- A portfolio to achieve long-term capital appreciation.
- Only quality stocks, and a time horizon of 20 years.
- Dynamic management and reinvestment are crucial.
Investing in financial assets is an important task in people's lives. For a good reason, increasingly more attention is given to the creation of personal securities portfolios in order to achieve long-term capital appreciation. The primary objective is often to reach the required capital for retirement. Sometimes these investments are intended also to cover different needs such as having a supplementary income or providing the means to cover unexpected situations.
With this article, my goal is to explain how we may increase total gains over time by building up a low risk portfolio with 85% of the overall capital. The remaining part (15%) will be invested in fast growing companies with great potential. That's my kind of portfolio, and I will name it as the 85/15 Portfolio. It will have only stocks: a maximum of 10 "low risk" stocks, and a maximum of 5 "fast growing" stocks.
The easy part regards the selection of companies with "low risk" that will provide a continuous source of income. They will be very large companies with huge profits, with historically large and growing dividend yields. The aim here is to capture the high dividends and also take advantage of the share price appreciation.
For this 85% part of the Portfolio I will consider the following assumptions:
1. A time horizon of 20 years
2. Dividend yield of 4%
3. Annual share appreciation on average of 5%
4. Maximum of 10 stocks
Stocks may be selected from a large group of blue chips with outstanding performances. At this point, as a mere working assumption, I will indicate the following 5 stocks: Annaly (NYSE:NLY), Vodafone (NASDAQ:VOD), AT&T (NYSE:T) Verizon (NYSE:VZ), and Johnson & Johnson (NYSE:JNJ). Although these choices are only a simple example, I can mention McDonald's (NYSE:MCD) and Chevron (NYSE:CVX) as alternatives to Verizon and AT&T. Thus, all these stocks would be of different sectors.
As a crucial point, it is essential to find a balance between appreciation potential and dividend level.
The financial projection is:
All capital gains and dividends are reinvested.
The investment of 85% of the capital at an estimated capitalization rate of 9% will have a total return of 460% over a period of twenty years. If the investment will achieve growth as planned then, at the end, every dollar will turn into $5.6.
With the investment of the remaining 15% equity in "fast growing" stocks we intend that results may be doubled for the whole portfolio. Here are the assumptions:
1. A time horizon of 20 years
2. Annual share appreciation on average of 20%
3. Maximum of 5 stocks
Stocks will be selected by investors with an adequate assessment by consulting the vast SA library as well as other sources. The first three choices, just as an example, are Cornerstone (NASDAQ:CSOD), Himax (NASDAQ:HIMX), and SolarWinds (NYSE:SWI).
The financial projection is:
The investment of 15% of the capital at a capitalization rate of 20% will give a total return of 3,734% in 20 years. If all goes as planned, at the end, every dollar will turn into $38.3.
Taking everything into account, the overall result may be impressive. In fact, we'll have the following table indicating the potential value of the portfolio for Year 20, and also for Year 25 if we wish to extend it for another 5 years:
|Year 0||Year 20||Year 25|
In year 20, each dollar will turn into $10.51, doubling in year 25.
If the assumptions are met and given that capital is always reinvested, a wider investment horizon will lead to a much higher capitalization.
It would be advisable that the choice of the portfolio was taken by investors with their own research using - among others - the analysis included in the articles of Seeking Alpha where there is a lot of excellent material.
In both cases the evolution of the portfolio will have a dynamic management which may increase its final value. Therefore, whenever a stock has risen 50% in a somehow exaggerated manner its position may be sold. This level will be measured not only by its fundamentals (primarily) but also by metrics such as RSI and price relative to EMA(200). Buying on dips should also be a normal practice in accordance with the cash available.
Especially concerning "fast growing" stocks, there will be greater care with its downside, cutting losses and selling up 50% of a specific position when the fall is greater than 15% and closing the entire position when losses reach 25%. The best situation is to let the profits run until an adequate sell will be possible with a good profit. The stock will then be replaced by another making possible a dynamic asset allocation.
An important question must be addressed: will be now a good time to start the portfolio? And if the answer is positive, will it be advisable to invest gradually or now is the right time to invest without problems just trying to choose fair prices?
You must take into account that we are thinking of a very long-term portfolio. Naturally, it would be advantageous to buy after a sharp drop, but we have to be realistic and act according to the current situation. As there is a real risk of a market correction, it is more appropriate to point out a cautious and gradual investment, being quite selective in our choices.
This 15/85 Portfolio is a guide to investors and can be applied in accordance with the interests of each investor. If assumptions may stand it will have conditions to succeed, especially if a dynamic management will be in place. After defining the portfolio strategy, investors should choose stocks according to their own research, using the articles from SA and many other sources. My suggestions were made to achieve a better understanding of my portfolio model. I hope my ideas can be of support to investors.