Most investors reading this will have at least some skin in the game, but what if you were to start investing for the first time tomorrow?
This is a question I often ask myself. I ask because I want to try and assess my knowledge of the market and my level of risk as well as try to question my existing holdings. To be a successful investor, you need to be able to adapt to changing environments, and this means reviewing holdings as well as the justification for those holdings on a relatively regular basis.
If you continually look at your portfolio through rose-tinted spectacles and seek out the most positive articles to confirm your original thesis, you’ll never be a successful investor. It will take too long for you to realize when a company’s outlook has changed so drastically that the shares are worth significantly less than you thought they were. The only way to get around this issue is to look at your portfolio from a fresh and unbiased viewpoint regularly.
What if I were to start investing again tomorrow knowing what I know today but having never had enough money to invest before?
For a start, I would use an index fund as an anchor. This may seem like a tedious boilerplate answer, but I’m a believer in having a portfolio core that is made up of something boring so you can build out with more unusual and exotic holdings but still have the security of something slow, steady and trustworthy holding the base.
As well as an index fund I would also buy a fund tracking the Russell 2000 Value index. The reason for this holding is that while I know value investing outperforms over the long term, picking stocks is a time-consuming and complicated process. What’s more, even if you believe you have picked a winning equity, there’s no guarantee it will work out that way. The outperformance of value includes survivorship bias, those stocks that have failed and not included the figures, and it will only take two or three total losses to dent long-term investment returns severely. By buying a value index tracker fund, I should be able to continue to benefit from value’s long-term outperformance without falling into any value traps.
For the Value ETF and Standard & Poor's 500 index fund, I would devote around 50% of my portfolio. There’s no need to be any more diversified when the funds themselves own 2,000 stocks.
Outside of the index tracking funds I would devote around 20% of my portfolio to deep value opportunities. Every investor should own some deep value stocks because they have so much potential. Indeed, deep value stocks can generate highly lucrative returns (100% if bought at a 50% discount book) but unlike more speculative opportunities the risk of permanent capital impairment is significantly reduced. Many risk-averse investors would benefit from the added kick deep value opportunities would give to their portfolios thanks to the high returns coupled with limited risk.
Alongside deep value, 10% of the portfolio would be devoted to high dividend stocks.
The last 20% available I would spend on compounders, companies that can compound shareholder equity year after year such as Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), Fairfax Financial (FFH, Financial) or Markel (MKL, Financial). These slow and steady businesses need no babysitting and should complement the value stocks that tend to be low growth.
So overall, if I were to begin investing for the first time tomorrow I would favor low-cost index and value funds, deep value stocks, compounders and some dividend stocks. This is the perfect combination of the best stocks the market has to offer.
Disclosure: The author owns no shares mentioned.
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