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You might remember that back in June my 63-year-old dad decided to let me begin managing his $100,000 retirement account at Vanguard. The goal was to help him get better returns than he was earning with a money market fund. And while I’ve been talking about retirement matters, CDs, and other topics lately, the big unanswered question in the room has been: “So how are things actually going in that new portfolio?”
The short answer: In just three months, dad is already up many multiples of what he would have gotten from his money market fund for an entire year.
Today I’m going to talk about five of the strategies I’ve been using to help his portfolio outperform … and show you how to benefit from them, too.
But before I do, I want you to see the first four investments dad bought and how they’ve worked out so far …
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As you can see, every single position is up so far. And what’s especially important is that each individual holding is beating the S&P 500 index — with one stock more than doubling its benchmark’s performance, and another nearly tripling it.
I should also mention that dividends are not even factored into the performance numbers above. And if you look at the column on the far right you’ll notice that each one of our holdings carries a significant annual yield. Heck, one should hand dad another 7 percent return over the next year just from dividends!
Mind you, the returns above are not hypothetical. They are the actual results my dad has gotten through real orders placed in his Vanguard account. And while all these positions are still open and anything can happen from here on out, I’m confident we’re going to continue increasing his nest egg safely and efficiently.
Why do I think so? How are we consistently beating our benchmark like this?
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Here Are Five Strategies I’m Using in Dad’s Portfolio …
First off, it should be pretty obvious that I’m favoring dividend stocks right now. That’s because:
- They have the best relative yields at the moment — meaning they’re paying more than CDs, money market funds, and most bonds right now.
- I believe they are actually less risky than other income-producing investments, especially longer-term Treasury bonds.
- Over time, these companies should continue raising their dividends, which means dad’s effective yields can go even higher the longer he holds his positions.
- Plus, there are still plenty of values to be found in the stock market because most investors remain shell-shocked from the beating they took over the last few years.
Of course, these are all things I’ve been saying here in Money and Markets for a long time now so they should come as no surprise to you. Still, you might be wondering how I’m picking the individual positions.
Well, let’s start with …
Strategy #1. I’m looking for companies that others are ignoring.
If you refer back to that performance table, you’ll see that one of the positions has already risen more than 26 percent in two months.
What’s interesting about that stock is that I recommended it right around the time that nearly everyone else was writing it off. The company had posted a couple quarters of lackluster results and people were assuming it would just keep dragging along the bottom. After all, the stock hadn’t moved much even as the market rallied substantially.
I thought differently. In fact, all my indicators were telling me things were actually going much better than people thought. I liked that the company had just boosted its dividend substantially, too. The fact that its stock had been lagging was a good thing!
So I told dad to buy it. And when the firm came out with its latest quarterly results a few weeks ago, it blew away estimates … with the shares rising more than 12 percent that day alone.
Since then, a bunch of analysts and experts have come out praising the stock. Go figure!
That leads me to another point …
Strategy #2. I’m using charts to help find entry and exit points.
Let’s stick with the same stock for a minute. In addition to the fundamental picture, which I thought everyone was getting wrong, I also saw that it was nearing a point on the charts that represented a long-term point of support. In other words, when the stock had hit that level in the past, it had bounced higher again.
More importantly, I also saw that there was another level a bit higher that had presented a strong ceiling plenty of times in the recent past.
Take a look at this chart and you’ll see what I mean:
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The green line represents a previous bottom. The red line represents an area that had repeatedly presented strong resistance. The green arrow is where I told dad to buy. And the red arrow shows the stock breaking through resistance and then surging higher on the strong earnings release.
Now, do things always work out this perfectly? No way! Nor am I some huge fan of using complicated technical analysis.
At the same time, I recognize that charts do give me another way to evaluate positions, especially in the tricky markets we have today.
Speaking of which …
Strategy #3: I’m generally telling dad to use limit orders. These instructions tell your broker to buy or sell your shares within specific price ranges.
So in the case of buy orders, I’m almost always telling dad to “place a good-till-cancelled order to buy at such and such a price or better.”
Why bother, especially in a longer-term income portfolio?
Because I believe it’s good to be disciplined and to name your price for something before you buy it. It’s the difference between going to the grocery story with a shopping list and coupons in hand or stuffing your shopping cart full of items that catch your attention as you browse.
In short, placing orders this way forces you to wait for the stock to come to you at a price you’re truly happy with. And every extra bit you shave off your entry adds to your bottom line on the exit.
By the way, in one case, a stock I recommended started rising before dad ever had a chance to get in. And rather than having him chase it, I told him to cancel the order!
Strategy #4. I’m staying aware of currency movements. While I’m not looking to recommend specific currency investments to dad, I am always considering how movements in the currency markets can help or hurt his portfolio.
So it’s no coincidence that two of dad’s positions are benefitting from the recent weakness in the U.S. dollar.
The first is our oil and gas play — that’s because as the greenback moves lower, oil usually trends higher.
The second is a foreign utility company. Because it’s a foreign stock trading on a U.S. exchange, dad benefits whenever the company’s home currency strengthens against ours. Better yet, since his dividend payments are also originally denominated in the company’s home currency, he can get fatter checks when those dividends are converted into dollars, too.
Strategy #5. I’m keeping an open mind. Sure, right now we’re having some success with dividend stocks. But that doesn’t mean I won’t recommend bonds when the time is right. Or use plenty of other investments and strategies I’ve got in my playbook.
Same thing with our timeframe for holding investments — while I generally believe in keeping solid companies for long periods of time, I’m not opposed to taking profits when a position runs up in a short period of time.
The name of the game is going where others aren’t and always balancing the risk with the reward.
That’s what I’m going to keep doing for dad … and I hope you try and do the same!
Best wishes,
Nilus
P.S. I just sent out another new recommendation and dad will be acting on it tomorrow. If you’d like to get the name of this new “buy” immediately … along with complete details on all the positions he currently owns, just click here. Heck, I’ll even let you look at his brokerage statements if you decide to invest alongside us!
