The investment industry is full of literature that speaks in generalities and that doesn’t do a whole lot of good for those who are looking for specific, actionable advice. There are a few reasons why that advice is missing. First, specific trading advice offered without knowing the individual is seen as taboo for investing professionals and rightfully so. There are tens of thousands of products available and all of those are catered to a different type of investor. There is no universal solution that will work for everybody.
Second, investment advice comes at a high price because of its potential to produce large gains. Those “in the business” don’t want to freely offer their money making techniques for free when their living is made managing money.
I believe that providing people with a specific and actionable starting point for putting together a retirement portfolio outweighs the risks of readers copying the advice instead of using it as a jumping off point so, with hesitation, I have put together a portfolio that would be suitable for somebody with $10,000 to invest today.
This portfolio assumes the following: You’re a 40 year old married person working full time with a retirement plan through your current employer. That retirement plan isn’t forecasted to be enough to meet your retirement needs twenty years in to the future. All specific names below are recommendations as of September 19th, 2011. If you’re reading this article well in to the future, these names may no longer be appropriate.
If you have successfully saved $10,000, congratulations! If you have saved as little as $5,000 you can take these recommendations and cut each in half.
Part 1: Fixed Income (40% or $4,000)
The fixed income portion of your portfolio is boring and needs very little management relative to other parts of your portfolio. It’s not so much designed to show growth in the actual product. Instead, you’re capitalizing on the yield that you’re receiving for letting a company, municipality, or government entity use your money.
The three ways to gain exposure to fixed income is directly through bonds, notes, and bills, through bond mutual funds, or bond funds traded on the stock exchanges. For those with little experience as investors, Bond ETFs are the easiest way to gain fixed income exposure although much like stocks, these funds have to be watched and stops placed on each position. Four of my favorite bond ETFs are HYT, BKLN, EMB, and LQD. You could invest $1,000 each in to these names, $2,000 in to two or any other combination.
If you spend any less than eight to ten hours researching these names, you haven’t spent enough time before investing money.
Part II: Income Stocks (30% or $3,000)
Income stocks are companies who have a long track record of stability and pay a dividend of more than 3%. You will see a little bit of growth in the stock but it will be slow and steady over time. Once again, we’re going after yield. Names like Verizon (VZ) yielding more than 5% or Eli Lilly (LLY) yielding 3.8% are staple names. Some people believe that you should invest in companies with a lot of cash and lower dividends because they’re more likely to raise their dividend. I fall somewhere in the middle on that theory.
Part III: Growth Stocks (20% or $2,000)
Growth stocks are the high flyers who could double their stock price over time. These are the Apples, (AAPL) the Deere (DE) and Intel (INTC) who still have a lot of room to appreciate in value. Names like Deere currently yield 2.3% and Intel yields 3.6%. Although we’re not focused on yield, any name that we plan to hold an investment for a long time they should pay us something which is why I recommend buying names that pay you a dividend of 1% to 3%. There are always exceptions. Apple doesn’t yield anything but the growth potential is so high that we’re not concerned with yield.
Part IV: You Choose (10% or $1,000)
Are you a stock market junkie who likes to make short term money? Use the remaining $1,000 to make some bets on names that you like. No day trading but multi day, week, or month bets that may make a little bit of money. No more than 10%, though, and if you’re not in to trading stocks, put this money in equally in to the three parts above.
If you go out and put $10,000 to work in these names without learning about these names, you will lose money. These are names that I use for clients but before I committed money to them I spent most of a weekend researching and learning about each. If you don’t have the time for that, give the money to a qualified financial advisor.