The news around the stock market is not too good these days. I’m writing this article late on Monday Oct 7th and no solutions have been found for the Government Shutdown. The market is down roughly by 1% over the past couple of weeks and we can expect more volatility if the problem persists.
At the end of this summer, we discussed Hindendburg Omens from right, left and center. All technical analyzes are clear: we are heading towards a market correction. Stocks have halted their rally but they seem to be suspended like leaves in autumn.
Back in June this year, all attention wason theffact that we were headed towards the FED and the apocalyptical possibility of seeing the “monthly gift” of $85B evaporating into thin air. At that time, the market slowed down, worried about the possible impact of less liquidity in the economy while bondholders were taking a hit.
This is all just noise. Loud noises, off course, but noise nonetheless. Based on my experience, I’ll go with two predictions:
#1 The Stock Market Will Go Through a Correction of At Least 10%
#2 The Stock Market Will Bounce Back a Few Months Later
Therefore…. What’s the point of timing the market? Stocks go up and down and up and down since the stock market was created over a hundred years ago. This is why the only thing that matters is how you build your core portfolio. This core will pay you dividends during the storm and will show paper profits when the sun shines and the birds sing.
Why You Need a Core Portfolio
The idea behind having a core portfolio is to have a skeleton around your investing strategy. Without a clear vision of your investment strategy, you may be tempted to listen to noises. Then, you could buy and sell according to what’s being written in the media. You will obviously (and perpetually) lose money if you ever do this.
The core strategy is the skeleton that will stand in the storm. It will hold still and never move no matter how hard you get hit. It’s the most important part of your portfolio since it is the part that will always come back to life once the market turmoil is over.
What Should Be In Your Core Portfolio
In a short answer: companies you would hold forever. As a dividend investor, I’m looking to hold a part of my portfolio literally forever. My goal is to hold stocks that will eventually pay double digit dividend yield.
The idea is to build a core portfolio that will rarely change over time and add “satellite” positions that come and go as the market generates buying opportunities. As an example, my core portfolio shows stocks like Coca-Cola (KO), Wal-Mart (WMT), McDonald’s (MCD), Chevron (CVX) and Johnson & Johnson (JNJ). I intend to stick with these stocks for over 10 years. The only reason that would make me sell them is if the company business model falls apart suddenly.
The core portfolio pays a smaller dividend distribution at first since these are well established companies yielding between 2.50% and 3% depending on the moment you buy them. The good news is that if you hold them long enough, their dividend payout increases over time. I’ve been holding CVX, KO and JNJ for a few years now and they are yielding over 3 and 4% now. This is also why they will eventually yield double digits in the future too.
The core portfolio is like a merchandise train, it moves slow but steady. You know it won’t be stopped and will continue its ride until the end. This is the part of your portfolio that matters when bad news arises on the stock market since those companies continue to make profits and pay their dividend!
Add Satellite Investment For More Growth
The core is nice and comfy for the dividend investor; you get your quarterly dividend, see a yearly increase and the paper profit doesn’t move too fast. So, if you are looking for more growth, you may be disappointed. These stocks are not very exciting. But then again, who told you that investing was supposed to be exciting?
This is why I have the habit of adding “satellite” picks that will come and go as there is an opportunity on the market; it’s the salt they had in my Salted Caramel Latte for Halloween. It is what makes investment interesting and exciting!
These satellite stocks are bought and sold in my portfolio when occasions occur. The best example I can see is my trade on Seagate Technology (STX). The stock was beaten to death while being a leader in its industry. A year of good results and STX was back on track. I sold the stock over the summer mainly because I saw that sales were stagnating at this point. Since the company evolves in a mature – nearly dead – industry (PC), I thought I was better off to sell the stock with a healthy profit and boost the size of my core portfolio (by adding stocks like WMT and MCD).
Not all trades are profitable (I also bought VNP and RIM with the same thinking) but this is my “gambler side”. I would never do this with my entire portfolio but I’m ready to risk a part of it. The rest is invested in boring and stable stocks that will increase their dividend year after year.
Do You Want To Know How To Build This Solid Core Portfolio?
I’m currently working on an amazing project; a complete investment tool that will support you in building and managing a core portfolio. This tool will provide buy and sell signals based on fundamentals and stock research. If you want to be part of it, just sign-up here.
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Disclaimer: I hold positions in Coca-Cola (KO), Wal-Mart (WMT), McDonald’s (MCD), Chevron (CVX), and Johnson & Johnson (JNJ).Google+
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