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Retirement: Future-Proof Portfolio For Young Investors Is Even More Relevant With Negative Interest Rates

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Includes: ACGPF, ACNFF, ADM, ADP, AMNF, AWR, BASFY, DEO, DIS, DNNGY, ED, ETN, GILD, GLW, HASI, INFY, JNJ, KNYJF, MDT, MMM, NGG, NVO, O, PG, RHHBY, S, SGAPY, TCEHY, TSM, UL, UNP, VTR, VWDRY, WPC
by: Giesbers Investment Strategy
Summary

The Future-Proof Portfolio for young investors has performed really well in 2019, in line with the rest of the market.

The current environment has developed to a situation in which there truly seems to be no alternative to stock investing.

Overvaluation of low-volatility stocks can hurt the return of part of the portfolio for the next couple of years.

It has been a while since I last wrote about my future-proof portfolio for young investors. To refresh my own memory and the memories of my readers: the future-proof portfolio for young investors is a model portfolio focusing on future-proof companies with decent dividends and growth prospects. It is loosely based on my own private portfolio: I own all the securities mentioned, but my private portfolio has a few more different stocks and more yearly mutations. The idea behind both is the same: I intend to buy-and-hold quality companies with a decent dividend.

The reason for keeping this model portfolio and my private one separated is that I want to keep it very simple and replicable for my readers: a starting balance of 50,000 In January 2018, and additions of 3,000 every half year. My bookkeeping will be in my local currency, the euro, but this portfolio can easily be replicated in other currencies. In my private portfolio, additional purchases might depend on my income and savings rate, which can fluctuate.

Current state of the portfolio

Name Ticker Shares Value Weight 2019 Dividend received 2019 Gain / loss (incl dividend)
Consumer
Unilever UL 43 2.385,64 3,64% 34,3 18,73%
Disney DIS 22 2.765,64 4,22% 34,14 33,17%
Archer Daniels Midland ADM 57 2.047,51 3,12% 35,40 2,37%
Diageo DEO 69 2.328,82 3,97% 20,92 22,39%
Accell OTCPK:ACGPF 42 955,50 1,46% 21,00 23,41%
Armanino Foods of Distinction OTCPK:AMNF 488 1.600,80 2,47% 31,60 37,01%
Amsterdam Commodities OTC:ACNFF 92 1600,80 2,44% 92,00 0,21%
Industrial
3M MMM 10 1.502,59 2,29% 25,46 -7,93%
BASF OTCQX:BASFY 37 2.304,36 3,51% 118,40 5,23%
Union Pacific UNP 18 2.707,60 4,13% 28,02 26,17%
Kone OTCPK:KNYJF 44 2.405,92 3,67% 72,60 35,73%
Eaton ETN 44 3.380,60 5,15% 83,64 27,54%
Vestas Wind Systems OTCPK:VWDRY 35 2.458,45 3,75% 34,91 8,33%
Healthcare
Medtronic MDT 29 2.834,19 4,32% 39,67 25,00%
Roche OTCQX:RHHBY 10 2.479,54 3,78% 76,86 19,05%
Gilead Sciences GILD 15 900,93 1,37% 16,71 12,91%
Johnson & Johnson JNJ 17 1.954,21 2,98% 42,45 4,42%
Novo Nordisk NVO 43 1.972,18 3,01% 31,37 17,22%
Utilities
Consolidated Edison ED 31 2.537,30 3,87% 40,73 24,82%
National Grid NGG 109 998,67 1,52% 56,85 14,26%
Ørsted OTCPK:DNNGY 21 1.832,57 2,79% 27,45 52,26%
Technology
Corning GLW 72 1.870,48 2,85% 25,48 0,02%
TSMC TSM 54 2.144,14 3,27% 48,95 26,30%
Infosys INFY 134 1.412,37 2,15% 23,06 29,12%
Automatic Data Processing ADP 20 3.043,39 4,64% 41,74 34,95%
Tencent OTCPK:TCEHY 45 1.783,11 2,72% 5,12 15,71%
Telecom
Singtel OTCPK:SGAPY 994 2.105,71 3,21% 111,95 19,22%
REITs
Realty Income O 46 3.134,39 4,78% 73,65 26,91%
Ventas VTR 44 2.945,53 4,49% 92,45 35,18%
W.P. Carey WPC 19 1.537,57 2,34% 51,92 46,96%
Hannon Armstrong HASI 56 1375,20 2,10% 49,35 53,39%
Total 65.595,44 100,00% 1.537,48 21,41%

Source of table: Own book keeping

First of all, performance has been wonderful in 2019: 21.41% including dividends. The total performance of the portfolio in 2018 was only 1.37% (including dividend and measured in euro; in US dollars the return would have been negative).

All the stocks in the portfolio except for 3M have been a positive story until now in 2019. We even have some outperformers with Ørsted and Hannon Armstrong, which are both up more than 50%.

New purchases

As some attentive readers might see, I increased positions in three stocks, in which I each invested 1,000 euros. This was done at the end of last January. These are my purchases and the reasoning behind them:

Amsterdam Commodities: This Dutch trader in spices is a very solid and slowly growing dividend stock that was trading for a decent price. Though achieving a high yield is not one of the aims of my portfolio, it's always nice when there is a solid, growing company that pays a decent dividend: 5.37%. As you can see, this purchase has not paid off yet, as the stock is only up for 0.21% this year. In my opinion this company is still fairly valued.

Eaton: This was the hardest pick for me. Eaton is a very solid company with a decent dividend, but they were not undervalued last January. In hindsight this has been the best pick of the three so far, as the stock is up more than 27% this year. But since I'm focused on the long term, I hope this outperformance can continue. Right now the stock seems to get a bit pricey at almost $90.

BASF: This German conglomerate's stock is going through some hard times; it declined more than 30% since the end of 2017. I would consider BASF to be one of the riskier stocks of my portfolio, since they are currently experiencing their fair share of problems and their dividend for the future is not very safe. This article describes their problems better than I can. Still, I bought their shares last January since in spite of their problems they remain a company with a large moat and their shares were downright cheap. At the moment, their shares are still cheap, but relatively risky compared with the other stocks in my portfolio.

In accordance with my strategy, I will still invest 3,000 euros in stocks this month as well. I will dedicate a future article to the decision as to which stock(s) in which to invest this money.

Negative interest rates and their implications

My portfolio has performed wonderfully this year, more or less in line with the overall market sentiment. Beating the market is not a direct goal of my strategy. Since this portfolio should be used some day for retirement, its goals are a bit more defensive:

  • Invest in stocks of high-quality, future-proof companies that are very likely to still be thriving a couple of decades from now.
  • Sustain a decent and growing dividend income.

So, to put it in a few words: The portfolio focuses on safe growth with a decent dividend.

With negative interest rates we are entering uncharted territory for people owning capital. I am based in the Netherlands, and in our country today’s headlines say we should expect negative interest rates on savings accounts in the near future. Our government bonds, and those of much of Europe, already have negative interest rates. That means getting a return on your capital has become much more difficult. Though negative interest rates at the moment seem to be a local phenomenon, rates have dropped considerably during the last year. In the US. President Trump even tweeted about it recently.

As a consequence of these developments, I would expect that buying stocks will become a more attractive strategy compared with the good old savings account. With government bonds reaching into negative yield territory and savings accounts likely to receive negative returns, there seems to be truly no alternative anymore. This can already be seen in some very safe low-volatility stocks: some seem to be getting historically overpriced, such as Procter & Gamble (PG), and some even seem to be getting close to an outright bubble, such are American States Water (AWR). In my portfolio there also are some very solid, low-volatility companies that could suffer from historic overpricing: Most at risk are Unilever, Kone, Consolidated Edison, Ørsted, Roche and all of the REITS. I would not be surprised if the return on these stocks in the next couple of years will be worse than average.

For young people who have the luxury of being able to invest for the long term, the future-proof portfolio for young investors is an attractive way to invest in the stock market without having to trade stocks or fishing for stocks with very high yields, which can both be risky strategies.

Disclosure: I am/we are long ALL STOCKS IN MY PORTFOLIO. 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.