Being at the young age of my career and with the capacity to bear the risk, my investment strategy will be that of a moderately aggressive investor. As part of this investment strategy, I will be seeking long-term capital appreciation through mix of equity investments, few fixed income instruments and cash reserves, where the target return will be 10-12% on annual basis, while I do not have specific preference for dividend payment. Most important, despite of my preference for high return from my portfolio, I will refrain from investing in any penny stock. However, amid bullish run of the US equity markets, and weak European markets, I need to select my assets meticulously, and since the rumors of Federal Reserve increasing the interest rates this September are hovering in the markets, I will also include some interest rate derivatives in order to hedge my position against possible interest rate fluctuations that will affect my bond value.
On the other hand, being well-versed with importance of portfolio diversification, and an eye-witness of financial carnage brought in by the crisis of 2007-08 where even the prudent investor was trapped as a victim of herd behavior, and invested majority of their holdings in mortgage backed securities, I will be including non-correlated assets in my portfolio in order to eliminate the unsystematic risk while leaving my investment exposed only to market risk, i.e. un-diversifiable risk.
Finally, a very marginal portion, i.e. 5 percent of my portfolio holding will be held as cash reserves in order to meet any emergent conditions that may require immediate need of cash.
Since we have a very limited amount of investment to make, I will not make any investment in offshore stocks, although they too offer advantage of diversification. Therefore, my investment will only be in large cap US stocks that have strong fundamentals, are industry behemoths, and have indicated ability to withstand the financial crisis. Below are the stocks that I intend to include in my portfolio:
This consumer electronic tech-giant has provided lucrative returns over the years, and with back-to-back success of its products, the stock is sure inclusion in my portfolio considering my long term horizon. Important to note, after the blockbuster success of IPhone 6 and an announcement of $19 Billion quarterly profit this January, the stock has yielded 31.25% returns in just six months. Moreover, with expected merger with long-time rival, Microsoft, market analysts believe that stock is still undervalued and should reach the $240 level relative to its current price of $127.
Of the total portfolio investment, I prefer an allocation of 30% in this stock.
The world’s largest coffee chain company has repeatedly exceeded Wall Street estimates, and with US economy rebounding and consumer spending back on bullish track, the company expects the revenue figures to soar higher. Even the market analysts shares a bullish consensus on the future walk of the stock price amid growing share of the company in packaged coffee and single serve segment, and strong same-store-sales growth.
Of the total portfolio investment, I prefer an allocation of 20% in this stock.
This was one stock that survived strongly even during the financial crisis amid growing inclination of the world population towards a healthy lifestyle, this stock remains a top pick amongst the sports apparel industry. While the company is getting benefited from increasing consumer spending in North American market, but the tremendous growth in Chinese and Indian market is bring higher optimism waves for the company. Moreover, with gross margins remaining healthy because of Nike’s pricing power and with long-term operating leverage remaining intact, market analysts have issued bullish views for the future trend in the company’s stock.
Of the total portfolio investment, I prefer an allocation of 15% in this stock.
Bonds Mutual Fund
i)Vanguard Short Term Investment Grade Bond Fund
Rated as ‘Strong Buy’ by Zacks and with a 4-Star rating by Morningstar, this short-term bond fund holds high and medium grade corporate bonds, US treasury bonds and few pooled consumer loans. With the expense ratio as low as 0.18%, the fund has an appreciable return of 2.16 percent per annum over the past three years.
The bond will be a supporting player in my portfolio, where its inclusion is targeted towards introduction of a conservative asset in my portfolio.
ii) Guidestone Funds Extended Duration Bond Fund
This 4-Star rated bind by Morningstar invest 80% of its pooled funds in fixed income securities with the objective of maximizing total return with preservation of capital. Despite of its conservative investment, the bond has yielded 6.09% over the past three years with expense ratio as little as 0.55%.
Interest Rate Futures
As already discussed in the investment strategy, since Federal Reserve is expected to increase the interest rates in September, this activity will lead to fall in value of my bond holdings. Therefore, in order to hedge the interest rate risk, I will be investing an equal amount in 3 month interest rate futures( on recurring basis) to lock in the future interest rate. Important to note, an interest rate future is a derivative contract between a buyer and seller, wherein each party agree to lock in the price of an interest bearing asset in the future.
In order to meet any unexpected need for cash, I will be holding 5% of my portfolio value as cash in my saving account.
GuideStone Funds Extended-Duration Bond Fund. n.d. http://money.usnews.com/funds/mutual-funds/long-term-bond/guidestone-funds-extended-duration-bond-fund/gedyx. 2 July 2015.
Nike: All-Round Strength Sets A Bullish Backdrop. 29 June 2015. http://seekingalpha.com/article/3289165-nike-all-round-strength-sets-a-bullish-backdrop. 2 July 2015.
RBC Capital Reiterates Bullish View on Starbucks (SBUX). 13 April 2015. http://www.streetinsider.com/Analyst+Comments/RBC+Capital+Reiterates+Bullish+View+on+Starbucks+(SBUX)/10451411.html. 2 July 2015.
Treanor, Jill. Carl Icahn: Apple shares 'dramatically undervalued' and should trade at $240. 18 May 2015. http://www.theguardian.com/technology/2015/may/18/apple-shares-carl-icahn-stock-market-value. 2 July 2015.
Vanguard Short Term Investment Grade Fund. n.d. http://money.usnews.com/funds/mutual-funds/short-term-bond/vanguard-short-term-investment-grade-fund/vfstx. 2 July 2015.