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Top 10 picks for your portfolio

Every investor wants to build the hardest working portfolio possible, but how should they go about it? To find out, Peter Switzer spoke to leading investment banker Justin O’Brien, vice president of Morgan Stanley Smith Barney.

His answer was surprising – meat and three veg.

According to O’Brien, it’s all in how you weight your portfolio by sector (or by food group).

A healthy balance
So what were his top 10 gross yielding stocks?
  1. Tabcorp
  2. Telstra
  3. Stockland
  4. Telecom NZ
  5. ANZ
  6. Commonwealth Bank
  7. Westfield
  8. Westpac
  9. AMP
  10. Origin

The important thing about the selection above is the diversification.

“It’s a mixture of banks, telcos, property and diversified industrials,” explains O’Brien, adding that all good things should be enjoyed in moderation.

“Yield is great, but like anything, you can have too much of a good thing,” he says. “One of the lessons that we’ve learnt over the last 12 to 18 months is that if you chase yield, you can actually end up in a yield trap.”

O’Brien points to examples in which investors chase yield, only to see their investment evaporate, taking the capital along with it.

While blue chip companies are considered to be traditionally safer, O’Brien says excessively chasing yield is not the best way to construct a portfolio.

“Another way to look at it is to think of meat and three veg,” he says. “Your meat stocks are your growth stocks and your vegetables are your dividend yielding stocks. You should have a blend, so you don’t have too much of anything, so you just have a nice balance.”

So what are the ideal sector weights to consider when building your portfolio? Moving away from dinner table talk, O’Brien suggests the following:

  • Financials: 37 per cent
  • Materials: 26 per cent
  • Consumer services: 11 per cent
  • Industrials: six per cent
  • Oil and gas: six per cent
  • Healthcare: four per cent
  • Telecommunications: five per cent
  • Consumer goods: 2.5 per cent
  • Utilities: 2.5 per cent.

“This is the breakdown of the ASX 200 as it stands today,” explains O’Brien, pointing out that financials are a core group, because when you drill it down, it includes banks, insurance and financial services.

By this logic, your portfolio should be a reasonable representation of the stock exchange. While a little more explicative than the meat and three veg rule, is this benchmark a hard and fast rule?

“This is one of the tools we would use, amongst others, as a sort of benchmark for what sort of stocks you would actually bring into the portfolio.”

Ideal core portfolio

But what is the perfect core portfolio? This is O’Brien’s pick:

  • ANZ
  • Toll holdings
  • BHP
  • Cochlear or CSL
  • QBE
  • Santos
  • Westpac
  • Westfield
  • Woodside
  • Woolworths.

In any mix, O’Brien says the banks are key, as are larger players like BHP, which offer materials exposure.

“Materials are an important component,” he explains.Help from above

But this is by no means a complete DIY guide. Weighting and tracking your stocks can prove quite a challenging exercise.

“And this is where I’d advise clients who are looking at building their own portfolio to engage a professional. Because anyone can give you a haircut, but you sometimes need a hairdresser,” says O’Brien. “It’s all about partnering up with stockbrokers or with financial advisors – this is their space, they’re dealing with it 24/7, they live, breathe and sleep it.”

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Published on: Thursday, July 30, 2009

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