Working with hedge funds and money managers has made me aware of certain similarities between nearly all long-term, market-beating professional investors. It doesn't matter how large (or small) their asset base is, what stocks or other financial instruments they trade, or even their particular strategy.
This one thing is constant across all successful money managers. It is the most basic tenet of successful portfolio construction. In fact, it's the most basic concept underlying success in nearly every field.
I'm talking about the necessity of having foundational or core holdings in every financial portfolio. It's a simple concept, once you understand what I mean by "core" or "foundational" holdings.
Achievement in any endeavor demands a solid foundation. Everything requires an underlying base to ensure stability and continued successful growth. Two everyday examples are mathematics and construction. It's impossible to understand advanced mathematics without knowledge of core concepts like arithmetic. The same can be said for construction: All tall buildings designed to withstand the test of time share the same common element of a solid foundation.
This concept can be applied to building a successful long-term investment portfolio: Every successful long-term portfolio is built upon foundational, or core, holdings. These core holdings provide the bedrock from which your investment portfolio can grow exponentially over time. Core holdings can make up between 50% and 80% of your portfolio; the exact percentage depends upon your goals and ability to actively manage risk.
One of the most common core holdings is the S&P 500 SPDR ETF (NYSE: SPY), an exchange-traded fund that represents the U.S. stock market and is designed to create market-matching returns. This means that portfolios that are properly balanced with SPY as their core holding should, at the least, deliver near market-matching performance.
Obviously, all investors desire better performance than simply matching market returns. Since the core holdings match the market, market-beating returns come from so-called satellite holdings.
Satellite holdings are also known by the phrase "trading around a core position." These holdings are riskier than the core holdings; therefore, they are more likely to deliver market-beating returns and turn the entire portfolio into a winner in the process. Satellite holdings generally have shorter holding periods and are actively managed using fundamental or technical analysis or a combination of the two. However, there is one more step that separates winning portfolios from portfolios that are just average.
Nearly every professional U.S. stock portfolio that I have observed contains more than just SPY as the core holding. There are generally several other large-cap stocks or market-following ETFs that make up a professional's core holdings. In fact, the most interesting thing that I discovered is there is a stock that is consistently part of the core holdings in every top-performing stock portfolio.
Readers of Amy Calistri's The Daily Paycheck advisory are well aware of the dividend-producing power of Procter & Gamble (NYSE: PG). The 176-year-old consumer products company has increased its dividend every year for the past 57 years.
|© 2013 Procter & Gamble|
|Procter & Gamble's twin towers in Cincinnati are home to company's world headquarters.|
P&G's products are sold in more than 180 countries and boasts $84 billion in annual sales. The company's strength is built upon its $25 billion brand portfolio. Household names such as Bounty paper towels, Tide detergent and Charmin bath tissue make up the company's 50 leading brands. These names create 90% of P&G's sales and profits, and individually, 25 of them each bring in over $1 billion annually to the company. These are truly impressive stats for any consumer products company.
The latest figures from Procter & Gamble show continued growth into its fiscal first quarter of 2014. Diluted net earnings per share rose 8% from the same period last year, to $1.04, and net sales increased 2%, to just over $21 billion. Remarkably, this includes a negative 2% impact from currency exchange rate fluctuations.
P&G is not only a consumer-focused company, it is also very shareholder-friendly. In its fiscal first quarter of 2014, it repurchased $2.5 billion of stock and paid out $1.7 billion in dividends. I particularly like the fact that P&G is projecting continued growth into the remainder of its fiscal 2014, with a 3% to 4% increase in organic sales and an increase of 5% to 7% in core EPS.
Risks to Consider: Even the most conservatively designed portfolio is exposed to overall market risks. Always use stop-loss orders and diversify when investing.
Action to Take --> Designing your portfolio around core holdings is the major key to long-term investment success. Using an overall market proxy like SPY combined with one or more dividend-producing large-cap stocks as the core is the way professional traders construct portfolios. I think Procter & Gamble is the ideal large-cap stock to add as a core holding.