If you’re running an SMSF with a partner, have a high-paying job, or just use time in the market to your advantage it’s possible to build a $1 million investment portfolio early in life.
The earlier you can get there the better as this will give you more time to grow your wealth prior to retirement when many people will prefer to focus on income over growth.
After all in retirement if you don’t have any income coming in from a regular salary, you’ll want income from elsewhere to meet everyday expenses, or to pay for overseas holidays for example.
Once you start managing larger sums of money I’d also suggest avoiding the small cap or speculative end of the market as liquidity can often be a problem and you can easily lose your shirt in a matter of days on the back of a bad operating update.
Moreover, it’s possible to ‘beat the market’ and generate total returns of say 15%-20% per annum+ by looking to high-quality mid or blue-chip growth shares on sensible valuations.
The kicker is that mid caps or large-caps also fall into the ‘bottom drawer’ or buy-to-hold category that allow you to enjoy compound growth over say 5 to 10 years or more.
Whereas most rising small caps tend to be ‘flashes in the pan’ best suited to professional investors constantly scouring the market for opportunities and on the ‘inside track’ in terms of information, access, or both.
Keeping this in mind, here are five businesses I’d happily invest six figures into as part of a $1 million portfolio to hold until retirement. If you manage a portfolio around $1 million I’d suggest somewhere between 12 to 30 total holdings.
Macquarie Group Ltd (ASX: MQG) is the asset manager and investment bank that has de-risked itself since the GFC to focus more on the asset management and commercial lending or financing space. Adaptability and the alignment of the interests of staff and shareholders are also a core part of a rapid fire, no passenger, culture where performance is highly valued. This has translated into a long history of share price appreciation and rising dividends.
CSL Limited (ASX: CSL) is performing well thanks to a dominant market position and strong underlying demand for its blood therapy products. It also reinvests heavily in research to develop new products that might produce new profit sources for shareholders over the long term.
Xero Limited (ASX: XRO) is probably the riskiest pick of the lot as it only just posted a maiden half-year net profit after tax of $1.4 million. Annualised monthly recurring revenue has grown to $638 million though and it probably now has more than 2 million subscribers globally. Xero could potentially keep growing nicely for another 5 years in which case I reckon the shares will go higher.
ResMed Inc. (ASX: RMD) is the founding family led sleep therapy business that has an excellent track record of profit and dividend growth. Management is focused on reinvesting to develop market-leading products that maintain margins and win market share. It’s also pushing into the digitally connected healthcare and software space.
Cochlear Ltd (ASX: COH) is another healthcare market leader in the hearing aid space that appears well positioned to grow profits into the future. It faces cut price competition from overseas rivals and must invest to maintain price premiums. However, it also enjoys strong underlying demand and huge global markets.
Some of these businesses are on conventionally expensive valuations which is why it makes sense to dollar cost average purchases into them over quarterly to annual periods. If you’re investing more than $50,00o into a stock it makes sense anyway to spread out the purchase a little to allow for the swinging sentiment behind market valuations.
Overall, I’ve not seen much to change my view that these are among the best long term holds among the S&P/ ASX100 (ASX: XTO) index of leading businesses. There are dozens of others to consider in the digital classifieds, tech, healthcare, ‘bond proxy’ and financials sectors, although for differing reasons I have not included them on this list. In another article I’ll take a look at some of them, while also covering overseas businesses in a separate article.
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Tom Richardson owns shares of Cochlear Ltd., CSL Ltd., Macquarie Group Limited, ResMed Inc., and Xero.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd., CSL Ltd., and Xero. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. 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 Scott Phillips.