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Successful Investors: What Would You Do in 2021 With a Blank Slate and $5,000?

By Keith Noonan, James Brumley, and David Butler - Dec 12, 2020 at 7:30AM

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These strategies could help you orient your portfolio for success next year and beyond.

2020 has been a year for the history books. In March, the stock market suffered its worst month since the Great Depression, but by August, the S&P 500 index had set a new record high -- and it recently notched its latest fresh peak. It's been a whirlwind year, to put it mildly.

There's still lots of retrospective analysis to be done and lessons to be taken from everything that's transpired in 2020, but investors also have to remain forward looking. To get a sense of how some successful investors are approaching the upcoming year, we asked three Motley Fool contributors what they'd do if they had to start from scratch with $5,000 to invest in 2021. Read on to see what they had to say. 

A bag labeled '2021' and a person holding an arrow pointing up and to the right.

Image source: Getty Images.

Pursue both value and growth, but stick to my wheelhouse

Keith Noonan: The prospect of starting from scratch as an investor in 2021 is a bit daunting. With the stock market posting remarkably strong performance despite all the twists and turns 2020 has brought, there's a good case for taking a more value-focused approach to investing next year.

Tasked with starting over with $5,000 in funds to deploy, I'd certainly apportion some of that cash to underappreciated dividend stocks that have lagged the market in 2020. Names including Hanesbrands and AT&T come to mind because they both offer high yields, trade at low earnings multiples, and have business and brand strengths that look relatively sturdy.

However, I'm also not a big believer in approaching stock analysis with an overly strict dichotomy between value and growth. There are growth-dependent stocks on the market that also offer great value for investors, particularly if you're approaching the market with a buy-and-hold approach. On the other hand, I think it's smart to be selective in the current market climate. 

Diversification can be great, but with the major indexes trading near all-time highs and plenty of uncertainty still on the horizon, it's probably harder to find great deals. It's going to be even harder if you're looking outside of sectors that you know well. 

The video game industry is one area that I remain very bullish on and think should prove relatively resilient in the near term, even if next year brings more turbulence and volatility. I'd spread some of my $5,000 starting fund across companies including Zynga, Activision Blizzard, and Glu Mobile. Each of these companies is profitable and trading at reasonable levels, and from my perspective, the batch exemplifies the concept of "growth at a reasonable price."

With potentially revolutionary technology trends including augmented reality and 5G starting to pick up steam, there are compelling catalysts for many growth-dependent companies on the horizon, even with good reasons to be cautious about the market at large. I'd keep an eye out for opportunities in these categories, as well.

I'm planning on remaining in the market for decades to come and should have time to recover from some growth bets that don't pan out. If I was starting over as an investor next year, I'd just want to make sure that those bets were well founded and also fortify my portfolio with some more traditionally conservative stocks. 

Keep it boring

James Brumley: If 2020 only taught us one investment lesson, it's this: The so-called "black swan" events that are only supposed to happen once every 100 years are now happening about once every four years. Yet we still can't predict them. It matters, but not for the reason you might suspect.

Yes, the market is recovering from COVID-19, just as it overcame the subprime mortgage meltdown, Greece's debt crisis, China's slowing growth in 2016, the 2014 collapse of oil prices, and other disasters. The steep sell-offs before those rebounds, however, have the nasty habit of flushing investors out of great stocks at the exact wrong time. I shudder to think how many people sold their stakes in Apple in March following the stock's 25% pullback, only to miss most of all of what's turned into more than a 100% gain since March's low. Commission-free trading apps like Robinhood only make it easier to justify short-lived trades that end up doing more harm than good.

That's why I'd like to see more investors -- and newcomers, in particular -- embrace more proven investment principles in 2021 with positions that don't lend themselves to an exit at the first sign of trouble.

I'm talking about mutual funds, and index funds, in particular... which are more likely than not to outperform actively managed funds. I don't think it would be wrong to allocate half of any new investment capital to a fund like the Fidelity 500 Index Fund or the Schwab S&P 500 Index Fund. Both have low operating expenses, but more important, the temptation to actively trade in and out of them isn't as strong as it might be with individual stocks.

As for the other half of that $5,000 sum, there's nothing inherently wrong with using individual stocks to build or update a diversified portfolio. Nevertheless, I'd still buy them with the intent of owning them for at least a year.

There's a reason most actively managed mutual funds don't beat index funds in any given year -- it's hard to do so with any consistency! Small-time amateurs don't fare any better either. I've seen several horror stories just this year discussing the devastating losses suffered by most swing traders and day traders despite the promise of quick riches.

I'm hoping this reality serves as a wake-up call to everyone that the stock market doesn't work like that. Most of the money made in the market is made by people who can leave their positions alone for years at a time. More than that, Hartford Funds recently crunched the numbers to find that 42% of the market's overall gains come from dividends.

To this end, investors would also be wise to enter 2021 with solid dividend names like Verizon or Procter & Gamble. There's nothing sexy about either one. But had you reinvested their dividends over the course of the past 10 years, you'd be up 171% and 191% (respectively) on those long-term holdings. That's pretty sexy.

Don't chase the trends of 2020

David Butler: Starting out in 2021 is a challenge of self-control. The market is at all-time highs. We've watched tech stocks have incredible bull runs through 2020 as a result of remote work and social distancing, and that's not to mention the trillions of stimulus dollars that went out. But the rebound has been unbalanced. It's important to understand that the massive 800% run we saw in Zoom from January into October is not how the market traditionally works. It would be foolish to attempt to replicate those kinds of trades, rather than look into quality long-term investments.

The challenge of $5,000 is how to spread it. It's tempting to throw it all down on one name, as a 3% or 4% gain only nets you $150 to $200. I'd take a half-and-half strategy. Pick a few dividend plays that aren't overpriced and toss in a growth stock that was doing well before the COVID-19 pandemic.

That's probably the biggest thing for me. I want stocks that have a track record of success, not just momentum from social distancing and remote work. It wouldn't hurt to own something like Amazon, as it was doing well long before the pandemic. This is a company that continues to reinvest its revenue, pressing for more and more market share.

It doesn't have to be that cliche, though. Low interest rates are causing bank stocks to not receive much love, but you can still find banks that are trading below the book value of their balance sheets. That provides openings into some high dividend names that have the opportunity to regain their share-price declines. A small-cap name like First Commonwealth Financial ( FCF -0.39% ) is still trading below book, still trading more than 20% lower than January 2020 levels, and offers a 4.17% dividend. If 2021 turns out to be any semblance of a return to normal, where vaccines help take pressure off of businesses, banks could find momentum as investors become less fearful of defaults in loan portfolios.

Low-risk index funds are never bad either. Something like the Vanguard High Dividend Yield ETF is a good place to start.

Regardless of the sum of the portfolio, it's important to invest in assets that aren't reliant on the volatile shifts we saw in 2020. A lot of stocks saw monumental gains due to the effects that remote working and social distancing would have on the way we live. Don't chase those trends. That ship has sailed.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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