Where to Invest $100,000 Today for Passive Income
Transcript:
Hello fellow compounders. The market has been down in the last couple of weeks, giving us ample opportunities to buy good businesses for cheap. In this video I have answered a question of where to invest $100,000 in the market now, and I'll also review the Basketball Team Approach to building an investment portfolio.
Welcome to the Always Be Compounding Club, where we share ideas on how to build, grow, and enjoy wealth. I'm your host, Dennis Chen. I'm a full time investor, entrepreneur, financial book author, Wharton MBA and CFA charter holder. Welcome aboard.
So let's get started. In my last video, we showed the best investment plan for defensive Daniel and enterprising Elizabeth. If you're new here, you may check out that video in the link above. Today, we're going to build the investment portfolio for both Daniel and Elizabeth. Assuming that they each received a $100,000 inheritance gift from a rich aunt.
The Defensive Daniel plan is easy. He wants to keep it simple, and he doesn't want to do much work managing his portfolio. So his $100,000 will be invested in VOO, which is the S&P 500 Vanguard ETF. That's it, plain and simple. Everything in the S&P 500 is set it and forget it. That’s done.
Enterprising Elizabeth, on the other hand, is an active investor and is managing her portfolio as a basketball team. The important thing for her is diversification and asset allocation. Following the basketball team analogy, the parameters for the portfolio will be as follows.
Number one, big stocks that meet the ABC/DLRM philosophy, that's the Always Be Compounding Don't Lose Money philosophy. This is similar to going to the NBA draft and picking players that meet the parameters for your basketball team needs. So we'll pick businesses that:
- You understand
- Have long term competitive advantages
- Are led by honest and competent people
- Can be bought at a reasonable price, and
- All this while maintaining a rational risk adjusted and tax efficient portfolio, which in our case, we are doing by using the basket team portfolio analogy to manage the investment allocation to keep the number of stocks between 5 and 12.
In a basketball team, there are usually between 8 and 12 players, there are always 5 players on the court, and there are up to 7 bench players. By keeping the stocks to a maximum of 12, we will be able to keep the amount of research work manageable.
Number three, the portfolio will have at least five stocks from different industries. Just like in a basketball team, there are five positions on the court: point guard, shooting guard, small forward, power forward and center. Each position has a role to play in the team.
This is the same in the investment portfolio, we want to have different kinds of businesses to maintain a balanced portfolio. Just imagine if you were playing a basketball team. With all centers, it would probably not go well. The same would happen if you had a stock portfolio that had all oil and gas firms. It would probably be doing good now that there's a war going on. But other than that, in a normal environment, you really don't want to have all your exposure in one industry group.
This leads us to number four, allocate investment dollars in a balanced way. No single stock will have or should have more than 30% of the funds. This is analogous to players getting minutes to play on court. In the same way in an investment portfolio, they get instead of minutes, you're getting allocated investment dollars. This guideline is to spread the amount of dollars, and around, and have a balanced portfolio or team.
Of course, you'll give more minutes to the Michael Jordan or LeBron James of the world and listen. In her case, you'll probably give more dollars to Berkshire Hathaway, which is her favorite go to stock number five, keep each stock for at least three years. This is analogous to when you recruit a new player, you give him some time to develop. Same with your businesses that you're buying. What positions would I choose for Elizabeth's new portfolio? I suggest approaching the task as an NBA Draft. Let's pick the best available stocks first and also be aware of the position needs.
We'll make sure that we have at least five different industries. So here are my picks for a list of its portfolio if it were done today, June 7 2022.
Pick number one - Berkshire Hathaway, symbol BRK.B, with a 15% allocation. This is the best all around holding company. It is managed by Warren Buffett, and it owns excellent businesses. Look up the video I did on my trip to the 2022 annual Berkshire Hathaway Meeting, you can check out the link above. It's trading at 85% of the estimated fair value.
Number two, Alphabet symbol GOOG 12% allocation. It's the parent company of Google. it’s the premier online advertising provider. Look up the video 2022 Market Crash Guide, which I did a couple of weeks ago, where I talk about Alphabet, it's selling around 65% of the estimated fair value.
Number three - pick Blackrock symbol BLK, will allocate 12% of this business. It's one of the premier asset managers in the world. It also owns iShares, which has 34% of the ETF market in the USA. I also talked about it in the market crash guide. It's selling at 77% of the estimated fair value.
Pick number four. The Walt Disney Company, symbol DIS, we're allocating 10% to this portfolio.
Who doesn't know Disney, it’s the ultimate entertainment company. It has parks, the Disney Studio, Pixar, it has Disney Plus and of course ESPN. It's currently selling at around 63% of its estimated fair value.
My fifth pick is Mercado Libre, symbol MELI. We're allocating 10% to this business. It's the largest e-commerce marketplace in Latin America. It has over 140 million active monthly users and 1 million active sellers across 18 countries. It also operates complementary businesses like shipping solutions, payment and financing operations, advertising and turnkey e-commerce solutions. Think of it as a cross between Amazon and Alibaba in Latin America, it can be bought at 53% of fair value. This makes it the cheapest stock on our list.
Pick number six, Medtronic, symbol MDT, 9% allocation. It's one of the largest medical devices companies in the world. It develops and manufactures troponin, medical devices for chronic diseases. Things like pacemakers, defibrillators, heart valves, stents, insulin pumps, surgical tools and other medical devices. About half of its sales are from the outside of the United States. It currently sells at 75% of the estimated fair value.
My pick number seven is DuPont, symbol DD, we're allocating 8% to Dupont, which is a diversified speciality chemical manufacturer. It provides specialty chemicals and downstream products for the electronics communications, automotive construction, safety and protection and water management industries. It repays around a 2% dividend yield. It's currently selling at a 68% of the fair value estimated.
My 8th pick is Realty Income Corp, symbol O, 7% allocation. This is the premier Real Estate Investment Trusts for monthly income. It owns around 11,000 properties, most of which are freestanding single tenant triple net lease retail properties that are located in 49 states and Puerto Rico. It provides an annual dividend yield of around 4.3% which is paid up monthly. It is currently selling for 89% of the fair market for value estimate.
Pick number 9, YUM China, symbol YUMC, 6% allocation. This is the largest restaurant chain in China. It has around 10,600 restaurants which includes KFC, Pizza Hut, Taco Bell and other brands. It got hit by COVID 19. But this should be only temporary. This is a business that has a large competitive advantage and should return to its growth path, once things get back to normal. It is selling at 53% of the estimated fair value given by Morningstar. This stock is cheap.
And my 10th pick is Starbucks, symbol SBUX, 6% allocation. Who doesn't know about Starbucks? It is one of the most widely recognized nice restaurant brands in the world, okay, in fact I go to Starbucks at least three or four times a week. It has around 34,000 stores across 80 countries. It currently has a dividend yield of close to 2.5%. And it trades at 79% of the fair value estimate.
Picks number 11 and 12 are kind of placeholders while we look for other stocks. But in the meantime, we have 10, solid stocks, and placeholders at 11 and 12.
Let me tell you at 11. We'll put Vanguard’s short term inflation protected securities ETF symbol VTIP with a 3% allocation. And at position number 12 we'll put Vanguard's S&P 500 ETF symbol VOO with a 2% allocation.
By now all the members of the club know that my favorite stock is Berkshire Hathaway. If you have reached this part of the video, let me know by telling me your favorite stock in the comment section below. And I'll make a video with my opinion about the most favorite stock that is mentioned in the comments.
So there you have examples of the portfolio for defensive Daniel to keep it simple, and the basketball team focused investment portfolio for enterprising Elizabeth. Both of them could be implemented today. If these examples were helpful to you, and you'd like to learn more, then subscribe to my channel smash the like button. And let me know in the comments below what other topics you'd like to learn about and I'll do my best to make a video about it. Thank you for watching. Remember to always be compounding take care