Diversified Stock and ETF Selection

Building Your Portfolio’s Core - Part 2 of 4

With your asset allocation strategy as the blueprint, it’s now time to construct the building blocks of your $100k portfolio. This step involves carefully selecting a mix of individual stocks and ETFs that align with your investment goals, risk tolerance, and market outlook. As the old adage goes, “Don’t put all your eggs in one basket.” Diversification is essential for managing risk while still capturing growth opportunities. In this post, we’ll cover how to build a diversified stock and ETF selection strategy that forms the core of your portfolio.

Detailed Guidelines & Recommendations

Stock Selection

1. Sector Diversification

Just as a balanced diet includes a variety of food groups, a well-diversified portfolio includes companies from various sectors. This helps reduce the impact of any single sector’s downturn. Consider diversifying across sectors such as:

• Technology (e.g., Apple, Microsoft)

• Healthcare (e.g., Johnson & Johnson, Pfizer)

• Consumer Goods (e.g., Procter & Gamble, Coca-Cola)

• Financials (e.g., JPMorgan Chase, Bank of America)

• Energy & Industrials (e.g., ExxonMobil, Caterpillar)

Avoid over-concentration in one sector, even if it’s currently outperforming. A diversified sector approach helps cushion the blow if a specific industry faces headwinds.

2. Market Capitalization

Balancing your portfolio with stocks of varying market caps is key to capturing both stability and growth:

• Large-Cap Stocks: Established giants like Alphabet and Berkshire Hathaway are more stable, providing steady, lower-risk returns.

• Mid-Cap Stocks: Companies in their growth phase, such as Chipotle or Roku, offer a mix of growth potential and stability.

• Small-Cap Stocks: These younger, high-growth companies (think of niche tech startups) can offer explosive gains but come with higher risk.

As Peter Lynch advised, “Invest in what you know,” but also ensure you diversify across company sizes to benefit from both stability and growth.

3. Growth vs. Value Stocks

Striking a balance between growth and value stocks can help stabilize your returns:

• Growth Stocks: These companies reinvest profits to fuel rapid expansion. Think of Tesla or Shopify, where the focus is on capital appreciation.

• Value Stocks: Often overlooked by the market, these stocks trade below their intrinsic value. Classic examples include blue-chip stalwarts like Coca-Cola and Walmart.

Warren Buffett famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” A mix of growth and value stocks ensures your portfolio is prepared for varying market conditions.

ETF Selection

1. Core Holdings

Start with broad-market ETFs to form the core of your portfolio. These funds provide instant diversification across multiple sectors and minimize the impact of individual stock volatility. Consider low-cost index ETFs like:

• Schwab Total Stock Market Index (SWTSX): Broad U.S. market exposure.

• Vanguard Total Stock Market ETF (VTI): Covers the entire stock market.

• iShares Core S&P 500 ETF (IVV): Focuses on the top 500 U.S. companies.

Jack Bogle, the founder of Vanguard, advocated for low-cost index funds as a simple yet powerful way to grow wealth over time. “Don’t look for the needle in the haystack. Just buy the haystack.”

2. Sector-Specific ETFs

If you have strong convictions about certain industries, sector-specific ETFs can provide targeted exposure:

• Technology: Technology Select Sector SPDR Fund (XLK)

• Healthcare: Health Care Select Sector SPDR Fund (XLV)

• Financials: Financial Select Sector SPDR Fund (XLF)

These funds allow you to overweight sectors you believe will outperform without the need to pick individual winners.

3. International ETFs

Diversify geographically to capture growth outside the U.S. market and reduce reliance on the domestic economy:

• Vanguard FTSE Developed Markets ETF (VEA): Focuses on developed markets outside the U.S.

• iShares Core MSCI Emerging Markets ETF (IEMG): Provides exposure to high-growth emerging markets like China, India, and Brazil.

• iShares MSCI EAFE ETF (EFA): Covers Europe, Australasia, and the Far East.

Global diversification not only helps manage risk but also opens up opportunities in economies that may outperform the U.S. in certain periods.

My Take on Stock and ETF Selection