Many believe that China is in position to become the economic superpower of the 21st century. So if you'd like to follow in the footsteps of the world's fastest growing major economy, you might want to take some pointers from how the Chinese are investing their money right now.
A look behind the Great Wall
As fellow Fool contributor Alex Dumortier discussed yesterday, the Chinese sovereign wealth fund China Investment Corporation (CIC) disclosed a list of its U.S. holdings. Studying the way the CIC invests can provide some valuable lessons for you on how to set up a strong portfolio.
1. Start with a core.
The first thing to focus on is building up the core of your portfolio. By starting with a well-diversified set of investments, you'll give yourself the best chance to reach your financial goals without suffering major setbacks along the way.
To do so, CIC has made extensive use of ETFs. Its portfolio includes the following:
- The S&P 500-tracking SPDR Trust ETF.
- SPDR sector funds covering virtually every sector of the U.S. market except for technology and utility stocks.
- The PowerShares QQQ ETF, which tracks the stocks in the tech-heavy Nasdaq 100 index.
- An iShares ETF giving the fund exposure to U.S. small caps in the Russell 2000 index.
- Several other iShares ETFs focused on international stocks, ranging from two broad-based funds owning developed and emerging-market stocks to some country-specific funds tied to Japan and China.
All told, CIC has over $2 billion invested in these ETFs.
Similarly, you can put together a reasonable core for your portfolio with just a few ETFs. By investing in a solid core of stock funds like the ones CIC owns -- along with some bond investments, which China has no shortage of -- you'll give yourself the freedom to take a more aggressive stance with the rest of your investments.
2. Invest strongly in your best ideas.
The next step to creating a strong portfolio is to identify your best investing ideas and to buy stocks and funds that reflect those ideas. You want to invest enough that it will reward you for making smart decisions.
In CIC's case, you can see several concentrated positions. In natural resources, the fund has just over $3.5 billion invested in Teck Resources (NYSE:TCK), and another $500 million in Brazilian miner Vale (NYSE:VALE). You'll also find big investments in gold and oil via ETFs.
Also, CIC has big investments in financial stocks. A $1.7 billion holding in Morgan Stanley and another $700 million in BlackRock shares dominate CIC's list, although you'll also find smaller investments in Citigroup (NYSE:C) and Bank of America (NYSE:BAC).
When you have strong opinions about stocks, don't hesitate to put your money behind them. If you don't, you won't see much profit from being right. CIC clearly has conviction in its investing thesis, and you should too when you invest.
3. Avoid portfolio creep.
There is one thing, though, that doesn't make much sense in CIC's portfolio. The fund has chosen to make relatively small purchases in a number of individual large-cap stocks, including Apple (NASDAQ:AAPL), Coca-Cola (NYSE:KO), and Johnson & Johnson (NYSE:JNJ). In large part, that's what pushes the list up from a couple dozen stocks and funds to 84 different holdings.
Moreover, most of the positions CIC has in those stocks range from $1 million to $10 million -- a pittance in comparison to the nearly $10 billion asset base the fund controls. Even if one of those stocks does very well, it won't make any real difference to CIC's overall results.
Don't let your stock portfolio end up looking like a garage full of things you never use. If you have such a small position in a stock that it makes no difference to your overall results, you'll be better off either adding to your investment or getting rid of it entirely. Keep your portfolio size manageable, and you'll find it much easier to keep track of your investments.
Follow the leaders
Even though CIC's disclosures only include a portion of its global holdings, you can still see the building blocks of a strong portfolio. It's a good model that you can follow to share in China's success.
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