It’s official … both of my daughters (25 and 22 years old) are now individual stock investors. They’ve got over 60 years ahead of them so they need to choose their sectors and stocks wisely. And for someone in their 20’s, 60 years can seem like forever. Them buying individual stocks is exciting news but with it comes lots of choice and decisions.
What kind of investors are they going to be? What are they going to invest in? If they choose stocks, which stocks (of thousands to choose from) and which countries will they choose? The choices can be overwhelming.
“Our favorite holding period is forever.”
Warren Buffett
But because they are my daughters, and this blog writes mainly about stocks, we’ll help them focus on companies in the S&P 500. The S&P 500 has companies representing 11 different sectors. You’d think that having equal weighting within the sectors is the way to go but there are differing opinions (and I’m one of them).
My daughters have so much time in front of them to allow compounding to really help them build wealth. And with this time, they can slowly pick and choose when and what to buy. Though we’ll build them a quality and fairly diversified portfolio, some sectors will play bigger roles and some might not every get chosen.
Consumer Staples & Healthcare
Normally, I’d pull 30 or 50 years worth of sector data but so much has changed during those timeframes. Plus, the last 13 years were at my finger tips and it’s enough data to give us some direction.
We’re looking for sectors that can provide double digit average annual returns, lower volatility, and worst-case returns that are much lower than the other sectors. My kids will be buy and hold (forever) investors and they plan to reinvest their dividends.
Using those parameters, I highlighted the Consumer Staples and Healthcare sectors as possible targets to build the foundations of a portfolio. Again, they’ll buy other sectors too but these are sectors that will be foundational (and larger) in their portfolios.
Remember, past results do not predict future results. But at 50 years of data (versus just 13 years shown above), these two sectors still rise to the top. They want sector leaders to build around for both good and bad economic times.
When it comes to consumer staples, there’s a reason they dominate my Master Stock List. Building a portfolio around consumer staple companies like Coca-Cola, Pepsi, Colgate-Palmolive, Proctor & Gamble, and a few others just makes plain simple sense. These are iconic products that people buy over and over and over again.
As for healthcare, look for industry leaders with decades of dividend growth during good and bad times. Companies like Johnson & Johnson, Abbott Labs, Pfizer, and some others are standouts in this sector.
What About The Other Sectors?
I’ve written about this before but there are certain sectors that are just hard to hold forever. Financials (banks especially), technology, and consumer discretionary are very fickle, volatile, and hard to predict sectors. These 3 sectors will be in my kids portfolio but they won’t be dominant. Plus, they might churn these some after holding them for 5-10 years.
Those 3 sectors are just so volatile that I’d be agreeable to take profits if a company is getting to far ahead of itself. This is very common with technology companies where price/earnings ratios can run into the 100’s. Interestingly enough, some of the bigger technology companies can actually look defensive now.
Looking at the Big Tech names (Microsoft, Cisco, IBM, Alphabet, etc…), they’ve actually held up pretty well during this historic market downturn. Since the mid-February downturn, big tech isn’t doing that bad (through 3/27):
- Microsoft = -21%
- Cisco = -24%
- IBM = -31%
- Alphabet = -27%
I say not too bad because some technology companies get smashed during market corrections. The high P/E ratios come crashing down to earth. If you get into the technology sector and want to hold for many years, I’d stick to the big names and hope to receive some dividends too.
As for energy, I’d focus on the big majors (Exxon Mobil, Chevron, and Royal Dutch Shell) and buy them when they are down. Actually, now is a great time to buy them. During major downturns, many smaller energy companies will file bankruptcy because they can’t make money at lower oil and gas prices.
Utilities and telecoms (or communication services now) have their place. I like AT&T and Comcast for their cashflow. Material stocks I can live without if I don’t ever own them. Industrials are useful in a portfolio, especially ones like 3M, General Dynamic, or Lockheed Martin. But these can also be very volatile. There is a place for them all in your portfolio but the weighting of the sectors is the most important thing.
Summary
Here’s what I told my daughters in their quest to build a solid, long-term portfolio. Start with my Master Stock List and the Dividend Aristocrats. These companies have business models so outstanding that their dividends have been growing every single year since at least the 1990s.
Last week, when my daughters wanted to buy some stocks, our focus was on these stocks. And with so many great stocks on sale, the choice was hard. Eventually, we chose Coca-Cola (at $36) and Exxon Mobil (at $34) as their first stocks. As they build a larger portfolio, we’ll keep looking at the two lists mentioned but focus more on 2 sectors: healthcare and consumer staples.
There are many great companies not on those 2 lists but they are a great place to start building a portfolio. When these companies come down in price, that is the time you grab them for your portfolio. I’m a big fan of reinvesting dividends, especially if you don’t need the cash now. Reinvesting dividends over decades enables explosive compounding and maximizes wealth building.
Thanks for reading!
Mr. TLR