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I began picking stocks when I was in the Navy, sometimes making trades from sleepy old French telegraph offices in Vietnam between patrols. This worked well and I paid for law school with my trading profits. Law was less fun than the market and I eventually switched to running a client’s stock brokerage firm and later become a registered investment adviser. Picking stocks seems to reward a certain flair — like oil painting or golf, neither of which I can do well — and I am glad to share my experience.
The market has made a substantial comeback from its low of its low of 6,547 on the Dow Jones Industrials in 2007. Investors who held back may rationalize their fear of perceived risk by concluding that they have missed the run.
Fortunately, their anxieties are shared by so many that the market’s resurgence has not run ahead of rebounding company earnings. There are obvious obstacles, as the media outcries remind us constantly, but momentum remains with the bulls as the global economic recovery continues.
Nearing yearend 2010, the market is up about six percent for the year to date. Portfolios I manage are higher and I expect to end the year with double-digit returns. I suggest investors locate their account balances from last December and compute how they are actually doing this year.
If 5 percent or more, fine, that’s doing as well as the market. If less, I recommend making changes that match this model portfolio.
Ten to twenty five percent should go into higher yielding bond funds. (“Full” positions are 10 percent, “half” 5 percent.) I would start with a full position in Western Global, which is trading at a 7 percent discount from its asset value and yielding 8.4 percent, paid monthly. This is a new fund established in 2009 with modest leverage. Franklin Trust has been around since 1988 and is not leveraged. It has a 7 percent discount and yields 7.1 percent. So does ING Global. Each gets half to full positions.
Alternatives include Annaly Mortgage and its more aggressive stable mate, Chimera. These are leveraged REIT’s that buy mortgage backed securities. Insecure investors may think that’s too risky; more thoughtful investors will find their respective current yields of 15 percent and 18 percent worthy of another look.
With a nod to the “gold bugs,” who bring more passion than perspective to investment, half positions can go to quality gold mining companies. The best are Barrick Gold and Goldcorp.
That leaves around two-thirds of the portfolio available for technological and industrial companies, which are leading the economic recovery. Banks and housing stocks can be put on layaway for a year or two and consumer stocks approached with caution.
I suggest 20-25 percent of the portfolio in quality tech stocks. IBM, the old reliable, is growing earnings at 10 percent, yields 1.8 percent and has increased its dividend for 18 straight years. Intel dominates its sector and offers a 3.4 percent yield. Full positions in each provide a solid base.
Oracle deserves a half position. Safeguard invests in tech and life sciences and adds exposure to small cap stocks to a deliberate emphasis on large caps. Apple, which is both a tech and consumer stock, rates at least a half position. The following industrial, commodity and medical stocks add both modest income and growth.
DuPont has growing sales in traditional chemical lines and in agriculture and healthcare. Autoliv is a leading supplier to the global auto industry. International Flavors and Fragrances sells to the consumer food, beverage and cosmetic sectors. Full positions.
Vale and Rio Tinto provide metals and other raw materials for global industry. Occidental Petroleum is a good all around choice. Core Labs is a steadily growing energy service company. Half positions in each.
Novo-Nordisk leads in diabetes care. Bristol-Myers has a promising drug pipeline and its consumer lines smooth out FDA drug approvals. Merck is an alternate. Full positions.
This portfolio yields around four percent with five stocks outside the U.S. adding additional diversity. With quarterly tuning, it should continue to outpace the general market.
More from this contributor:
Profiting From the Anxiety Index in Stocks
Dividend Stocks Are Screaming Bargains
The Rewards of Finding Mispriced Stocks