Rudi’s Response: Yield, All-Weather Stocks And Calculated Risk

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FNArena recently received the question below from a subscriber and given we suspect this matter probably concerns most of our readers and subscribers, we thought it might be best to share the response of FNArena Editor Rudi Filapek-Vandyck with a broad audience.

Question:

Hi Rudi,

I wrote to you a little while ago and you were kind enough to respond, so I thought I'd write again.

My investment goal is to maintain an acceptable income stream for the next 20 years, whilst at least growing my principle by the rate of inflation. (I'm retired).

My portfolio is predominantly the Big 4 banks, Telstra, Woolworths and Wesfarmers. I still have a lot of cash on the sidelines, so at the encouraging of supposed market advisers and in response to the disappointing returns on cash, .. I recently 'diversified'. Ha, ha, ha! Needless to say I broadened my portfolio into the mining sector and have seen significant falls in value.

That's part of my learning and I accept this. I was going to heavily invest in BHP and WPL but held off. But if you look at my investment goal, you'd think I should be in Australia's biggest companies and BHP and WPL should be part of my portfolio .. or not?

So Rudi, as you know there aren't many big secure companies on the ASX you'd have confidence in to be around and profitable for the next 20 years. I think my current 'core' of shares (the Big 4 banks, Telstra, Woolworths and Wesfarmers) are probably o.k. but I feel I should add more. At the right time/price do you think BHP and WPL should be part of my portfolio?? (Or should I wait to see your updated All Weather Stocks?)

Look forward to hearing from you Rudi.

All the best.

John H

Response:

Hi John,

I have a suspicion there's a whole army of retirees and SMSF-operators out there who share the same dilemma as you. Here's me hoping they did not "di-worsify" into energy and mining stocks.

As you are aware, I am not a big fan of adding a lot of exposure to resources stocks, not for investing purposes (as opposed to short term trading strategies). My analysis post 2008 suggested resources companies would have too difficult a task at hand to deliver consistent returns for shareholders. This has been my view for the past six years and I think it's only fair to say this has been proven correct.

I am not about to change this view. Rather than focusing on whether the shares you'd like to add to your portfolio will still be around in twenty years, I'd say instead focus on whether the shares you'd like to add have the odds working into their favour to deliver you positive rewards in the years ahead.

Resources stocks will rally, at some point, because that's what they do best. But I still find it hard to see them delivering consistent positive returns past the next rally.

As suggested consistently since 2013, a new upswing is building for commodities but unfortunately for investors in Australia, those commodities that matter most for the local share market are NOT going to participate. Those commodities are gold, copper, iron ore, coal and crude oil/gas. While market dynamics for copper seem to be improving, I still think it'll be 2016 before we can genuinely start talking about a better outlook.

On a risk-reward basis, and certainly for the purpose of your own strategy as outlined in your message, I'd strongly suggest you put the focus on industrials. As you would have noticed from your own portfolio, industrial stocks have done just fine since 2009 and they have been, and will remain able to combine dividends, growth and consistency in the years ahead. This is what you want.

A few things to keep in mind:

– pure dividend stocks are all pricey now and this means a de-rating is but an interest rate hike away (might not happen in 2015, but it will, at some point)
– the best defense against such a de-rating is picking dividend stocks that also offer growth
– my All-Weather Performers remain ideally placed inside the challenging environment that lies ahead for most ASX-listed companies, but you'll have to watch valuations closely. Right now, for example, I wouldn't be chasing a stock like Amcor ((AMC)), but it'll be a great opportunity after the next correction, no doubt

Earlier this year I wrote a story on portfolio construction in which I suggested long time investors who do not want to be sitting behind their pc screen every day with sweaty hands, like yourself, should consider three baskets of stocks:

1. Reliable dividend payers
2. All-Weather Performers
3. Calculated risk stocks (industrials stocks with a higher risk profile without going overboard)

I still think this is the best diversified portfolio. Feel free to incorporate some shorter term trading strategies into the riskier part of your overall portfolio, depending on what you are comfortable with.

Apart from all of the above, I think it's time you said goodbye to whomever advised you to add those resources stocks to your portfolio. Clearly, this expert is an ignorant dinosaur and not in tune with post-2009 dynamics for the Australian share market. (Sounds harsh, but it is true. You lost money because of the wrong advice. Seek someone better).

Also note, I just updated my thoughts and views on All-Weather Performers. The eBooklet is available exclusively to paying subscribers here at FNArena. Make sure you download your copy and read it over the Xmas break.

Regards,

Rudi Filapek-Vandyck
Editor
FNArena

 

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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