Last week, we introduced Fools around the world to the first five investments we purchased for this special real-money portfolio. We’re back today to bring you the next round of high-conviction stock and fund picks that we believe are well positioned to make money over the next five years.
But before we get to this week’s picks, we wanted to share some of our Foolish secret sauce for building a winning portfolio.
Foolish Commandments for Building a Successful Portfolio
- Aim for at least 15-25 individual stock positions.
A well-diversified stock portfolio should contain at least a few dozen individual stock positions. This is important to ensure that an investor is not overly exposed to the fortunes of just one or two companies.
- Ensure that no single stock accounts for more than 15% to 20% of your total portfolio.
Fools are big proponents of investing heavily in high-conviction stocks, and that’s perfectly fine. However, we do recommend keeping your exposure to any one stock to no more than 15% to 20% of your investable assets. This will help limit company-specific risk.
- Consider the tax implications if selling in a taxable account.
While we’re patient, if not reluctant, sellers of our winners, we understand that there are times when you need to take some profits. When you do so in a taxable account (versus a tax-advantaged account like an IRA or 401(k)), the taxman will want his cut. Before you sell, carefully consider what tax liability may be generated by your actions.
- Stocks are important, but you should also consider how your portfolio looks as a whole (asset allocation).
Building a winning portfolio stock by stock is a time-tested bottom-up approach to investing. But if you combine that with a top-down approach – namely, looking at the allocation of your entire portfolio across asset classes – you have better odds of maximizing return while minimizing risk.
- Remember that you are building a long-term portfolio!
Fools buy stocks for the long run. That means we’re not too concerned with the market’s short-term dips and drops and gyrations. When you buy a stock, you are buying a long-term investment, so get comfortable with any names you welcome into your portfolio!
Now let’s get back into the details of our April Fool’s Portfolio!
Just as a reminder, here is the allocation plan we are working toward for this portfolio:
- 15 Stocks: 75% of our portfolio (5% each)
- 5 ETFs: 20% of our portfolio (4% each)
- Cash: 5% cash reserved
In other words, whatever you plan to invest to follow along with our April Fool’s Portfolio, you would buy up to a 5% position in each stock if following us step by step.
Last week, we revealed the first five investments in our portfolio. If you haven’t purchased these stocks or ETFs yet, we recommend doing so:
- Vanguard Total Stock Market ETF (NYSEMKT: VTI) — 4%
- Vanguard Total International Stock Market ETF (NASDAQ: VXUS) — 4%
- Amazon.com (NASDAQ: AMZN) — 5%
- Etsy (NASDAQ: ETSY) — 5%
- Pinterest (NYSE: PINS) — 5%
And now let’s focus on the next five investments that we’re purchasing for our special April Fool’s Portfolio:
Vanguard Small-Cap Stock ETF (NYSEMKT:VB)
Portfolio Weighting: 4%
This exchange-traded fund focuses on the smaller end of the market capitalization spectrum, making it an ideal choice for dedicated small-cap coverage. With a median market cap of $6.2 billion and a price tag of just 0.05%, this fund provides inexpensive, broad exposure to a wide range of smaller companies that tend to have a fundamentally different growth profile than most large- or mega-cap companies.
Because the bulk of our stock picks for the April Fool’s Portfolio will reside in the large-cap space, we wanted to ensure we had some representation from smaller names as well. This fund fits the bill and should provide a diversified approach to investing in this sector of the market.
Portfolio Weighting: 5%
It used to be that if you had kids, the investing case for Disney was clear as day. But the House of Mouse these days has moved way beyond cartoon characters and theme parks. Less than two years after launch, its young streaming business has crossed over 100 million global subscribers, and 1 million new Disney+ watchers join each week. While COVID-19 squashed the company’s theme parks and cruise operations, Disney+ took off and even helped in the evolution of how Disney releases films. Adding in Hulu and ESPN+, Disney has nearly 150 million subscribers to its huge library of streaming content. All told, within a few years a few hundred million subscribers will be enjoying Disney content from their couches or mobile devices.
Disney’s stock has rebounded nicely since its 2020 lows, but we still believe there is more upside ahead as lockdowns lift and consumers start traveling and spending again. Theme parks will see more visitors to return them to their healthier revenues and profits. Retail stores and movie theaters will open up. And sports returning to more normalcy will help drive ESPN viewers, content, and revenues. Eventually Disney should return to paying a dividend that will help support its stock and attract more shareholders. There will be ups and downs as its once-largest segment (Parks) opens back up, but we think Disney gives you a fun and rewarding way to make money by owning its stock.
Portfolio Weighting: 5%
Turning from Hollywood to Latin America, MercadoLibre operates an e-commerce platform and logistics network through its MercadoLibre marketplace and also offers payments and fintech solutions through MercadoPago. It is the largest e-commerce business in Latin America. Often dubbed the “Amazon of Latin America,” MercadoLibre operates across 18 countries including Brazil, Mexico, and Argentina. It serves a market of more than 635 million people with some of the fastest internet penetration rates across the globe.
Already a leader in e-commerce, MercadoLibre widened its lead during 2020 with the number of active users growing 78% and merchandise sold across its marketplace growing 50%. Yet the company is more than just selling goods. In its MercadoPago division, payment volumes jumped 134% in the last quarter of 2020. The company’s Mercado Envios logistics business shipped 214 million products, up 131% in the last quarter.
With a market cap of about $77 billion and annual sales of almost $4 billion, MercadoLibre is the big fish in a large and growing pond. We think there’s a pretty good chance that it can grow into a whale over the next five years. That means a higher stock price than today, and profitable returns for shareholders.
Portfolio Weighting: 5%
One of the most successful companies of the computer and internet age makes our list this week. Founded in 1975, Microsoft is a nearly $2 trillion company with a stock that has grown almost 900% over the past decade. The company started by Bill Gates is a giant in software, cloud computing, AI, gaming and many other areas that impacted millions of people around the world every second.
Microsoft Office is the de facto software suite that millions rely on to do their jobs, but equally important is the company’s thriving intelligent cloud segment, led by its Azure cloud computing offering. Microsoft also has a gaming segment (Xbox), personal computing with its Surface tablets, ownership of the LinkedIn social media platform, growing AI innovations, and so much more. And just this week the Washington-based company announced it will be buying automated speech software provider Nuance Communications (NASDAQ:NUAN) for almost $20 billion in cash (15% of Microsoft’s current cash balance and less than half the company’s annual earnings). A Microsoft-plus-Nuance partnership will supersize Microsoft’s healthcare business; that’s where Nuance gets most of its revenue.
With a proven, visionary, successful leader in CEO Satya Nadella, Microsoft is once again a leading darling of the tech world. With some of the best financials of any company in the world to support its growth and expansion plans, Microsoft is a stock that can sit nicely in your portfolio for years (and collect a little dividend along the way).
Portfolio Weighting: 5%
With nearly 380 million active accounts generating nearly $1 trillion worth of transactions last year through 15 billion transactions, PayPal is a force in the growing and evolving “fintech” landscape. Through the company’s simple-to-use, widely known PayPal and Venmo apps, PayPal has goals to reach 1 billion global users transacting daily, and has set a stepping stone of 750 million accounts and $2.8 trillion annual payment volume by 2025. That’s ambitious, but considering the company’s success under CEO Dan Schulman, we’re not doubting the potential.
By being an early disrupter in the digital payment and banking space, PayPal has earned a $320 billion market cap that generates $21 billion in revenues. Furthermore, it has a rock-steady balance sheet and generates very attractive operating margins and profits. And it deploys those profits back into its business in R&D and other investments.
Its recent acquisition of Curv to support cryptocurrency assets is a great step. PayPal already allows bitcoin buying on its platform and announced its “Checkout with Crypto” initiative to give its clients the option to convert crypto assets to fiat currency to check out at millions of merchants. That’s just one example of the innovation this company brings and has brought over the years. And we expect much more ahead of this proven winner.
Fools, we are halfway through the unveiling of our April Fool’s Portfolio!
And that means that we will have more updates and guidance on Foolish investing coming your way in the second half of the month, so you don’t want to miss out. We want you to invest alongside us, so make sure you are buying the stocks and funds we present each week.
Be sure to check back here next week on Friday, April 23, for our next update and a new round of Foolish investments!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.