Let's face it -- aggressive stocks are fun. They can double in value in just a year. And even if they don't, it's exciting to think that they might. Who wouldn't love to make some fast and easy money?
But while some hot stocks might perform wonders for your portfolio, others can implode, taking your hard-earned dollars with them. That's why it's smart to devote a sizable portion of your portfolio -- if not all of it -- to solid, proven long-term holdings.
A solid core
You can prime your portfolio for success by centering it around some core holdings. Ideally, there won't be too many of them, and you'll be aiming to hold them for a long time.
Reining in the number of stocks you own can help you keep up with your holdings better. Consider that if you're invested in 120 different companies, they will issue nearly 500 quarterly reports in the course of a year. Most of us would not be able to read all that, so we'll end up not following our holdings very well. If you own, say, just 12 core stocks, you'll have a lot less work to do.
By aiming to hang on for years, you can develop a better understanding of each holding, too. Over time, you'll watch them implement various strategies successfully or unsuccessfully and will develop a better sense of their potential. Those who turn over most of their holdings every few weeks or months have a lot more learning to do -- or to ignore, at their own risk.
Boring is good
Solid core holdings can help you sleep at night, too. They tend to be in reliable, slow-changing industries, or are powerhouses that can successfully adapt to change. Coldwater Creek and Talbots, for example, are two fashion retailers that struggled mightily in 2011, with Coldwater's revenue growth shrinking by almost a quarter over the past 12 months and Talbots planning to close more than 100 stores by 2013. Fashion tastes can be fickle, and a poor economy can have consumers pulling back on discretionary purchases.
Waste Management (NYSE: WM ) is an example of a very different kind of business, the kind that makes a good core holding. It's focused on garbage, which is a defensive industry. No matter what the economy is doing, we'll all be putting out our garbage on the right night of the week, expecting it to be collected. Even the world of garbage changes over time, but it tends to do so slowly, and smart companies such as Waste Management adapt, such as by investing in recycling technologies.
Core holdings don't have to be boring or slow-moving. Intel, for example, is a $135 billion company in the fast-changing technology arena. It can be harder for big companies to grow briskly, but it can be done. Intel's revenue has grown by about 13%, on average, over the past three years, and its earnings by 35%. The company is a longtime innovator, recently introducing thin Ultrabook laptops and regularly rolling out fast and better chips. The fertilizer business might make your eyelids droop, but the stock of PotashCorp, the world's largest fertilizer maker, has grown at more than a 30% annual clip over the past decade. Its future looks bright, too, with higher prices locked in on contracts with India and China.
Many prime core holding candidates offer significant dividend yields, too, and these can serve you well as they'll tend to keep being paid through ugly and beautiful economic environments.
If you don't have at least a handful of holdings that you consider the core of your portfolio, you'd do well to add some to your mix. Look for proven, profitable performers in growing industries, and ideally companies with low debt and perhaps a meaningful dividend yield, as well. Over the next few days we'll be rolling out a handful of standouts for your consideration -- check them out:
- Wednesday: A dividend-focused ETF that has gained more than 17% annually over the past three years.
- Wednesday: A technology giant that has averaged 15% gains over the past 20 years.
- Thursday: An Asia-based tech giant with net profit margins above 30%.
- Thursday: A growing retailer that has averaged 13% gains over the past two decades.
- Friday: A titan of waste, with a dividend yield near 4% that has grown its payout by 9% annually over the past five years.
- Friday: An oil and gas transportation specialist whose stock has gained almost 20% annually over the past 20 years.
- Monday: One of the most diversified giants, with top-notch management and legions of fans.