The other day, I noticed a young tree, barely holding its ground, leaning awkwardly against a railing. Its roots were exposed, struggling to anchor it in place.
That scene stuck with me—not as a gardener but as an investor.
What happens to a tree without strong roots can happen to your portfolio without a solid foundation: It becomes vulnerable in the face of life’s inevitable storms.
Building a firm foundation
A tree with exposed roots is like a portfolio without a strong foundation—it’s bound to struggle when conditions get tough.
If your investments don’t have a solid base, they can falter during economic downturns, just as a weak tree might collapse in a storm.
That’s why the key to long-term success lies in building a portfolio designed to endure.
A bedrock of blue-chip stocks
How do you go about constructing an all-weather portfolio that can withstand headwinds?
One way to start could be with a layer of blue-chip stocks to act as the bedrock of your portfolio.
Blue-chip stocks are so named because of their strong business models, experienced management, and long track record in surviving various economic cycles.
The trio of local banks, namely DBS Group (SGX: D05), United Overseas Bank (SGX: U11), and OCBC (SGX: O39), are good examples of blue-chip stocks.
These banks form the pillar of Singapore’s economy and have weathered multiple economic storms.
They have also evolved their business models, digitalised, and become stronger in the process.
Other prominent blue-chip names include Keppel Ltd (SGX: BN4), an asset manager which started as a conglomerate, and Singtel (SGX: Z74), Singapore’s largest telecommunication company.
These businesses are credited with initiating strategic reviews that allow them to realise value for their shareholders and in Singtel’s case, pay out more dividends.
Speaking of dividends, most blue-chip stocks have the bonus of having a regular payout.
This payout acts as a source of passive income that helps to augment your earned income.
The REIT sector is one that we cannot ignore when talking about dividends.
REITs, or real estate investment trusts, are mandated to pay out at least 90% of their profits as distributions to enjoy tax benefits.
You can choose to add blue-chip REITs such as CapitaLand Integrated Commercial Trust (SGX: C38U) or Frasers Centrepoint Trust (SGX: J69U) into your portfolio.
These REITs not only have a long operating history but have proven themselves to be resilient through tough times such as the pandemic.
By building up a solid foundation for your portfolio, you will be better prepared for the inevitable downturn.
Weathering periodic downturns
Just like the seasons, the economy goes through cycles of growth and contraction.
A well-built portfolio helps you ride out downturns without sleepless nights, knowing that your investments are well-positioned to thrive in the long run.
Get Smart: Buy and monitor
Constructing a strong, all-weather portfolio is exactly what we do at The Smart Investor.
First, we build a layer of strong, blue-chip stocks that act as a firm base.
Then, we add slightly riskier growth stocks but provide the potential for better returns.
Finally, we may sprinkle on some smaller, high-growth stocks that offer an additional kick.
Of course, we do not advocate just buying and forgetting.
It’s important to constantly monitor the businesses within your portfolio even if they are blue-chip stocks.
Only when can you ensure that you have an optimal portfolio that is suited to grow well over the long term.
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Disclosure: Royston Yang owns shares of DBS Group.
