Do you have a strong Core Portfolio to ride the Bull Market?

To achieve one’s financial goals, it is very important to construct a portfolio of good quality companies. And Core stocks rank right on the top on quality. However, in a bull market, when prices are rising very fast in the mid and small caps stocks, it is easy to ignore Core stocks. So much so that your portfolio could become skewed towards smaller cap stocks, leading to a more volatile and even a riskier portfolio. Think of it as a tall building where the higher floor became even higher and each floor became bigger. Such a building is at risk of falling. In investing it means undergoing a severe and painful correction in case the market corrects. What you need is a stronger foundation which allows you to build a taller building. And that the role of Core stocks in your portfolio. 

And if you are relatively new in the market and haven’t had time to build your portfolio, your priority should be to build a strong foundation before shopping for mid and small cap stocks.

What are Core stocks?

Core stocks are essentially large cap stocks and are typically associated with well established companies with a proven track record. These companies have weathered various market cycles, thus demonstrating resilience and robustness. Resilience is their ability to revert to the regular good performance once the tough situations are over. But this is not all, they also handle tough market and economic situations better. For example, they can handle commodity price increases better as they can increase prices without adversely impacting sales. These companies are the ones which have large market shares in their respective industries, along with a solid customer base, diverse suppliers, good distribution, strong brands etc. contributing to consistent and profitable revenue growth. This is best described as Robust companies.

Why Should I invest in Core stocks?

Core stocks are best suited to navigate through market and economic cycles. In tough times they fare much better than their competitors and come out stronger than before. In good times they are well positioned to grow profitably. Also these are well understood stocks, covered by many analysts. This and their large liquidity ensure lower price volatility. This results in lowering volatility in your portfolio and enables you to stay invested without panicking even in the worst situations.

Okay, but what are the caveats of investing in such stocks?

Such companies are not bought to earn exceptional returns, but will rather offer steady, consistent returns, given that such companies already command a premium valuation. However, the market is prone to going even higher price than premium valuations. This is likely to result in mediocre to poor returns. 

Therefore, such companies must be bought when the valuation is reasonable and must be held on for a very long time, irrespective of what the market conditions are. Also, such companies can and probably must be averaged down on market downturn, to take advantage of the fact that such companies rebound faster than the general market.

How much to allocate to Core Stocks?

You can allocate anywhere from 60% to 80%, maybe even more of your portfolio to core stocks. The remaining can be allocated to what we at MoneyWorks4Me like to call as Booster stocks. But more about that in another blog.