Sunday, August 5

Week 57 - Four Stocks and a Bond Fund

Situation: Much of the available information about investing is mind-numbing in its complexity and scariness. That is why most people turn the task of saving for retirement over to trusted professionals.  A really smart, fee-only advisor might recommend that you put 60% of your retirement savings in a no-load S&P 500 Index mutual fund (e.g. VFINX), 30% in a no-load managed intermediate-term, investment-grade bond fund (e.g. PRCIX), and 10% in a no-load, inflation-protected, short/intermediate-term US Treasury fund (e.g. VIPSX). If you had come into an inheritance in June of 2002 and invested it that way on July 1, 2002, your total return through July 19, 2012 would have been 5.8%/yr. However, you’d have lost almost 23% during the 2007-09 bear market (see attached Table). Had your advisor guided you to a no-load, conservative-allocation balanced fund like Vanguard Wellesley Income Fund (VWINX), you would have done even better with a total return of 7.1%/yr, However, you would have lost over 13% during the 18-month bear market (Table).

Let’s pretend that investing isn’t all that complex and you can do better on your own. And let’s assume you have maximized your contributions to your retirement plan at work, and would also like to put $500/mo into a Roth IRA--by using a $100/mo automatic withdrawal from your bank account into each of 5 dividend/interest re-investment plans (DRIPs). Your question then is “which 5 DRIPs make the most sense going forward from today?" In our Week 54 blog, we surveyed all 500 of the S&P 500 Index companies to determine which have a “durable competitive advantage.” We then matched those with the 60 S&P 500 companies that have the most honored brands globally. We came up with 14 matches, 3 of which are companies on our Master List (Week 52): ExxonMobil (XOM), Wal*Mart (WMT), and Microsoft (MSFT). If we chose those 3 as DRIP investments, we would still need a diversified bond fund and a second Lifeboat Stock (Week 50) besides WMT in order to minimize risk. Our best suggestion is to pick a stock from the Master List that is issued by a regulated electric utility, one that grows its dividend annually and has a durable competitive advantage (Week 54). We’ve selected NextEra Energy (NEE). For the bond fund, we like T Rowe Price’s New Income Fund (PRCIX). If you had enrolled in these 5 DRIPs on July 1, 2002 then made no further additions, your total return through July 19, 2012 would have been 7.6%/yr and your portfolio would have lost only 13% during the bear market (Table).

Bottom Line: Risks that are embedded in the major world economies and global marketplace really haven’t changed much since 2007. Careful selection of two Lifeboat Stocks (e.g. WMT & NEE) and two additional stocks (e.g. XOM & MSFT) from what we like to call Core Holdings (Week 22) will get you started, supplemented by a diversified bond fund that can invest internationally (e.g. PRCIX). Once you see how well this works, that experience will likely guide you to investing in additional DRIPs.

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