How do you build out your portfolio of stocks? On this episode of “The 5,” recorded on Oct. 21, Fool contributors Jason Hall, Taylor Carmichael, and Travis Hoium tackle this question.
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Jason Hall: “Can you talk through the art of portfolio construction? List a couple of different buckets here, thinking about growth, value, REITs, and dividend stocks. Asking some questions like percentage of capital and positioning, then things like just diversifying into various sectors, thinking about things like making it anti-fragile. During periods of uncertainty, your portfolios actually gets stronger. Then thinking about once you have a base, expanding it with capital you have coming in every month.”
I’m going to kick this off and talk for a minute and give you guys just a minute and think about it, and then you can share your own insights. I’ve talked about this a little bit before, but by and large, my stock portfolio, for many years, my strategy was to buy the best companies I could buy, buy as many of them as I could, and then own them for as long as I possibly could. That was the strategy. I’ve never been one to spend a lot of time thinking about allocation to the certain industries. If that was something that I really was concerned about, I would just buy index funds because they do that already. I’ve never really been that concerned about it. Part of it, at my age, I’m still in my early 40s, so I’m still multiple decades that I’m measuring my financial goals, and that gives me margin of safety to not be too worried about being overexposed to certain sectors for a few quarters or a year or two or that kind of thing if there’s a sector downturn in that kind of thing.
To me, the way I think about it, is as my process has evolved over time is I’ve developed a barbell strategy. On one end of the barbell, and it’s not like a balanced barbell, it’s 70-30, 80-20. But on one end of the barbell is growth. I really focus on buying companies that can grow. Typically, that means they’re smaller companies. Again, matches up with my financial goals. I have a 4-year-old, I’m 20 years from retirement. I’m measuring my goals in decades, so I need to invest generally in growth stocks, and I think disruptive companies that are growing and in industries that are growing like the cloud. It’s a hell lot easier to buy a basket of cloud stocks and have the tailwinds to make money than fall into the weeds to think I need to diversify and also maybe buy some oil and gas, too. You look at which of those sectors has done very well over the past 10 years, which has done terribly. Think about over the next 10 years, which do you think is going to do better, oil and gas or the cloud? I simplify that way and look for growth with the majority of my investments.
The other end of the barbell, dividend stocks. Companies that are typically more mature businesses or their business model means that they pay dividends, like renewable energy yieldcos, for example, they are built to pay dividends. Buy the best companies in that area that I can that pay an above-average yield that are built with strong balance sheets and abilities with the tailwinds that are going to grow their cash flows so they can grow those dividends over time. That’s my barbell investing strategy. At some point, as I get older and as I get closer to financial goals and I’m no longer a decade or two decades from something, then the way I’m going to change it is I need to start protecting from the downside, which means I need to shift some of that out of equities into cash, or maybe bonds with the right terms that are going to mature when I’m going to need the cash. That’s about avoiding all of the risks of volatility to the downside with all equities. I don’t get too tied up with just specific buckets. Taylor or Travis, who want to make a pass at this?
Taylor Carmichael: I will, this is a fun subject, a fun question.
Hall: It is. It’s very individual, that’s the thing about it.
Carmichael: If you think about it, a stock, a company has a life span like a human being. It has its early days when it’s a baby and it has its long days until it dies. A company can last decades and decades and decades.
Hall: Well, they can be reborn, too, like Microsoft (NASDAQ: MSFT), for example we have earlier.
Carmichael: That’s a very good example. What I think really what works really well is when you buy a fast-growing small company, like say you buy Amazon (NASDAQ: AMZN) in 1999 or 2002 or 2004, or you by Intuitive Surgical (NASDAQ: ISRG) in 2007, 2008. You hit gold. It’s just a wonderful stock and amazing stock. You let it roll, you let it run, and you may take little slivers along the way. Honestly, we sold a little bit of Intuitive Surgical and we’re sorry to this day that we did, we sold a little bit of Shopify (NYSE: SHOP), sorry to this day that we did. But you take little tiny slivers if you need cash, if you don’t, don’t sell anything. Take little tiny slivers and buy another growth stock, the idea being if you let them run and then just keep on, eventually they’re going to mature, they’re going to turn into dividend payers, they’re going to be a lot safer, they’re going to be in the S&P 500, and they get boring, but keep the boring ones, too. Everybody’s personality is different. I tend to jump on the high-growth ones. My family owns Apple (NASDAQ: AAPL). We’ve owned Apple forever. I’ve been trying to get my mom to sell a sliver of Apple. She loves Apple, she gets mad at me. I’m like, “Mom, let’s get rid of some of this Apple.” But she’s right, and she’s been right that it’s a great idea just to let even when it gets boring and you feel like it’s topped out or they might be hitting a ceiling, keep it and let that turn into your slow growers and diversify along the way, of course, in different sectors. When you buy, I think you should buy growth and then hold up into the value states, would be the way I would take it.
Travis Hoium: I’m a little bit like Jason in that, I don’t have a specific process. I like to think of it as being able to sleep at night or just feeling comfortable looking at my portfolio. One of the things that I do is when I buy stocks, I typically don’t like those entry points to be more, it’s maybe 1% of my portfolio. I don’t have a large number of positions compared to a lot of people. It might be 20-35 stocks at any given time. One percent might be a typical allocation into a stock. Then if that stock runs up, I added Cloudflare, it was less than 1% and that’s run up and is now 4 or 5% of my portfolio. That was just a surprise to me and I’m just going to let that run. I don’t need to add more to that. But that’s what Taylor was talking about is let those growth stocks ride. But at the end of the day, I think when I look at my portfolio in totality, I judge, does this feel comfortable? Does this feel right especially in this moment? We’re at a time of exuberance in the market right now, so I look at my portfolio and growth stocks are really highly valued right now. What are my biggest positions? Well, it’s companies like Apple, Square (NYSE: SQ), which could easily argue that it’s too highly valued, but I got Verizon (NYSE: VZ) in there. These are companies that I’m comfortable owning even if there is a downturn, it’s not like their businesses are going to completely fall apart. It’s really more of, does this seem right than it is a metrics that I’m able to put on a spreadsheet and go a certain percentage REITs, a certain percentage dividend stocks, just naturally over the course of time that portfolio ends up diversifying itself as I find more attractive opportunities in different parts of the market. I’ve been adding comp stocks like GM (NYSE: GM) and Zillow (NASDAQ: Z) that I’ve never had in the portfolio before that have diversified me into areas that I’ve never invested in before because I find them interesting and attractive right now. It’s something that’s different for everybody, but that’s the way that I look at my portfolio construction right now.
Hall: Thanks guys. I think it’s useful and helpful. Again, the key here is it is so individual. Three people that we had overlaps, but we also all take our unique individual approaches. That’s one of the things that’s great about investing, is we get to figure out what’s going to work best for us as individual investors and our families in meeting our financial goals.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Jason Hall owns shares of Intuitive Surgical, Shopify, Square, and Zillow Group (C shares). Taylor Carmichael owns shares of Amazon, Apple, Intuitive Surgical, Shopify, and Square. Travis Hoium owns shares of Apple, General Motors, Square, Verizon Communications, and Zillow Group (C shares). The Motley Fool owns shares of and recommends Amazon, Apple, Intuitive Surgical, Microsoft, Shopify, Square, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends Verizon Communications and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $193.33 calls on Intuitive Surgical, long January 2023 $1,140 calls on Shopify, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, short January 2022 $200 calls on Intuitive Surgical, short January 2023 $1,160 calls on Shopify, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.