Building a portfolio can be a daunting task, especially if you're a new investor. The U.S. stock market alone comprises thousands of publicly traded companies, and it would take several lifetimes to absorb all the available information on all those businesses. Fortunately, you don't have to do that. But you will need to do some research if you want to buy individual stocks.
Generally speaking, I look for businesses that share these three traits: strong sales growth, a durable competitive edge, and a big market opportunity. Those types of businesses tend to create wealth for shareholders over long periods of time.
With that in mind, here are the first four investments I'd make if I had to build a portfolio from scratch.
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Airbnb: 16.7% allocation
Airbnb (ABNB 0.49%) has become synonymous with travel. Its platform lists properties from over four million hosts, helping people make lodging arrangements in thousands of cities around the world. That asset-light business model makes Airbnb more agile than traditional hotels because it can add new properties in minutes, without spending much money. Meanwhile, building a new hotel costs millions of dollars and takes years to complete.
Airbnb's business model also means guests have access to a broader range of lodging options, both in terms of the location and the type of property. For instance, you can book a stay at a coastal cottage, a suburban house, or an urban apartment. Or you can go with something more exotic, like a treehouse in the Hawaiian jungles or a castle in the Spanish countryside. No hotel has that kind of range.
Collectively, that competitive edge has made Airbnb a financial powerhouse. Last year, revenue skyrocketed 77% to $6 billion, and the company generated $2.2 billion in free cash flow, up from a loss of $667 million in the prior year.
Looking ahead, management puts its total addressable market (TAM) at $3.4 trillion, but Airbnb's gross booking value was just $47 billion in 2021, meaning it has captured just 1.4% of its TAM. To capitalize on that opportunity, Airbnb is working to engage guests through personalization and flexible search options, and it's making efforts to grow its host community through a simplified onboarding process and end-to-end property insurance. Simply put, Airbnb is successfully disrupting a multi-trillion-dollar industry.
CrowdStrike: 16.7% allocation
CrowdStrike Holdings (CRWD 0.81%) has become the gold standard in endpoint security. Its cloud platform helps clients protect their IT ecosystems by crowdsourcing trillions of security signals each week from millions of protected devices. It then leans on artificial intelligence and behavioral analytics to detect and prevent threats. To that end, CrowdStrike benefits from a powerful network effect because each data point makes its AI engine a little smarter, and that keeps CrowdStrike on the cutting edge of threat intelligence.
In 2021, Gartner and Forrester Research recognized CrowdStrike as a leader in endpoint security, and the company captured an industry-best 14.4% market share, up four percentage points from 2020. Not surprisingly, CrowdStrike delivered another impressive financial performance. Revenue soared 66% to $1.5 billion last year, fueled by 65% growth in its clientele, and free cash flow jumped 51% to $441 million.
Looking ahead, digital transformation should be a tailwind for CrowdStrike. The rise of cloud computing and the proliferation of connected devices will reinforce the need for effective cybersecurity. To that end, management believes its TAM will reach $116 billion by 2025, and given CrowdStrike's industry leadership, this stock looks like a smart long-term investment.
Image source: Getty Images.
Shopify: 16.7% allocation
Shopify (SHOP 0.65%) is the world's most popular e-commerce software. Its technology allows businesses to manage sales across physical and digital storefronts, including custom websites, online marketplaces, and social media platforms -- all from a single dashboard. Shopify supplements its core offering with value-added services like payment processing, shipping, and financing, making it a great option for modern entrepreneurs.
Fueled by that value proposition, Shopify now powers two million businesses around the world, more than double what it had in 2019. Better yet, more of those merchants are using value-added services like payment processing and financing, evidencing the stickiness of the platform. As a result, revenue surged 57% to $4.6 billion in 2021, and free cash flow jumped 18% to $454 million.
Going forward, Shopify puts its TAM at $160 billion, but that figure will continue to rise as online shopping becomes more popular. To add, the company is also executing on an ambitious growth strategy that could supercharge its growth trajectory and further differentiate its business, including the launch of new products like fulfillment services, money management accounts, and cross-border e-commerce solutions.
Vanguard S&P 500 ETF: 50% allocation
Ultimately, your goal should be to build a diversified portfolio of at least 25 stocks. That doesn't mean you need to invest in all 11 market sectors. You should invest in sectors that interest you, and you should only put your money into businesses that you understand.
The goal of diversification is to mitigate risk by ensuring that your financial well-being doesn't depend too heavily on any one business. Of course, it will take time to research and buy 25 different stocks, and that's OK. In the meantime, I would allocate 50% of my money to the Vanguard S&P 500 ETF (VOO 0.10%). That index fund is designed to track the broader S&P 500, meaning you benefit from instant diversification. And with an expense ratio of just 0.03%, you would pay just $3 in annual fees on a $10,000 portfolio.
Better yet, the S&P 500 has generated an annualized return of 7.2% over the last 20 years. Assuming that pace continues, your money would nearly quadruple over the next 20 years.
