private equity firm.
Like Doug, I find frontier markets fascinating. They offer huge upside to early movers with the courage to take a stake in countries in transition to market economies. Vietnam is and maybe Cuba in a few years. One other country Doug highlighted was Myanmar (widely known as Burma).
Burma is moving in the right direction, and while sanctions are still in place, the visit by Hilary Clinton to the country late last year was the first by a U.S. Secretary of State in 50 years.
Burma is of course rich in oil, gas and timber, but it offers investors much more. The size of France with 48 million people, it boasts 1,240 miles of coastline and 600 undeveloped tropical islands. Its 2,000 pagodas and other historical sites will make a high priority tourist destination for jetsetters.
Doug compares the country to neighboring Thailand that has an economy 10 times bigger with 14 million annual tourists, compared to a paltry 300,000 for Burma.
While listening to all this, I could sense from the audience both keen interest and apprehension. They must have been thinking – “This is great stuff but how does this fit into my portfolio?”
So when my speaking turn came up, I opened with my boring and boom portfolio strategy.
The vast majority of your investments should be in a core portfolio that is, well, boring. The goal here is capital preservation, and the portfolio should be widely diversified with plenty of cash, quality bonds, timber, currencies, commodities, blue-chip stocks and precious metals.
(For Investment U’s recommended Asset Allocation Model, click here.)
The strategy is passive, and low-cost exchange-traded funds (ETFs) are a great tool to put this core “boring” portfolio together.
You should also have some international and emerging market ETFs in your core – but they should be conservative.
Two Core Portfolio Ideas
First, a great choice would be Powershares International Dividend Achievers (NYSEArca:PID). PID is a basket of international stocks that have a sterling dividend growth record: five consecutive years of dividend increases. Normally, there are 30 companies in this ETF.
Next, I highly recommend WisdomTree Emerging Equity Income (NYSEArca:DEM), which is a basket of higher dividend-paying emerging market stocks. As you might expect, it outperforms in weak markets and underperforms in strong markets. This lower volatility is just what I think most investors are looking for and the proof is in the pudding.
Just take a look at the below chart comparing DEM with the most widely used emerging market ETF in the world, iShares MSCI Emerging Index Fund (NYSEArca:EEM).
You can see that during the past five years, DEM outperformed and ended in the black, while the much larger and famous EEM ended its volatile ride in the red. The index that DEM aims to track has a dividend yield of 7.08% (the actual yield may differ).
Once you’re comfortable that your core portfolio is a fortress, you can be more open to all sorts of higher-risk, higher-return ideas – but don’t forget the risk management tool of trailing stop losses.
Your overriding goal for your boom portfolio is sharp capital appreciation. You’re taking on more risk, volatility and, in some cases, less liquidity in return for a chance at big gains.
I will be highlighting boom chip opportunities in future articles. You might even go so far as to look at frontier markets; after all, there are 100 countries with stock markets outside of the developed markets and the emerging markets.
Boring is beautiful, but having some boom in your portfolio makes life interesting and gets your blood pumping. We could all use some of that.
Once, the core portfolio is in place, you can look at what’s left for your “boom” portfolio.