Retirement: A Future-Proof Portfolio For Young Investors

by: Giesbers Investment Strategy

A retirement portfolio for young investors should have a different focus than investments of almost-retirees.

Yield is much less important, growth is much more important.

A combination of diversification and future-proofing should be used.

Diversification is something which should happen at different levels.

I introduce my model retirement portfolio for young investors.

On Seeking Alpha, there exists a wealth of information about retirement and possible portfolio strategies to achieve this. Most of these portfolios focus on people who are relatively close to their retirement age. For a young investor, especially someone in his 30s or early 40s, there are a couple of important differences in the investment strategy one should focus on. In this article, I am presenting a buy and hold model portfolio for retirement for people who still have quite some years to go.

Difference between young and old retirement investors

One of the most important differences between young and old people investing for their retirement is the need for yield. While old investors could try to live on the yield of their portfolio without the need to ever sell any shares, yield should not be an important short term target for younger people. It is still important to invest in companies with a good dividend, since those companies tend to outperform the market in general.

old vs young

Source: earnestbjohnson

Much more important for young than for old retirement investors is what I call the future-proofing of your portfolio. You will want to invest in companies which are likely to still thrive in a couple of decades, and which have little risk of going bankrupt in the meantime. This is why I look much more critical at debt levels of companies, especially in this low interest rate environment. I want my investments to be able to survive all possible interest rate hikes in the future.

Another topic on which I focus is on industries: it is important that the industry in which I am investing will still be around in a couple of decades. This is why I'm leaving out fossil fuel companies or banks. These types of companies will likely still exist in some decades, but their business model might have changed completely, and therefore I find it very hard to predict if specific companies will survive and which of them will thrive in the future.

A model retirement portfolio for the young investor

This 30 stock portfolio is meant to be an example for young investors saving for their retirement, and it is based on my own portfolio. I am a shareholder in all companies listed in this portfolio.

Name Ticker Price Shares Value Current yield
Consumer stocks
Unilever UN 46.88 43 2,015.84 2.98%
Disney DIS $ 110.63 22 1,980.94 1.52%
Archer Daniels Midland ADM $ 43.04 57 1,996.74 2.98%
Diageo DEO £ 25.56 69 2,007.85 2.43%
Accell ACGPF 23.75 42 997.50 3.03%
Armanino Foods of Distinction AMNF $ 2.52 488 1,000.91 3.17%
Amsterdam Commodities ACNFF 25.05 40 1,002.00 4.59%
Industrial stocks
3M MMM $ 247.93 10 2,017.92 1.89%
BASF BASFY 96.22 21 2,020.62 3.12%
Union Pacific UNP $ 140.75 18 2,062.04 1.89%
Kone KNYJY 45.79 44 2,014.76 3.39%
Eaton ETN $ 85.18 29 2,010.53 2.81%
Vestas Wind Systems VWDRY kr 422.10 35 1,984.09 2.30%
Healthcare stocks
Medtronic MDT 85.76 23 1,972.48 2.15%
Roche RHHBY F 234.50 10 1,991.08 3.50%
Gilead Sciences GILD $ 81.49 15 994.88 2.55%
Johnson & Johnson JNJ $ 142.03 17 1,965.19 2.36%
Novo Nordisk NVO kr 346.80 43 2,002.74 2.19%
Consolidated Edison ED $ 79.41 31 2,003.61 3.60%
National Grid NGG £ 8.06 109 999.99 5.53%
Ørsted DNNGY kr 350.40 21 988.24 1.71%
Technology stocks
Corning GLW $ 34.09 72 1,997.72 1.82%
Taiwan Semiconductor Manufacturing Company TSM $ 45.45 54 1,997.57 2.53%
Infosys INFY $ 18.49 67 1,008.29 2.32%
Automatic Data Processing ADP $ 121.09 20 1,971.12 2.08%
Tencent TCEHY $ 60.16 20 979.29 0.11%
Realty Income O $ 53.98 46 2,021.00 4.87%
Ventas VTR $ 55.91 44 2,002.25 5.65%
W.P. Carey WPC $ 65.30 19 1,009.82 6.18%
Hannon Armstrong HASI $ 21.79 56 993.16 6.06%
Total 50,010.18 2.95%

As you can see, the current value of this model portfolio is about 50K (in euro, my home currency) and it yields almost 3%.

4 types of diversification

One of the most important things when investing for the long term is diversification. Sectors, especially ones that are more cyclical will have good times and bad times, but if your mix of investments is a good one, you can prevent sector-based downturns from having a huge effect on your portfolio and prevent volatility while still enjoying a nice upside. I focus on different types of diversification when designing my portfolio.

Sector diversification

The diversification by sector is already reflected in the categorization as depicted in the table. What is less clear is that there is also a diversification inside the categories themselves. I will quickly provide a brief overview of the constituents in my model portfolio and very briefly introduce their position in the sector.

The consumer stocks include food manufacturers and processors Archer Daniels Midland (ADM) and Armanino (OTCPK:AMNF). On the other side of the spectrum are Disney (DIS) (entertainment) and Accell (OTCPK:ACGPF) (bikes), more focused on the consumer discretionary market. Consumer goods giant Unilever (UN), alcoholic beverages producer Diageo (DEO) and soft commodity trader Amsterdam Commodities (OTC:ACNFF) are very stable consumer stocks with a decent dividend and a nice growth. During market downturns, I expect this part of the portfolio to outperform, except for the first focusing on the discretionary market.

The industrial compartment of the portfolio is very mixed with every company active in a different section of the market. 3M (MMM) is a conglomerate powerhouse which just doesn't seem to stop growing. BASF (OTCQX:BASFY) is the largest chemical producer in the world. Union Pacific (UNP) is a very stable railroad company. The Finnish company Kone (OTCPK:KNYJY) is one of the leading elevator producers in the world, focusing more and more on service. Eaton (ETN) is a huge power company which is active in the electric sector and in aerospace and vehicles. Last but not least, Vestas (OTCPK:VWDRY) is the largest wind turbine producer in the world. These diversified operations will all still be around in tens of years. It is easy to imagine that elevator and wind turbine markets will still experience lots of growth. Even railroads continue to have a bright future, since it is still one of the most efficient ways of transportation available.

The healthcare sector is focused on four drug producers: Johnson & Johnson (JNJ), Roche (ROG), Novo Nordisk (NVO) and Gilead (GILD). of which two are European. JNJ also has a big consumer products division. Medtronic (MDT) produces medical devices. I am convinced that there exist healthcare options with more growth, but it is important to strike a balance between expected growth and safety. The above names will all likely need to do takeovers in the future to continue growing, but they are all big, established companies which can be expected to stick around and thrive.

The utilities and the REITs are there to provide a stable foundation of the portfolio. If there is market turmoil, they are likely to still pay out a good dividend while providing modest growth potential. The utilities are a geographical diversified trio, with also exposure to renewable energy in Ørsted (OTCPK:DNNGY). Consolidated Edison (ED) is a big dividend aristocrat providing New York with electricity. Though National Grid (NGG) is mainly active in the UK, they also have operations in the US. With regard to the REITs, diversification is focused on the type of real estate they invest in: Realty Income (O) focuses on shopping centers, Ventas (VTR) on healthcare real estate, while Hannon Armstrong (HASI) has operations in debt and equity provisions for renewable energy and energy efficiency projects. W.P. Carey (WPC) has a mixed portfolio with retail, government and industry properties spread out over the US and several European countries.

The technology part of this portfolio is a mix between US and Asian companies: Corning (GLW) is a very established company in glass science which still has a lot of room to innovate and grow. Taiwan Semiconductor Manufacturing Company (TSM) is one of the world's largest semiconductor producers, also active in lighting and solar energy. Infosys (INFY) is an India-based IT services provider, mostly active in the US and Europe. Not originally a technology company, Automatic Data Processing (ADP) is a human resources company which provides software for this purpose. Tencent (OTCPK:TCEHY) is a Chinese conglomerate which is active in internet-related services and products. Almost only active in China and not very well known in other parts of the world, they quickly became one of the most valuable companies of the world during the last years.

Geographical diversification

Most of these stocks are companies situated in the US or Europe, but almost all of them have worldwide operations. Geographical diversification of the portfolio is as follows:

  • US: Disney, Archer Daniels Midland, Armanino Foods of Distinction, 3M, Union Pacific, Eaton, Gilead, Johnson & Johnson, Consolidated Edison, Corning, Automatic Data Processing, Realty Income, Ventas, WP Carey, Hannon Armstrong.
  • Europe: Unilever, Diageo, Accell, Amsterdam Commodities, BASF, Kone, Vestas, Sanofi, Roche, Novo Nordisk, National Grid, Ørsted.
  • Asia: TSM, Infosys, Tencent.

I am looking for more stocks of emerging markets and Asia, preferably in sectors which are underrepresented in my portfolio.

Small and large caps

Most companies in the portfolio are stocks with a relatively large market capitalization. But it is very important to also invest in small caps. The problem here is that usually small cap stocks have a shorter history and are much less easy to predict. For a retirement portfolio, we want to select stable companies which can stick around for multiple decades. In the end, every company which is a large cap stock now was a small cap once, so we should not dismiss them just because of their size. And do not forget that in some periods, small caps tend to outperform large caps.

The small caps included in this portfolio are Accell, Amsterdam Commodities, Armanino and Hannon Armstrong. There are many medium sized stocks in the portfolio though and not too many stocks with a mega market capitalization. On the medium to long term, I am looking for more small caps to add to the portfolio.

Diversification over time

I will track the progress of this portfolio over time starting now, but one type of diversification which is very important for investors saving for their retirement is time diversification. This is often very underestimated: in my opinion time diversification is most important of the four types.

Buying stocks for a specific amount of money on a fixed moment every month or quarter is a very solid strategy. If the prices of my shares increase: fine! If prices drop: even better, I will buy more stocks for the same amount of money! The main benefit which young investors have is time. You can make use of this by investing a fixed sum of money every month and dollar cost averaging your way into your portfolio. This is what I did and what I will continue to do until my retirement.

This portfolio is not a perfect one, but I feel it is a resilient one with regard to the future, and diversified enough to filter away sector- or country-based downturns. Though some stocks might be more speculative than others, the total yield of the portfolio is not bad, but it is focused more on future potential than anything else. Many of the stocks in the portfolio are fairly or overvalued at this moment. But the benefit of a diversified portfolio is that there is usually a part of it which is on sale. Currently the REITs are attractively valued, and I recently increased my position in Ventas and Realty Income.

I am going to track the performance of this model retirement portfolio for the young investor over time. Keep in mind though that being a young investor, I'm less focused on the results over time periods of only a couple of years: this portfolio should perform on the long term. People who are nearing their retirement dates would likely rather choose more yield-focused investments.

Thank you for reading! If you have any ideas about my model portfolio, please let me know in the comment section below!

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Disclosure: I am/we are long ALL STOCKS MENTIONED. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.