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Core Portfolio Holdings: The Other 5 Out of 10 Plus 1

By: Ted Allrich
Posted: 6/12/2012 10:10:00 AM
Referenced Stocks: AA;AXP;IBM;JPM;MMM;MRK;WMT

Last week I wrote about the value of having a core portfolio, one that has relatively safe investments.  These are the stocks or funds that over time should be the most rewarding, the ones that you buy first and hold for longer than any speculative trading you might try.  If you put most of your money in these areas, you'll have a better chance of having strong returns.
I would suggest you put 9% of your investable funds in each of these 11 categories that way you get solid diversification.

When I mention "buy and hold", I don't mean you buy and forget.  These stocks or funds demand some attention.  There is no investing program that runs on auto-pilot.  That's because things change at companies: new contracts, lost contracts, new management, management that gets arrested, management that steals, management that delivers quarter after quarter.  You need to follow these investments and make changes when required.

Here are the 5 other categories for a Core Portfolio:
6) One stock from the Dow Jones Industrial Average.  Currently the DJIA has these stocks in it:
Alcoa - AA; American Express - AXP; AT&T - T; Boeing - BA; Caterpillar - CAT; Coca-Cola - KO; Citigroup - C; Disney - DIS; DuPont - DD; Eastman Kodak - EK; Exxon Mobil - XOM; General Electric - GE;
General Motors - GM; Hewlett-Packard - HPQ; Home Depot - HD
Honeywell - HON; IBM - IBM; Intel - INTC; International Paper - IP; Johnson & Johnson - JNJ; McDonald's - MCD; Merck - MRK; Microsoft - MSFT;
3M - MMM; JP Morgan - JPM; Altria - MO; Proctor & Gamble - PG
SBC Communications - SBC; United Tech - UTX; Wal-Mart - WMT

Don't just randomly pick one.  Maybe the best one for you is the one with the highest dividend.  Maybe you don't want to own a tobacco company so don't choose Altria (previously Phillip Morris).  Maybe you're concerned about interest rates going higher so don't buy Citigroup.  In other words, you'll have to look at each one individually and decide the one that makes the most sense to you based on current economic conditions.  These stocks are some of the biggest and the best.

7) One Brand Name Stock.  Pick a well known name like Coke, McDonald's, Disney, Procter & Gamble, or Nike.  A highly recognizable brand name has a competitive advantage in every market.  Choose one you buy all the time.  You can bet you're not the only one using it.

8) A consumer staples stock.  These are the basics like soap, toothpaste, deodorant, razor blades, things that are quickly consumed and bought again.  No matter what the economy does, people will buy these products.  Good examples are Procter & Gamble, Colgate, Clorox, Church & Dwight (makes Arm & Hammer baking soda), and Tupperware.

9) An emerging technology.  Every one wants to own the next Microsoft.  The odds of doing it are more than 10,000 to 1 if you buy just one stock.  But if you buy a technology fund that specializes in small cap stocks (the new ones), you'll have better odds.  You can find specialized funds by using mutual fund screening programs on AOL, Yahoo!Finance, MSNMoney and other financial sites.  By owning a specialized tech fund, you don't have to be an expert in tech.  That's what you're paying the fund manager to be.

10) One dividend stock or income fund.  This is a holding that will throw off cash in good times and bad.  If you opt for one stock, make sure the dividend will be paid through economic cycles.  That means finding a stock that pays less than 50% of its income out for the dividend.  Also, don't reach for the dividend.  In other words, if the average dividend is about 2% right now, be suspect of something that is yielding 8% or higher.  Higher yields mean higher risks.  If you're only going for the dividend, check out Real Esate Investment Trusts and utilities.  If you want the dividend and some growth, check out the large cap stocks like GE or MO.  If you opt for an income fund, pick the one that has stocks, not bonds.  In fact, bond funds that specialize in longer maturities will have a rough time as interest rates go higher.  You'll have more yield, but your principal will be at risk as bond prices move lower.  If you're going to buy a bond fund, pick one that is short term or intermediate term in maturity.

And the bonus sector: ETF's.
Exchange Traded Funds may be all you need to diversify.  They give you almost every asset class you can imagine, foreign and domestic.  They trade on an exchange like a stock so they're very liquid.  By buying several ETF's that represent every one of the above sectors, you can have professional management with low fees.  Choices range from index funds that track the S&P 500 to specialty funds that own Chinese real estate to an ETF that buys gold and holds in a vault.  If you don't have ETF's in your portfolio, you're missing a simpler and better way to invest.

As mentioned above, if you buy these 10 categories of stocks and/or funds, you'll have the odds in your favor for making money over the long term.  These stocks or funds will not make you rich quickly.  They take time.  Also, if you want to buy some hot tips or small stocks, do it after you've bought all of the above.  And keep the purchases to a minimum. 

Keep your diversification high, your risk minimized.  That's the theory behind this Core Portfolio.

- Ted Allrich 
June 12, 2012