The other day my friend said he wanted to open up an investment account and asked me for some advice. Thought I would pass along the thoughts I gave him. For him I was comping up with a strategy that would work for a more passive investor who is looking to save up some money. Again, purely my opinion but I told him to look out for a mix of 4 different categories (and to allocate the mixture between the 3 based on how risky he’d like to be).
1. Put some money in index funds, ETFs, or a low fee mutual fund. Index funds are like aggregates of a bunch of stocks and should always go up long term, even if it’s not by a lot. I like the Fidelity Blue Chip Growth Fund (FBGRX) – YTD trailing returns are 34% and 5 year trailing returns are 24%.
2. Value and Blue Chip stocks. These are stocks like Coca Cola, Disney, Johnson & Johnson, etc. There’s not a lot of growth potential but they’re also not going anywhere south anytime soon. For value stocks you want something with a low Price to Earnings (P/E) ratio. P/E ratios are kind of like a sign of cheapness – a low ratio means the price of the stock is not that high relative to the amount of earnings they make. For these stocks you probably also want one that pays high dividends. BP has a P/E of 6.33 and a 4.75% dividend yield).
3. I’m not sure what the proper term is but I’d call these growth potential solid stocks. These are ones that aren’t overly risky (I’m not worried about them going out of businesses or truly tanking), but they aren’t value stocks and have a little bit of growth left. I’m thinking Google, Restoration Hardware (I’m long this one), KORS, Tifanny, and pharmaceuticals.
4. Risky picks. Not sure that these are really the best bet in your first portfolio, so I wouldn’t put too much in them, but can’t hurt to have a little bit in speculation plays. Still unsure if I’d put Facebook in this category or category 3 but I’m long it at the moment and like its potential. I also really like 3D printing stocks in this category, specifically DDD and ONVO. I also like solar stocks and think solar is really going to pick up in the near future as energy concerns increase. For solar I like TSL at the moment.
For more thoughts on finding stock ideas check out this post.