Today I'd like to introduce you to my friend Mike. Mike is a
real person and that is, in fact, his real name. He and I met in
college and have been close friends since. He's extremely
intelligent, a partner in a major law firm, and he has, to my
knowledge, never bought an individual stock.
Mike and his lovely wife are very risk-averse. They're both leery
to the point of paranoia about stocks, and they resolutely despise
the remotest prospect of losing money. Their portfolio is
remarkably conservative. It's mostly cash.
I've told Mike until I'm blue in the face that knowledge mitigates
investment risk. I've repeatedly shown him ways to limit his
downside. And, frankly, I have a very strong track record of
picking stocks, a spate of winners that ought to enhance my
credibility and nudge him toward action. But none of that matters.
He isn't going to change.
It's going to cost him.
If Mike were to open a savings account with $50,000 and add $1,000
to it each month, he would rack up $306,994 in twenty years. That's
not chump change, but his total earnings would be a mere $16,994.
Over the course of that long period of time, the rate of return
offered on FDIC-insured savings accounts wouldn't even make up for
In the long run, it is almost guaranteed that Mike is actually
going to see his worst fear come to pass: Without a stronger
return, he'll lose money.
My buddy Jeff is a P.R. genius in Dallas. We were neighbors in
school and have been close ever since. Jeff and I talk a little
more about investments than Mike and I do, and Jeff isn't afraid to
put money into the market, though his idea of investing is to find
a good S&P index fund with a really low expense ratio , park
some money in ultra-safe bonds and let both investments sit as he
reinvests his gains. It's not a bad strategy, but it does mean that
he will settle for less than the overall market's return every
If Jeff starts investing today with a $50,000 portfolio in such an
index fund and adds $1,000 a month, then, based on historical
averages he and his wife will capture $492,191 in gains in 20
years, which will give their account a balance of $782,191.
Both Jeff and Mike are extraordinarily talented, and each has an
admirable work ethic. In other words, Jeff and Mike have
exceptionally strong earning power.
But even with six-figure salaries, a few big bonuses and generous
retirement plans, I'm sad to say that neither of these two friends
of mine is on track to use his money to build a multimillion-dollar
That puts them in the same boat as just about everyone else, of
course. Most investors are stuck in the slow lane, passively
accepting the market's returns and failing to use equities as the
supercharging force they can be.
Before I go any further I should tell you something about the cash
Mike hoards and the ho-hum securities Jeff prefers.
There's nothing wrong with them. Not a thing.
In fact, every intelligent portfolio should contain some of each.
But, at the same time, a portion of ANY portfolio that's aiming for
seven figures has to swing for the fences. I'm not saying it needs
to be "high risk." It doesn't have to involve complex derivatives,
dicey junk bonds or commodities. The securities allocated to this
segment of the portfolio simply have to have the potential to
deliver serious gains.
I'm a father of a daughter who's in private school, will go to
college and who will need cars, trips and someday, a wedding. I'll
tell you this about my portfolio: It's got a lot of choices that
Jeff would like. About 80% of these assets, in fact, are blue chips
like Berkshire Hathaway (NYSE: BRK-B) and General Electric (
). They offer the prospect of a reasonable return over time, and
neither is so risky that I worry about risking my daughter's
But the other part of the portfolio? I call it the "20% Solution."
These securities are what I'm counting on to make a major
difference in my returns. I know that these companies have the
potential to deliver huge returns. One such stock has already
returned more than +200% in the past year, and the fact is I
wouldn't sell those shares if you put a gun to my head because I
think they are going to keep rising. In fact, when I add money to
the portfolio each month, it's the first company I consider adding
Over time, big winners like that are going to move the needle on my
portfolio. They're going to make some dreams come true, and to make
sure that happens I allocate a small percentage of my portfolio to
It works like this:
Say you have a portfolio with the same starting balance of $50,000
that Mike and Jeff had in my two examples. If you allocated 80% of
that to the S&P and invested the remaining 20% of the money
into a stock that delivered knockout returns, the picture changes
dramatically. From 2000 to the end of 2009, S&P dropped more
than -20.0%. If you had a portfolio exposed to broad market
returns, you lost money. In the case of the S&P, that $50,000
would have shrunk to $39,983.20.
If you'd allocated 20% of the portfolio to shares of Apple (Nasdaq:
AAPL), however, you'd have ended up with $113,224, as the computer
maker's +712.4% on your $10,000 in the period offset -$8,013.42 in
losses on the $40,000 allocated to the S&P.
Using the compound annual growth rate for Apple and the S&P 500
during that decade, we can observe the difference between the two
portfolios as the $50,000 grows with the addition of a $1,000
investment each month.
The S&P 500 Portfolio, to which a total $170,000 was
contributed, incurred a -2.21% compound annual loss and ends up at
But the S&P-Apple 80/20 portfolio, which also saw $170,000 in
contributions, sees a dramatically different turn of events as
Apple, despite its minority position, generates a huge
disproportionate return. Eighty percent of the portfolio, the
initial $40,000 plus 136,000 in additional contributions, is
allocated to the S&P and shrinks to $118.984. But the Apple
shares, which start out with $10,000, or 20% of the portfolio, and
to which an additional $34,000 is added, grow to $154,567, for a
total balance of $273,551, a +60.9% total return.
That's the power of a game-changing stock like Apple.
And those are the kind of stocks I focus on finding. In a number of
cases, I've found stocks that offered triple-digit returns in a far
shorter period of time. I captured a nearly +300% gain with
Rockhopper Exploration in less than 90 days as that small oil
exploration firm made a major discovery in the South Atlantic --
sparking an international diplomatic incident in the process.
Another game-changing Apple-like company I discovered is a tiny
enzyme maker with a huge presence in the biofuel arena. It's
delivered a nearly +200% gain in the past year -- a rate of return
that blows the doors off the +23.3% annual growth rate Apple
achieved in the example.
What I'm saying is that the results of a portfolio with room for
big winners can be dramatically different from those that stick to
cash, fixed-income or even the returns available in the broad
As I can continue to uncover the fast-track picks like the ones
I've already found, I'll inch closer to a multimillion-dollar net
worth in a relatively short period of time.
The point is this: The returns provided by 80% of your assets will
be materially insignificant. They almost don't matter at all. It's
the big winners that propel the portfolio, not the same blue chips
that everyone else is investing in.
So, clearly, the question is how investors can find those picks.
It's an important topic. I've got a six-year-old little girl whose
face I see in my mind when I think about just how important those
returns are. And to help you find fast-track picks for your
portfolio so you too can position yourself for supercharged
results, I'm launching a new publication called
For a sneak peek at this exciting new letter, please join me for a
free webcast on June 15, where I'll reveal some of these
game-changing companies and try to help put you on the Fast Track
Note from the Editor:
We at InvestingAnswers are huge fans of Andy Obermueller. He penned
one of our most popular articles ever, Is Your Bank One of the 438
in Immediate Danger of Failure?, and we know that everything he
writes is backed by hours and hours of research. Click here to
learn more about his new publication, Fast-Track Millionaire. The
webcast is free, and we're sure you won't be disappointed!
Editor, Government-Driven Investing