow and you invest in more stocks, you
will need to decide how many stocks, mutual funds and ETFs are
reasonable to follow. When you reach your limit, add to stocks
that you already own.
begins about five years before your retirement. At this point in
your life, you should start to reverse your investment strategy.
Initially, start selling some of those risky stocks. Invest the
proceeds in ultra-conservative investments such as certificates
of deposits (CDs), money market funds, bonds or bond ETFs.
Your goal in Phase 4 is to get back to owning very conservative
stocks (your core holdings). I advise selling stocks that aren't
paying dividends. If you need to be ultra-conservative, sell
almost all of your stocks and invest in shorter-term bonds, CDs
and money market funds. When you are retired, your main goal
should be to not lose money, and to invest conservatively.
One of the most important attributes that an investor must
acquire is patience. The stock market can be a very
frustrating place because of its unpredictability. Expect to lose
money from time to time. Have confidence in your investment
decisions. "If a business does well, the stock eventually
follows. Our favorite holding period is forever," states Warren
Buffett, one of the greatest investors of all time.
Until next time-be kind and friendly to everyone you meet.
J. Royden Ward
For Cabot Wealth Advisory
Editor's Note: You could take Roy's excellent advice and purchase
the investments above, hold on and hope for the best. Or you
could get even more details on these and other top value
investments in his Cabot Benjamin Graham Value Letter. Get
up-to-date Buy, Hold and Sell ratings for these and other
investments each month (and in his mid-month update), so you
always know what to do with your holdings. Don't miss another