Just like building a house, to build a rock-solid portfolio you need to start with strong foundations.
If I came into $50,000 today and was looking to start a portfolio the first thing I’d do is identify some high quality, defensive companies. These companies would also need to have good long term prospects and be available at a reasonable price.
Given the importance of a solid foundation, I’d suggest allocating the majority of the portfolio to larger companies that pay dependable dividends.
$15,000: Argo Investments Limited (ASX: ARG) is a simple way to gain exposure to a diversified portfolio of “blue chip” shares. Amongst the largest positions in Argo’s portfolio are the four major banks, BHP Billiton Limited (ASX: BHP) and Telstra Corporation Ltd (ASX: TLS).
A holding in a listed investment company (LIC) such as Argo is (in my opinion) a sensible way to gain exposure to the market.
Having gained a diversified exposure to a range of the ASX’s largest companies via Argo, investors can now consider some stock specific opportunities to round out their foundation holdings.
$5,000: Brambles Limited (ASX: BXB) has an impressive track record of growing its business thanks to the value proposition it offers its customers and thanks to a valuable network effect which creates a positive feedback loop for its global pooling business.
At around 20 times earnings, I think this is a reasonable price to pay for this above average business.
$5,000: Amcor Limited (ASX: AMC) is another above average Australia-based business with significant global operations. The group’s exposure to the fast moving consumer and pharmaceutical sectors provide recurring revenues and a defensive earnings base.
The packing company is trading on around 19 times earnings which again seems reasonable considering the quality of the company and the double-digit growth rate in earnings being forecast by a consensus of analysts. (source: Reuters)
$5,000: TPG Telecom Ltd (ASX: TPM) might seem an unusual selection for a foundation stock, however, through share price appreciation, mergers and acquisitions, TPG now boasts a market capitalisation of nearly $10 billion.
With much better growth prospects than Telstra and providing exposure to growing telecommunications spending, it deserves serious consideration as a core holding.
$10,000 each: QV Equities Ltd (ASX: QVE) and WAM Capital Limited (ASX: WAM). Most investors want a combination of income and growth from their portfolio and generally it is the smaller end of the market that can provide that growth.
So, to round out the portfolio I’d look to add exposure to smaller stocks with higher growth potential.
With only limited funds to deploy I would recommend utilising two more LICs to provide a broad exposure to the smaller end of the ASX. This, I consider, a conservative strategy given the higher risks involved with smaller companies.
QV Equities’ objective is to own a portfolio of stocks outside the S&P/ASX 20 (Index: ^AXTL) (ASX: XTL). QV’s portfolio holds a range of appealing stocks with a skew towards the larger end of the ASX ex-top 20.
Meanwhile, WAM Capital focuses more on small and mid-cap companies, thereby providing shareholders with exposure to the smaller end of the ASX.
Essentially, by owning both LICs an investor gains a broad exposure to non-blue chip stocks via portfolios managed by well regarded, market-beating fund managers.
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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.