Sunday, January 10

Week 236 - A 10-Stock Retirement Portfolio (One Stock For Each S&P Industry)

Situation: If you don’t want to depend entirely on index funds to fund your retirement, you’ll need a plan for buying stocks. One approach is to only choose stocks from defensive industries, i.e., Consumer Staples, HealthCare, Utilities and Communication Services (see Week 231). Another strategy would be to have all 10 S&P industries represented, which would make your portfolio more diversified. (Academic studies show that returns are higher from owning stocks that are diversified across industries.) 

Mission: Pick one stock from each of the 10 S&P industries, meaning the 4 defensive industries listed above, plus Industrials, Financial Services, Consumer Discretionary, Information Technology, Basic Materials, and Energy

Execution: To avoid “cherry-picking” from a list of currently impressive stocks, I’ll simply present the 10 stocks in the S&P 100 list that I dollar-average into (see Table). To be complete, 9 alternates from the S&P 100 Index are listed. 

Administration: Five of the stocks can be purchased online and without additional fees by making pre-programed monthly additions with automatic dividend reinvestment using computershare: Exxon Mobil (XOM), NextEra Energy (NEE), Abbott Laboratories (ABT), IBM (IBM) and Union Pacific (UNP). One exception is that IBM levies a 2% fee for reinvesting dividends. The remaining 5 stocks are available at reasonable cost, also from computershare: Monsanto (MON), JP Morgan (JPM), PepsiCo (PEP), AT&T (T), and Nike (NKE). 10-yr US Treasury Notes can be purchased at no cost at treasurydirect but automatic purchase is not available and you’ll need to point-and-click each purchase, as well as reinvest interest payments. Total transaction costs per year come to ~$137 if you invest $1200 (or $19,200/yr) in each of the 10 stocks and 6 Treasury bonds. This results in an expense ratio of 0.71% (see Column U in the Table).

Bottom Line: We’ve shown that you can dollar-average $100/mo into one stock for each S&P industry, and back that up with $600/mo in 10-yr US Treasury Notes, to achieve a total return/yr of ~7.0% dating back to the S&P 500 Index peak on 9/1/2000 (after subtracting transaction costs of 0.71%/yr). This beats our key benchmark (the Vanguard Balanced Index Fund, VBINX) by approximately 2.0%/yr without incurring additional volatility, according to standard measures (see Columns D, I, and O in the Table). However, you are responsible for the considerable risk of sampling bias, since you’ll be selecting only one stock to represent each of the 10 S&P industries. 

Risk Rating: 6

Note: Metrics in the Table that are highlighted in red indicate underperformance relative to our key benchmark (VBINX). Metrics are current for the Sunday of publication.

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