* Small-cap stocks
* Blue-chip stocks
* Cash
* Precious metals
* Property
First up, small-cap stocks… this is the most profitable and exciting sector of the market. You can make quick-fire gains – and losses – in no time at all.
So if you’re after big gains, you should definitely have small-cap stocks in your share portfolio. The simple reason is that small-cap stocks give you the big percentage gains it’s hard to make with blue-chip stocks.
Plus, you can invest just a few hundred or few thousand dollars and see that grow many times over the course of six, twelve or twenty-four months.
Of course, that doesn’t happen all the time. Small-cap stocks are risky. That means, like all shares, small-cap stocks can go down too.
You’ll usually find small-cap stocks leading the market higher. They’re the first to move as early investors look to profit from beaten down or under-valued shares. Because they can achieve such big returns, early investors tend to pile into these stocks first.
Trouble is, when markets are less certain and investors aren’t prepared to take risks, small-cap stocks are the first to fall. That’s because investors know small-cap stocks can get hit hard in a downturn and so they look to get out early, before the rush.
As you can imagine, the skill is trying to pick those rises and falls before anyone else. That’s hard. That’s why even in a bearish market, it’s important to have small-cap stocks so you can profit when the market turns higher.
Even though I’m pretty negative on the fundamentals of the market, I’m still recommending Australian Small-Cap Investigator subscribers hold certain small-cap stocks in their portfolio.
How much you invest in small-caps is up to you. But remember that even a small exposure can give you a great return.
For instance, just say you’ve got a $20,000 portfolio, you could have as little as $2,000 invested across three or four stocks. And you could make a pretty decent return if the stocks soar higher.
While on the downside, your maximum loss would be $2,000 – and that’s if all three stocks went bust… which, let’s be serious, isn’t likely.
Next, blue-chip stocks… I like to break blue-chip stocks into two areas: blue-chip growth and blue-chip income stocks.
In my view blue-chip stocks are trading stocks. The days of buy-and-hold investing are over. If you want blue-chip growth stocks in your portfolio then you should watch them like a hawk.
You should be prepared to buy-in, ride it up and then sell when it looks toppy… and then potentially buy back in again when or if the stock price falls.
That’s the same regardless of the sector. It doesn’t matter whether it’s a resources stock or an industrial stock.
Let me show you a chart of Australia’s largest company, BHP Billiton [ASX: BHP]:
BHP Billiton [ASX: BHP]
Source: CMC Markets Stockbroking
Over five years the BHP share price has traded from about $25 to $45 today. That’s an 80% increase… which is pretty good. But over five years? Good, but not so good.
Now, I’m not saying that you can always buy at the bottom and sell at the top. But I am saying you should use the market price action in order to get out of the market before prices fall.
For instance, BHP is a blue-chip stock in most Australian investors’ portfolios. But how many financial advisors do you reckon told clients to sell BHP at $40 or $45 in 2008? I’ll bet there were very few.
Two years later and those investors are only just recovering the ground they lost. Instead of now locking in big profits from BHP’s latest rally – more than doubling since 2009, those investors are struggling to get back to breakeven.
The message here is, yes you should own some blue-chip growth stocks, but only as trading stock… not as long-term buy-and-hold stock.
Then there are blue-chip income stocks. Just as it’s important not to overpay for blue-chip growth stocks, it’s also important you don’t overpay for blue-chip income stocks.
Picking these stocks should be easy. And the good thing is, unless you’re in the retirement phase of your life, you don’t need to hold many dividend payers in your portfolio.
You can probably get away with five or six. You don’t need too many – I’m not a fan of the mainstream view about diversifying portfolios. Diversification is a cop out in my opinion.
It’s the financial professionals admitting they can’t be bothered doing the research to give you five really good stocks. Instead they’d rather give you ten or twelve stocks to reduce the chances of one of them being a bad apple.
If you put in the time it won’t be hard for you to find five good dividend payers. They don’t have to be Top 50 or even Top 200 stocks. You could consider adding a mid-cap dividend payer to your portfolio as well… especially if you’re looking for a higher yield.
This is the only type of stock I’d consider for buy-and-hold investing.
Next let’s look at good old cash… this is quite straightforward. You need cash. You need it to buy stuff. And, chances are, your employer will be reluctant to pay you in anything other than a cash deposit to your bank account.
I won’t go over my views on the banking system here. You can read about that in the Money Morning archives. To put it simply, the global banking system is a house of cards.
It has been saved once by taxpayer-funded government support and by interference from central bankers. There’s only so much they can do to stop the system collapsing.
However, as I say, you need to have a bank account. In fact it’s pretty hard to get by in the Australian economy without cash.
On the plus side, it should be remembered that the taxpayer guarantees bank saving up to $100,000. So, if your bank does go bust then thanks to the taxpayer (including you) you’ll get your cash back.
Of course, there’s no guarantee it’ll be worth the same when you get it back… inflation will help take care of that.
Now, if the entire Australian or global banking system collapses then you won’t need to worry about getting the cash back, because chances are it’ll be worth next to nothing… even $100,000!
This means you should hold as much cash as you need. To cover you for as much time as you believe the banking system will be safe. If you think the banking system has years left in it then you won’t worry about holding a large amount of cash.
If you think the system’s days are numbered then you’ll only want a small cash holding.
Other than that you should hold other assets. That could be trading shares, property or the subject I’ll get to next, precious metals…
Precious metals – gold and silver – are the alternative to cash. Both have been used as a currency unit for thousands of years.
In Australia’s case, right up until the late 1960s Australia’s coins still contained silver.
Regardless of what you read in the mainstream press, a non-precious-metal-backed currency is actually the exception rather than the rule.
Listen to anyone on the Sky Business Channel or CNBC. The so-called financial experts will call gold a “barbarous relic” or a failed currency. They make supporters of gold and silver out to be freaks.
Yet they fail to understand that a currency not backed by something tangible such as gold simply provides a licence for central bankers and governments to print money. That’s what leads to inflation and rising prices.
And so, as more money is printed, this should lead to higher gold and silver prices. That’s already happened as you’ve seen over the past ten years. The price of gold has increased from $400 to over $1,300 today.
That doesn’t mean the gold price will always go up. But long term, even despite the big increase in recent years, there’s still plenty to justify the price moving higher.
For instance, odds are US and European governments will need to print more bail-out dollars before this year is finished… and probably next year too.
Having gold in your portfolio is like holding an insurance policy against the devaluation of your wealth by government.
That means it makes sense to buy some. That could be anywhere from 5% of your portfolio, up to 20%. As a point of disclosure, I personally own gold and it makes up about 20% of my portfolio.
But again, you need to figure out what you’re comfortable with. You’ll soon figure that out. Start off with a small holding and then build on it. At some point you’ll stop and think, “That’ll do”. And you’ll probably be right.
Next, what about property? I continue to be very bearish on property.
The Australian property market dodged a bullet in 2008 and 2009 when house prices didn’t crash. I’ve gone on record many times to say that a housing crash will hit the Australian market.
So, if you own property or if you’re thinking of buying, here’s what to do…
If you own a home right now and you have a mortgage, you need to figure out a couple of things. First, can you afford to maintain the repayments if interest rates rise?
If you think things will be touch-and-go or if you think it would cause a lot of stress, my simple advice is this… SELL NOW!
The second thing to consider: is your home worth significantly more than when you bought it? If it is then your next choice depends on how you view your home. If you see it as a money-making opportunity then you should… SELL NOW!
But, if you just see it as a home and you’ve never seen it as a wealth builder, then you should stay where you are. The costs of buying and selling can be steep. Selling a home just for the sake of it doesn’t make a lot of sense.
But what if you don’t currently own your home? What should you do?
That’s simple too… and this may come as a surprise given my previous comments on housing. You should start doing the groundwork and research on buying property. Whether it’s for a place to live, or whether it’s just an investment.
Looking for the right property can take a lot of time and effort. If you started doing the research two years ago when most thought house prices would tumble then you’ve wasted a lot of time.
Property is severely over-priced and so buying now is a mistake. Some analysts claim the housing market is over-valued by up to 40%.
But, the indices don’t always tell the real picture. Look in any suburb and you’ll start to see houses being offered at more reasonable prices. They still aren’t cheap. And as an investor you shouldn’t buy yet. But now is definitely the time to start putting in some hard yards with your research.
By the time you’ve built up your research material over the next twelve or twenty-four months, those houses in those same suburbs will be offered at even cheaper prices.
The message is: don’t buy property yet. But add it to your watchlist…
I hope that’s given you some idea about how to play the broader market.
It’s by no means a full and personalised analysis of your financial position. But it could give you a starting point if you’ve been thinking about where you should invest your money this year. Read More... For the latest updates PRESS CTR + D or visit Stock Market news Today
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