Last week, we introduced Fools around the world to the first five investments we purchased for this special real-money portfolio. We're back today to bring you the next round of high-conviction stock and fund picks that we believe are well positioned to make money over the next five years.

But before we get to this week's picks, we wanted to share some of our Foolish secret sauce for building a winning portfolio.

Foolish commandments for building a successful portfolio

1. Aim for at least 15-25 individual stock positions.

A well-diversified stock portfolio should contain at least a few dozen individual stock positions. This is important to ensure that you're not overly exposed to the fortunes of just one or two companies.

2. Ensure that no single stock accounts for more than 15% to 20% of your total portfolio.

Fools are big proponents of investing heavily in high-conviction stocks, and that's perfectly fine. However, we do recommend keeping your exposure to any one stock to no more than 15% to 20% of your investable assets. This will help limit company-specific risk.

3. Consider the tax implications if selling in a taxable account.

While we're patient, if not reluctant, sellers of our winners, we understand that there are times when you need to take some profits. When you do so in a taxable account (versus a tax-advantaged account like an IRA or 401(k)), the tax collectors will want a cut. Before you sell, carefully consider what tax liability may be generated by your actions.

4. Stocks are important, but also consider how your portfolio looks as a whole (asset allocation).

Building a winning portfolio stock by stock is a time-tested bottom-up approach to investing. But if you combine that with a top-down approach -- namely, looking at the allocation of your entire portfolio across asset classes -- you have better odds of maximizing return while minimizing risk.

5. Remember that you are building a long-term portfolio.

Fools buy stocks for the long run: That means we're not too concerned with the market's short-term dips and drops and gyrations. When you buy a stock, you're buying a long-term investment, so get comfortable with any names you welcome into your portfolio.

Now let's get back into the details of our April Fool's Portfolio!

Allocation plan

Just as a reminder, here is the allocation plan we're working toward for this portfolio:

  • Stocks (15): 75% of our portfolio (5% for each stock)
  • ETFs (5): 20% of our portfolio (4% for each ETF)
  • Cash: 5% cash reserved

In other words, whatever you plan to invest to follow along with our April Fool's Portfolio, you'd buy up to a 5% position in each stock if following us step by step.

Last week, we revealed the first five investments in our portfolio. If you haven't purchased these stocks or ETFs yet, we recommend doing so:

  • Vanguard Total Stock Market ETF -- 4%
  • Vanguard Total International Stock Market ETF -- 4%
  • -- 5%
  • Etsy -- 5%
  • Pinterest -- 5%

And now let's focus on the next five investments that we're purchasing for our special April Fool's Portfolio.

Vanguard Small-Cap Stock ETF

Portfolio weighting: 4%

The Vanguard Small-Cap Stock ETF (NYSEMKT:VB) is an exchange-traded fund focusing on the smaller end of the market capitalization spectrum, making it an ideal choice for dedicated small-cap coverage. With a median market cap of $6.2 billion and an expense ratio of just 0.05%, this fund provides broad, inexpensive exposure to a wide range of smaller companies that tend to have a fundamentally different growth profile than most large- or mega-cap companies.

Because the bulk of our stock picks for the April Fool's Portfolio will reside in the large-cap space, we wanted to ensure we had some representation from smaller names as well. This fund fits the bill, and should provide a diversified approach to investing in this sector of the market.

Walt Disney

Portfolio weighting: 5%

It used to be that if you had kids, the investing case for Walt Disney (NYSE:DIS) was clear as day. But the House of Mouse these days has moved way beyond cartoon characters and theme parks. Less than two years after launch, its young streaming business has crossed over 100 million global subscribers, and 1 million new Disney+ watchers join each week. While COVID-19 squashed the company's theme parks and cruise operations, Disney+ took off and even helped in the evolution of how Disney releases films. Adding in Hulu and ESPN+, Disney has nearly 150 million subscribers to its huge library of streaming content. Within a few years, a few hundred million subscribers will be enjoying Disney content from their couches or mobile devices.

Disney's stock has rebounded nicely since its 2020 lows, but we still believe there is more upside ahead as lockdowns lift and consumers start traveling and spending again. Theme parks will see more visitors, returning them to healthier revenue and profit. Retail stores and movie theaters will open up. And sports returning to more normalcy will help drive ESPN viewers, content, and revenue. Eventually Disney should return to paying a dividend that will help support its stock and attract more shareholders. There will be ups and downs as its once-largest segment (parks) opens back up, but we think Disney gives you a fun and rewarding way to make money by owning its stock.


Portfolio weighting: 5%

Turning from Hollywood to Latin America, MercadoLibre (NASDAQ:MELI) operates an e-commerce platform and logistics network through its MercadoLibre marketplace, and also offers payments and fintech solutions via MercadoPago. It is the largest e-commerce business in Latin America. Often dubbed the "Amazon of Latin America," MercadoLibre operates across 18 countries including Brazil, Mexico, and Argentina. It serves a market of more than 635 million people with some of the fastest internet penetration rates across the globe.

Already a leader in e-commerce, MercadoLibre widened its lead during 2020, with the number of active users growing 78% and merchandise sold across its marketplace growing 50%. Yet the company is about more than just selling goods. In its MercadoPago division, payment volumes jumped 134% in the last quarter of 2020. The company's Mercado Envios logistics business shipped 214 million products, up 131% in the last quarter.

With a market cap of about $77 billion and annual sales of almost $4 billion, MercadoLibre is the big fish in a large and growing pond. We think there's a pretty good chance that it can grow into a whale over the next five years. That means a higher stock price than today, and profitable returns for shareholders.


Portfolio weighting: 5%

One of the most successful companies of the computer and internet age makes our list this week. Founded in 1975 and based in Washington state, Microsoft (NASDAQ:MSFT) is a nearly $2 trillion company with a stock that has grown almost 900% over the past decade. The company started by Bill Gates is a giant in software, cloud computing, AI, gaming, and many other areas that impact millions of people around the world every second.

Microsoft Office is the de facto software suite that millions rely on to do their jobs, but equally important is the company's thriving intelligent cloud segment, led by its Azure cloud computing offering. Microsoft also has a gaming segment (Xbox), personal computing (its Surface tablets), ownership of the LinkedIn social media platform, growing AI innovations, and so much more.

And just this week the company announced it will be buying automated speech software provider Nuance Communications (NASDAQ:NUAN) for almost $20 billion in cash (15% of Microsoft's current cash balance and less than half the company's annual earnings). A Microsoft-plus-Nuance partnership will supersize Microsoft's healthcare business -- healthcare is where Nuance gets most of its revenue.

With a proven, visionary, successful leader in CEO Satya Nadella, Microsoft is once again a darling of the tech world. With some of the best financials of any company in the world to support its growth and expansion plans, Microsoft is a stock that can sit nicely in your portfolio for years -- and collect a little dividend along the way.

PayPal Holdings

Portfolio weighting: 5%

With nearly 380 million active accounts, which last year generated 15 billion transactions worth nearly $1 trillion, PayPal Holdings (NASDAQ:PYPL) is a force in the growing and evolving fintech landscape. Through its widely known and simple-to-use PayPal and Venmo apps, the company aims to reach 1 billion global users transacting daily, and has set a stepping stone of 750 million accounts and $2.8 trillion annual payment volume by 2025. That's ambitious, but considering the company's success under CEO Dan Schulman, we're not doubting the potential.

By being an early disrupter in the digital payment and banking space, PayPal has amassed a $320 billion market cap and generates $21 billion in revenue. Furthermore, it has a rock-steady balance sheet, and generates very attractive operating margins and profits. And it deploys those profits back into its business in research and development, as well as other investments.

Its recent acquisition of crypto security start-up Curv, to support cryptocurrency assets, is a great step. PayPal already allows purchases of Bitcoin on its platform. And it announced a "Checkout with Crypto" initiative, giving its clients the option to convert crypto assets to fiat currency in order to check out at millions of merchants. That's just one example of the innovation this company brings and has brought over the years -- and we expect much more ahead of this proven winner.

Pie chart show weightings of each element in the April Fool's Portfolio

Image source: The Motley Fool.

Fools, we are halfway through the unveiling of our April Fool's Portfolio -- and that means that we'll have more updates and guidance on Foolish investing coming your way in the second half of the month, so you don't want to miss out. We want you to invest alongside us, so make sure you're buying the stocks and funds we present each week.

Be sure to check back here next week on Friday, April 23, for our next update and a new round of Foolish investments!

See our first five recommendations here.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors.

The Motley Fool owns shares of and recommends Amazon, Etsy, MercadoLibre, Microsoft, PayPal Holdings, Pinterest, and Walt Disney. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon, long January 2022 $75.0 calls on PayPal Holdings, and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.