Portfolio Development for Retirement


Portfolio Development for Retirement

8 Stocks for Safety

8 More Stocks for Serious Appreciation


While reviewing comments and suggestions from our Cabot Wealth Advisory readers, I found several excellent ideas in one of our recent surveys. I am always looking for new topics to write about, and several of your suggestions not only piqued my interest, but offer lessons for all investors.

I found this remark from a reader: I am interested in step by step instructions on stock investing. I can couple our first reader's remark with another reader's request: How should I develop my portfolio for retirement? These are basic questions, but I believe all investors need to review their investment plans from time to time.

Rather than give you my own opinions, I decided to consult expert advice, and no one is better than the American Association of Individual Investors. AAII, as it is called, is an independent nonprofit organization begun in 1978. AAII's goal is to assist individuals in becoming "effective managers of their own assets through programs of education, information, and research."

AAII divides the investment life of an individual investor into four phases:

Phase 1 begins as soon as you become employed for the first time. (My first job was long, long ago in Boston as a stockbroker trainee at Paine, Webber, Jackson & Curtis). As soon as your income begins to exceed expenses, then establish a cushion for emergencies. Your cushion will need to grow to the equivalent of six months of your income. You can plant your cushion in no-risk investments such as savings accounts at your bank or money market funds at a brokerage firm.

One of the cornerstones of wealth-building is being frugal. You should set reasonable savings goals and then live below your means. Individuals gain financial independence by budgeting, controlling expenses, and saving a reasonable portion of their income.

When you have accumulated the equivalent of six months of your income (and haven't piled up a lot of debt), you are ready to move on to phase 2. If your debts from college loans, car loans, credit cards, etc. have become excessive, you will need to reduce your debt before moving on to phase 2.

Phase 2 gets exciting. Any savings above your cushion can now be invested in mutual funds, exchange traded funds (ETFs), stocks, or bonds. Some advisors encourage investors to invest in mutual funds and exchange traded funds first, and then stocks when their portfolio reaches certain levels. I recommend investing in whatever interests you the most, because you will probably be more motivated to learn about what appeals to you.

Phase 2 is the most important step in your investment career. You need to establish a solid foundation of investments that you can build on in future years. I do not study mutual funds, so I am not qualified to offer advice on a mutual fund strategy. Rather, investing in a combination of ETFs and common stocks seems like a reasonable approach for many new investors.

Your initial investments should be growth oriented, but conservative. I recommend low-risk companies with reasonably good growth prospects for the next 5 years. Every month, I recommend undervalued, high-quality companies in my Cabot Benjamin Graham Value Investor advisory. Recommending high-quality value stocks is my specialty. I scan thousands of companies every month and pick stocks selling at modest prices with expected earnings growth of at least 10% per year. I want companies that pay dividends, although I will recommend non-dividend paying companies if I think the company will start paying dividends within the next couple of years.

The best route to financial independence is slowly accumulating wealth rather than a fantasy of get-rich-quick investing. Don't expect to double your money every year. According to AAII, the average annual return for common stocks is 10% to 12% per year during the past 85 years. Nevertheless, an individual who invests $10,000 at the age of 27, adds $2,000 every year to his or her account for 35 years, and can average 11% annual returns including dividends, will end up with a cool $1,069,000 at age 62.

The following list includes five companies and three ETFs that will get you started in the right direction and will provide a solid foundation for your investment portfolio. Invest approximately the same amount into each stock or ETF.

Advance Auto Parts (AAP)
Baxter International (BAX)
Cognizant Technology (CTSH)
Guggenheim 2015 Corp Bond ETF (BSCF)
Guggenheim 2017 Corp Bond ETF (BSCH)
International Business Machines (IBM)
Schlumberger, Ltd. (SLB)
SPDR S&P Dividend ETF (SDY)

All of the companies pay dividends and are currently included in my Cabot Value Model. The list includes a diversified cross section of industry leaders plus two bond ETFs, which is important because you will want to keep your risk low while you build for the future. Buying stocks in many different industries will reduce your risk. If you would like information on any of the eight companies or ETFs, or information on the additional eight companies in my Cabot Value Model, I hope you'll consider subscribing to my Cabot Benjamin Graham Value Investor. You will be glad you did! Get more details here.


Phase 3 begins after your initial investments start to show noticeable profits. Your initial stocks should be held for the long haul, unless the industry or the company falters badly. Sell a stock if the long-term outlook has deteriorated and replace the stock with a better one. All Cabot advisories notify subscribers when to sell a previously recommended stock.

Assuming you have your debt under control, you are ready to start adding investments to your core portfolio. Stocks and ETFs are a good way to go, but mutual funds are appropriate also. Rather than staying conservative, now is the time to start investing according to your personal preferences. If you are comfortable with higher risk, invest aggressively, but not foolishly. If you are conservative, then stay with low-risk stocks, ETFs, and mutual funds.

I advise adding stocks that are clearly undervalued together with stocks with exceptional growth prospects. In addition, you might want to add to some of your smallest core holdings, but be sure each company's outlook remains robust. I also recommend offsetting your aggressive investments with bonds or defensive ETFs. You should be prepared to jettison risky stocks that underperform and sell stocks that become overvalued. The eight stocks listed below are aggressive investments, but not high risk. The list includes companies in a diverse array of industries which blend well with the previous conservative list.

AMC Networks (AMCX)
Apple, Inc. (AAPL)
Arris Group (ARRS) Lear Corp. (LEA)
Noble Corp. (NE)
Prudential Financial (PRU)
Synchronoss Technologies (SNCR)
Tim Hortons (THI)

As your investment funds grow and you invest in more stocks, you will need to decide how many stocks, mutual funds, and ETF's are reasonable to follow. When you reach your limit, add to stocks that you already own.

If you would like additional information on any of the companies and are interested in subscribing to my newsletter, just click here to get started today.

Phase 4 begins about five years before your retirement. At this point in your life, you should start to reverse your investment strategy. Initially, start selling some of those risky companies that you fell in love with. Invest the proceeds into ultra-conservative investments such as certificates of deposits (CDs), money market funds, bonds, or bond ETFs.

Your goal in Phase 4 is to get back to owning very conservative stocks (your core holdings), money market funds, CDs, and bonds. I advise selling stocks that aren't paying dividends. If you need to be ultra-conservative, sell almost all of your stocks and invest in shorter-term bonds, CDs, and money market funds. When you are retired, your main goal should be to not lose money, and to invest conservatively.

One of the most important attributes that an investor must acquire is patience. The stock market can be a very frustrating place because of its unpredictability. Expect to lose money from time to time. Have confidence in your investment decisions. "If a business does well, the stock eventually follows. Our favorite holding period is forever." states Warren Buffett, one of the greatest investors of all time.

Until next time - be kind and friendly to everyone you meet.


J. Royden Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Editor's Note: You can find additional stocks selling at bargain prices in the Cabot Benjamin Graham Value Investor. In every issue, you'll find my legendary Maximum Buy and Minimum Sell Prices for over 275 stocks. And now you can take advantage of our cloud computing spreadsheet which provides up-to-the-minute stock prices, forecasts, ratings, and my Buy/Hold/Sell opinions.

Click here to get started today!

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