As can be seen by the graphic above, generated by Seeking Alpha’s Charting tool, “the market” has performed quite well over the last year despite the impact of COVID-19, a global recession, millions upon millions of Americans hitting the unemployment lines and tens of thousands of small businesses closing:
- DJIA: +5.9%
- S&P500: +18.0%
- NASDAQ100: +48.4%
Many investors may have gotten spooked out of the market during the March sell-off and now suffer from FOMO (fear of missing out). They’d like to reenter the market but now fear doing so might be just in time for a big market correction – which arguably the market is due for given the massive disparity and disconnect between Wall Street and Main Street. That said, if one or more COVID-19 vaccines are approved and distributed, and as therapeutic treatments evolve, markets could bounce higher still.
Most investors realize that overall market returns have been skewed significantly higher by a handful of large high-flying tech stocks such as Apple (AAPL), Amazon (AMZN), Tesla (TSLA), Nvidia (NVDA) and Microsoft (MSFT) – just to name a few. They would like to own these stocks, but fear they would now be buying at the top.
At the same time, holding money in cash is a losing proposition as interest rates are so low, conservative savers are getting severely penalized because real interest rates are negative (inflation is higher than the interest earned on savings accounts).
What To Do With $10,000
So the question is, if you have $10,000 to invest in “the market” with a 3-5 year time frame, what is a rational way to invest the money?
Now the absolute value of $10,000 is arbitrary. The amount allocated to this strategy would vary from investor to investor depending on personal factors such as net-worth, existing investments, long-term goals, risk appetite and tolerance, age, and diversification goals. As a result, $5,000 may be a more appropriate number of a small investor; $250,000 for an investor with a higher net worth. For the purposes of this article, $10,000 will be used and it is up to the investor to scale that amount up-or-down depending on his or hers personal situation.
With that being said, here are my choices in dividing $10,000 into five ETFs that should do well over the coming 3-5 year time frame:
|Dow Jones Industrials||15%||(DIA)||2.15%|
|Precious Metals / Gold||10%||
Click on the symbols in the chart above to locate Seeking Alpha coverage on each sector ETF. I have recently written articles on QCLN (see Green Energy QCLK: EVs, Solar, and Wind, Oh My) and Newmont (see How To Profit From The Potential End Of “King Dollar”).
Other than Newmont, all of these investment choices are ETFs and I would suggest reinvesting the dividends.
With respect to Newmont, it is quite volatile on a near daily basis as the price of gold can fluctuate dramatically based on headline news such as employment numbers, coronavirus outbreaks, and/or government “stimulus” plans. As a result, investors should try to buy the stock on a “down day”. That said, the company is a free-cash-flow machine with gold above $1,700/oz let alone close to $2,000/oz. Regardless, the long-term outlook remains very bullish due to massive currency debasement. As a result, it is prudent for investors to have a position in gold as an insurance policy against the fall in the US$ and/or a rapid rise in inflation. If holding a single gold stock is outside of your comfort zone, you could always buy a fund like Fidelity Select Gold (FSAGX) or the Spider Gold Trust ETF (GLD) instead.
As discussed earlier, the market is at or near all-time highs and the risk for a correction is real and some would say highly probable – especially heading into a contentious election. Glancing at the 1-year and 3-year sector returns (see chart below), one would think there is no recession and that the unemployment rate was still below 4%:
That said, there are fundamental reasons why my portfolio picks stayed away from sectors like financials/banks (interest rates likely to say low and/or negative for years) and energy (we live in an age of energy abundance with an excess of supply).
Back in November of last year, I used a similar methodology for investing into four high-tech stocks: Apple, Amazon, Broadcom (AVGO), and Alphabet (GOOG). See My A-List Technology Portfolio. That portfolio has delivered excellent returns. However, at this time such an overweight in Technology is not advisable.
If investors are skiddish about putting the entire $10,000 (or whatever monetary allocation works for the individual) to work at one time, take a few weeks or even a few months to scale into one sector at a time until you reach your full-allocation.
Summary & Conclusions
The “$10,000 Portfolio” was designed to be diversified and deliver excellent capital appreciation over the next 3-5 years. It offers exposure to the broad market, technology and software, consumer spending, and gold.
Each investor should analyze the choices based on what he or she already owns in their existing portfolio and what their ultimate goals are. Investors should feel free to swap-out one of the suggested components and replace it with an investment that better fits his or her needs and goals. After all, it is the allocation and diversification strategy that are the keys to long-term success. Good luck to you!
Disclosure: I am/we are long AMZN, GOOG, NEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.