How to master “core and explore” investing 



For investors old or young, I’ve long been responsible for taking a hybrid vehicle & ldquo;center and research ” approach. The “center ”–the so-called “severe cash ” which includes 80% to 90% of your portfolio–might be held in balanced funds or low-fee indexed alternatives, such as asset allocation ETFs in BMO, Horizons, iShares and Vanguard. A single such finance retains tens of thousands of stocks and bonds spread across the globe.

If your risk tolerance is large enough, this leaves 10% to 20% for a more adventurous “research ” allocation which could enter more speculative choices. This may include new tech IPOs or cryptocurrencies such as bitcoin or even ethereum, or investment funds which track them, as Dale Roberts and I researched in two MoneySense articles recently.

Late in 2020, I covered the subject of whether retirees should speculate at all, confessing I personally have done so, albeit tempered with risk-management techniques. Crypto qualifies as speculation, however I could see why even seniors are tempted by it when they could get more return in a single day out of bitcoin than a GIC is very likely to generate in a year (visit this recent post ). Regrettably, volatile cryptos and crypto funds may also generate comparable losses as quickly so keep these to no more than 1 per cent or 2% of a whole portfolio, and be fast to take partial gains inside registered accounts.

If you’re quitting profits without tax concerns, you could set the profits into less explosive speculations. Despite the pandemic, within the past year there has been a glut of stock offerings, including IPOs and so-called SPACs (special purpose acquisition companies), that I have remained clear of.

The minimum guideline is to spread your speculations among five roughly equally-weighted positions. If you’re a younger investor beginning, this might be your complete speculative portfolio. Older folk can choose “baskets” &; ldquo;packs” of five or four shares in a number of sectors.

I’m usually cautious of IPOs (a joke IPO stands for “it’s probably blossom ”-RRB-. However, I recently bought an IPO on its own day of difficulty: online vacation rental company Airbnb Inc. [ABNB/Nasdaq], advocated by more than one of the investment newsletters to which I subscribe. That was the very first time I bought an IPO the day it started trading, although I regret not having jumped on Google’s IPO back in 2004. 

I prefer to wait for a couple of months for new topics to repay. That approach worked with Facebook, once it fell within a couple of months of its botched IPO in 2012. And lately I’ve shot post-launch “starter” positions from plant-based meat substitute manufacturer Beyond Meat (BYND/Nasdaq), cloud information warehousing company Snowflake Inc. (SNOW/NYSE), and the now omnipresent Zoom Video Communications (ZM/Nasdaq). 

With the current market and economy shifting into some “recovery” theme as COVID vaccines gradually make their way throughout the people, currency managers are moving out of the COVID-resistant tech themes of work-from-home development stocks (notably Zoom) to much more traditional value names which benefit from a restoration.   

If you like the five-pack idea, think about Jim Cramer’s five WATCH shares: giant retailers who held during the pandemic and should likewise continue to thrive during a restoration: Walmart, Amazon, Target, Costco and Home Depot. (each of which I have ).  

Big tech thrived through the pandemic and appears likely to continue doing this in the recovery interval, supposing the Biden administration doesn’t even break up them. The FANG acronym also coined by Cramer initially stood for Facebook, Amazon, Netflix and Google, however more recent iterations comprise FAAMNG, including Apple and Microsoft into the record, or even FATMAN-G, that adds Tesla.

My family was early possessing them, in part because our daughter insisted we fulfill her TFSA with titles she uses: Apple and Netflix. She insisted on Tesla, that has powered the operation of their ARK ETFs and its famous manager, Cathie Woods. Tesla has composed 10% of a number of her funds, which focus on ldquo;innovation” themes of their future, such as next-generation Internet, genomics, robotics and fintech. 

Individual investors are free to pick off ideas by “mimicking” a number of her picks and making their own five-packs on such themes. You’ll find titles such as Square, Roku and Teladoc. If you’d like a one-stop exposure to all her topics in 1 Canadian-dollar nominated ETF, attempt Emerge Canada Inc.’s Emerge ARK Global Disruptive Innovation ETF (EARK/TSX). 

Matthew Ardrey, riches adviser with Toronto-based TriDelta Financial, states any investor who didn’t own the tech titans in 2020 lagged the S&P 500, as they now constitute more than 25% of that index’s value. Valuations are stretched; by 2020 year old, the S&P500 needed a P/E ratio of 30.26%  over historical market averages. “Because of this, we have largely avoided these titles within our portfolio,” Ardrey states.

Ardrey is skeptical about Tesla, that had a market cap of about $752 billion in the end of 2020. “If we’re to suppose the stock grew at 15% (much less than its historical rate) within the subsequent 15 decades, then it would have to have a market cap of $6.1 trillion to do so. The same is true of the other stocks. If this growth rate is assumed, then their whole market cap will exceed $70 trillion! That would represent over 38% of the world’s GDP of $183.995 trillion in 2035. ”

Nevertheless, Ardrey states TriDelta doesn’t ignore technology in customer portfolios. He likes data storage company Seagate Technology PLC (STX/Nasdaq), that has a solid volatility at 4.47% and also a P/E ratio only over 15. In addition, he likes stocks which lagged in 2020, for example Royal Bank (RY/TSX)along using a dividend yield close to 4% and a P/E ratio under 14. In addition, he finds value in certain Canadian utilities.

Adrian Mastracci, portfolio manager using Vancouver-based Lycos Asset Management Inc., reminds readers that over time, asset allocation has proved to be more important than security choice. If you agree, you could stick 100% using all the core asset allocation ETFs said at the start of the column. 

At the opposite extreme, if you’re a investor who owns just individual stocks, then Mastracci cautions that five shares would not provide sufficient diversification; you’d require at least 20 to 30 shares.   

Jonathan Chevreau is creator of the Financial Independence Hub, writer of Findependence Day along with co-author of Victory Lap Retirement. He can be reached at [email protected]


Recovering from GIC decal shock
Should retirees speculate?
How to make the most of your own TFSAs in retirement
Should you delay your retirement because of COVID-19?
Investing in 5G

The article How to master “center and research ” investing  appeared initially on MoneySense.

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