How to master “core and explore” investing 


For investors old or young, I’ve long been in favor of taking a hybrid “core and explore” approach. The “core”—the so-called “serious money” that comprises 80% to 90% of your portfolio—can be held in balanced funds or low-fee indexed solutions, like asset allocation ETFs from BMO, Horizons, iShares and Vanguard. A single such fund holds thousands of stocks and bonds spread around the world.

If your risk tolerance is high enough, that leaves 10% to 20% for a more adventurous “explore” allocation that could go into more speculative alternatives. This could include new tech IPOs or cryptocurrencies like bitcoin or ethereum, or investment funds that track them, as Dale Roberts and I surveyed in two MoneySense articles recently.

Late in 2020, I covered the topic of whether retirees should speculate at all, confessing that I personally have done so, albeit tempered with risk-management techniques. Crypto qualifies as speculation, but I can see why even seniors are tempted by it when they can get more return in a single day from bitcoin than a GIC is likely to generate in a year (see this recent article). Sadly, volatile cryptos and crypto funds can also generate comparable losses just as quickly so keep these to no more than 1% or 2% of a total portfolio, and be quick to take partial profits inside registered accounts.

If you’re booking gains without tax considerations, you could put the proceeds into less volatile speculations. Despite the pandemic, over the past year there has been a glut of stock offerings, IPOs and so-called SPACs (special purpose acquisition companies), which I have stayed clear of.

The minimum guideline is to spread your speculations among five roughly equally-weighted positions. If you’re a younger investor starting out, this may be your entire speculative portfolio. Older folk may choose “baskets” or “packs” of four or five stocks in several sectors.

I’m normally wary of IPOs (some joke IPO stands for “it’s probably overpriced”). However, I recently bought an IPO on its day of issue: online vacation rental firm Airbnb Inc. [ABNB/Nasdaq], recommended by more than one of the investment newsletters to which I subscribe. That was the first time I bought an IPO the day it started trading, though I regret not having jumped on Google’s IPO back in 2004. 

I prefer to wait a few months for new issues to settle. That approach worked with Facebook, after it fell within a few months of its botched IPO in 2012. And recently I’ve taken post-launch “starter” positions in plant-based meat substitute maker Beyond Meat (BYND/Nasdaq), cloud data warehousing firm Snowflake Inc. (SNOW/NYSE), and the now ubiquitous Zoom Video Communications (ZM/Nasdaq). 

With the market and economy shifting to a “recovery” theme as COVID vaccines slowly make their way through the population, money managers are moving from the COVID-resistant tech themes of work-from-home growth stocks (notably Zoom) to more traditional value names that benefit from a recovery.   

If you like the five-pack idea, consider Jim Cramer’s five WATCH stocks: giant retailers that held up during the pandemic and should also continue to thrive during a recovery: Walmart, Amazon, Target, Costco and Home Depot. (all of which I own).  

Big tech thrived during the pandemic and seems likely to continue doing so in the recovery period, assuming the Biden administration doesn’t break them up. The FANG acronym also coined by Cramer originally stood for Facebook, Amazon, Netflix and Google, but more recent iterations include FAAMNG, adding Apple and Microsoft to the list, or FATMAN-G, which adds Tesla.

My family was early owning these, in part because our daughter insisted we fill her TFSA with names she herself uses: Apple and Netflix. She also insisted on Tesla, which has powered the performance of the ARK ETFs and its famous manager, Cathie Woods. Tesla has made up 10% of several of her funds, which focus on “innovation” themes of the future, like next-generation Internet, genomics, robotics and fintech. 

Individual investors are free to pick off ideas by “mimicking” some of her picks and making up their own five-packs on these themes. You’ll find names like Square, Roku and Teladoc. If you want a one-stop exposure to all her themes in one Canadian-dollar nominated ETF, try Emerge Canada Inc.’s Emerge ARK Global Disruptive Innovation ETF (EARK/TSX). 

Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial, says any investor who didn’t own the tech titans in 2020 lagged the S&P 500, as they now make up more than 25% of that index’s value. Valuations are stretched; by 2020 year-end, the S&P500 had a P/E ratio of 30.26%  above historical market averages. “Because of this, we have largely avoided these names in our portfolio,” Ardrey says.

Ardrey is skeptical about Tesla, which had a market cap of $752 billion at the end of 2020. “If we were to assume the stock grew at 15% (much less than its historical rate) over the next 15 years, then it would need to have a market cap of $6.1 trillion to do so. The same is true of the other stocks. If that growth rate is assumed, then their total market cap will exceed $70 trillion! That would represent over 38% of the world’s GDP of $183.995 trillion in 2035.”

That said, Ardrey says TriDelta does not ignore technology in client portfolios. He likes data storage firm Seagate Technology PLC (STX/Nasdaq), which has a solid dividend at 4.47% and a P/E ratio just over 15. He also likes stocks that lagged in 2020, such as Royal Bank (RY/TSX), with a dividend yield close to 4% and a P/E ratio under 14. He also finds value in some Canadian utilities.

Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management Inc., reminds readers that over the decades, asset allocation has proved to be more important than security selection. If you agree, you could stick 100% with the core asset allocation ETFs mentioned at the start of this column. 

At the other extreme, if you are an investor who owns only individual stocks, Mastracci cautions that five stocks would not provide sufficient diversification; you’d need at least 20 to 30 stocks.   

Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at jonathan@findependencehub.com

The post How to master “core and explore” investing  appeared first on MoneySense.



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