How To Invest $100,000 Today: The Near-Perfect Portfolio Strategy (2024)

Markets are at crossroads and are mostly range-bound for the time being. There is one superimposing question on everyone's mind. Will we have a recession in the near term, and if so, how deep? Will the markets go down in a deep spiral, or will they muddle through the current difficulties and start going up from here? If anyone could predict that correctly, that's a sure path to getting rich in a short time. But, few amongst us (if any at all) have that kind of wisdom or a crystal ball.

In the absence of any crystal ball, where could you invest your money today, whether it is $100,000 or any other amount? Also, if you are already invested, how to stay invested without losing sleep? Many folks advocate staying in cash and letting the storm pass over. But that does not seem like sound advice since cash loses its value every day of the year due to inflation. Sure, you could invest in short-term treasuries or CDs (bank deposits), but even they get you less interest than the rate of inflation. Also, in our experience, a short-term approach or market timing never compounds wealth in the long term.

In this article, we will discuss how an NPP (Near Perfect Portfolio) Strategy can help us overcome some of the conundrums that we face in today's market environment. We have been writing about our NPP strategies since early 2020. The NPP strategy tends to provide lower volatility and limited drawdowns but, at the same time, provides a decent income and long-term growth. In fact, the NPP strategy attempts to provide SWAN (Sleep Well At Night) like attributes. If we were to define the NPP strategy in simpler terms, this is how it would look like:

1. When the market falls, for example, by 30% or more, the NPP strategy should fall to a much lower extent (maybe about 60% of the broader market).
2. When the market goes up, for example, by 30%, the NPP strategy will gain at least 22-25%% but, in most cases, similar to the market. However, even if it underperforms slightly during the bull markets due to lower volatility and limited drawdowns, overall, the strategy will likely outperform the broader market in the long run.
3. Due to limited drawdowns, the NPP strategy should avoid the risk of sequential returns. This is very important for near-term retirees.
4. The NPP strategy should also generate roughly 5% income for those who need to withdraw.

The above objectives and principles make the foundation of our NPP strategy. Sure, as the name suggests, the strategy is not perfect, and there will be times when it will not meet all the stated goals. However, could we meet 80% of the objectives 80% of the time? We definitely believe so.

The NPP strategy is also part of our Marketplace service, "High-Income DIY Portfolios." However, from time to time, we like to provide updates and progress of the NPP portfolio here on the Seeking Alpha public platform. We will provide an overview and comparison of the back-tested performance of our NPP strategy with the S&P 500. In the later section, we will provide a sample NPP 3-bucket portfolio. We also will provide guidelines on how to allocate, for example, $100,00 to an NPP strategy.

So, What are Near-Perfect Portfolio Strategies?

We have been writing about our Near-Perfect Portfolio strategies since early 2020. In fact, we have been investing in its three main components since 2016. Its credibility and mettle were proved during and after the crash induced by the 2020 pandemic. Our new readers would naturally ask, so what is the Near-Perfect Portfolio strategy or NPP in short? The NPP strategy basically invests in three or four distinct but divergent strategies. We call them buckets (or baskets) of investments.

There are three main goals or objectives of our Near-Perfect Portfolio:

• Preserve capital during the period of uncertainties.

• Provide sustainable income of roughly 5% to those who need to withdraw.

• Grow capital at an annualized rate of 10% or better (including the income).

NPP: A Combination of The Divergent Strategies:

Most investors, especially older investors, understand the importance of diversification. In its simplest form, you hold diversified stock ETFs (exchange-traded funds) and some bonds and fixed-income securities. You could also hold individual stocks instead of stock ETFs or a mix of both. The ratio of stocks and bonds usually depends on your age and life stage. In the past, the gold standard for retirees used to be a 60:40 or 70:30 ratio for stocks and bonds. Usually, when the stocks go down, bonds would stabilize the portfolio. However, the year 2022 shattered that perfect balance between bonds and stocks. Even otherwise, by investing 40% of your portfolio in bonds, you are compromising on growth. Since people are living much longer now compared to just a few decades ago, they need growth even during retirement. So, we usually recommend diversifying in varied types of asset classes and in multiple investment strategies.

The NPP strategy invests in divergent strategies and asset classes. In addition, It has an in-built hedging mechanism to lower the volatility and keep the drawdowns limited. Here are three sub-strategies that form the NPP.

• DGI (Dividend Growth Investing) sub-portfolio plays the foundational role in providing sustainable income with low volatility and decent growth.
• Risk-adjusted Rotation bucket forms an essential part of the overall strategy with an in-built hedging mechanism. It provides low drawdowns without compromising long-term growth.
• A small portfolio invested in high-income securities to boost the overall yield and income. It also helps to provide broader diversification in terms of asset classes.
• For Income-focused investors, an Options portfolio can be added. This is not for everyone, though.

NPP Strategy Performance During Bull & Bear Markets

We will now demonstrate how a 3-basket diverse NPP portfolio can act as a counterbalance to buy-and-hold portfolios by providing a comparison of the relative performance with the S&P500.

Know Your Risk Tolerance:

We urge readers to know their personal tolerance of risk, or in other words, know their tolerance of drawdowns. For the sake of an example, let's assume we have two investors, John and Steve. Both have a portfolio of one million dollars. At the onset of the pandemic in March 2020, Steve was a 50-year-old while John was 62. Now based on their personal situation and age factor, they would have different levels of risk tolerance. As the crisis developed due to the once-in-a-century pandemic, the stock market took a big hit. The S&P500 took a deep dive and lost nearly 35% in a very short span of time; John panicked by looking at his net worth dropping from a million to $600K in a matter of weeks and days. At that time, it looked like there was to end to the bottom, so he sold most of his stocks to convert them into cash. However, Steve looked at things differently. He had 12-15 years of working and earnings ahead of him, and that in itself brought some calm thinking. He decided to stay put, thinking that the market would eventually come back. As the pandemic and lockdowns were growing bigger, but due to unprecedented stimulus by the Govt., the markets recovered very quickly without giving much chance to John to get back in stocks. Even as the markets started recovering, John thought it was temporary, and the market would turn back. John could not get back in stocks until much later. In this example, we clearly see that due to his low tolerance for risk, his decision-making was impaired as well. The irony is that there are hundreds of thousands of Johns who are just making wrong decisions at the wrong time. So, how can you avoid getting into John's shoes? Simply by knowing your risk tolerance and recognizing your own situation, however, it needs to be an honest assessment.

This is also where our NPP strategy can help to a great extent. It helps in reducing the risk of your overall portfolio by 30-50% without compromising on growth and long-term compounding of your capital.

To provide some perspective, we will now compare the drawdowns of the recent (and not-so-recent) corrections and recessions. In the table below, we have listed the drawdowns of various buckets of the NPP strategy and the S&P500 (based on back-tested data).

List of drawdown timeframes:

• Jan-2008 to Mar-2009 (Financial and Housing crash)

• Oct-2018 to Dec-2018 (Crash of 2018)

• Jan-2020 to Mar-2020 (Pandemic crash)

• Jan. 2022 to Sep 2022 (Most recent correction).

Table-1:

** The combined NPP performance is calculated assuming a 40% allocation to DGI, 45% to Rotation, and 15% to a CEF portfolio.

The Combined NPP Strategy Performance:

Below, we will provide the annualized growth rates ("CAGR") of various baskets of the NPP strategy. Please note these are the results based on back-tested data.

Table-2:

** CAGR - Compound Annual Growth Rate.

Chart-1: The Combined NPP portfolio performance vs. S&P 500.

How to invest $100,000 today in NPP Portfolio?

Whenever you want to invest a large sum in stocks, some of the common questions that run through your mind –

• Is the market overvalued or nearing its peak?
• What if the market craters just after I buy?
• Should I invest in lumpsum or over a period of time?
• Lastly (but not least), which stocks or asset classes should I invest in?

Obviously, there is never a perfect answer to questions like these. But the NPP strategy helps resolve some of these questions or anxieties naturally. Here is how:

• The DGI bucket is for the long term and would be invested in solid blue-chip dividend-paying and growing companies. So, the price you pay today may not matter much over 15-20 years later. Sure, we should always pay attention to the price we pay, and if you like a stock but it appears to be way overvalued, buy in installments.
• The Rotational bucket has an in-built hedging mechanism, and each month, it tries to get out of assets that are not likely to do well and move into assets that are going to do well.
• No investment or portfolio is perfect (or risk-free), so, based on your personal situation, risk tolerance, and your judgment on the direction of the market, you should decide to invest lumpsum or over a period. If you are highly conservative, we will suggest investing gradually over six to twelve months.
• We will go over these specifically in the next section.

We will provide an overview of our three distinct buckets of the NPP strategy as well as performance comparisons with the market index.

Bucket 1: DGI Bucket (Allocation – 40% - 45% of the assets)

Bucket 2: Rotational Bucket (Allocation - 35% - 45% of the asset)

Bucket 3: CEF High-Income Bucket (Allocation - 15% -20% of the assets).

Optional Bucket 4: Options Income bucket (Allocation 10% - 20% of the assets).

Please note bucket four is optional and may not be suitable for everyone. Selling Options for income requires some past experience (or practice) and a sizable sum of capital. We will not be covering this option in this article. If you are interested in reading more about it, please follow our monthly article on Options. Here is the link to the most recent article.

Bucket-1: DGI-Core

The goals of the DGI Bucket are:

• Dividend income in the range of 3%

• Total returns in line with the broader market in the long-term

• Volatility and Drawdowns to be about two-thirds of the broader market.

Dividend ETFs Option:

If you are a highly passive investor or, for some reason, do not like to hold individual stocks, then simply invest in dividend-focused ETFs.

One of the best dividend ETFs is Schwab U.S. Dividend Equity ETF™ (SCHD). There are other good choices as well. We like three of the below ETFs; they all have low expense ratios and, together, can provide very decent diversification, yield, and growth. If you like to own all of them, please be aware that they will have some level of duplication.

• Schwab U.S. Dividend Equity ETF (SCHD)
• Vanguard High Dividend Fund ETF (VYM)
• Vanguard Dividend Appreciation Fund ETF (VIG).

If you want to own just one ETF, then SCHD may do the job. It holds slightly over 100 positions, providing very decent diversification. The yield from SCHD is quite attractive at 3.72%. The expense fee is very low at 0.06%.

Dividend Stocks portfolio:

It's relatively straightforward to structure/form a DGI bucket of individual stocks. Since this is our long-term buy-and-hold bucket, we should invest in solid, blue-chip dividend stocks only. Also, we must be careful in selecting stocks from many different sectors of the economy. A portfolio of 15-25 stocks can provide more than enough diversification. Here is one method to select the top DGI stocks. We will take the top 10 stock holdings from three of the dividend ETFs mentioned earlier. Out of these 30 stocks, we will need to remove duplicates and see what is left. We will be left with 20 unique names.

A portfolio of these 20 stocks is presented below:

List of 20 Stocks:

AbbVie (ABBV), Amgen (AMGN), Apple (AAPL), Broadcom (AVGO), Chevron (CVX), Clorox (CLX), Coca-Cola (KO), Exxon Mobil (XOM), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), Mastercard (MA), Merck (MRK), Microsoft Corp (MSFT), PepsiCo Inc (PEP), Pfizer (PFE), Procter & Gamble (PG), The Home Depot (HD), UnitedHealth Group (UNH), Verizon Communications (VZ), Visa (V).

Table-3:

If you like to have higher dividend yields from your DGI stocks, the following selections may be more appropriate. The average yield of these 15 stocks is 3.98%

AbbVie Inc. (ABBV), Amgen Inc (AMGN), The Clorox Co (CLX), Digital Realty (DLR), Enbridge Inc (ENB), Fastenal Co (FAST), Home Depot (HD), Johnson & Johnson (JNJ), Kimberly Clark (KMB), Lockheed Martin Corp (LMT), McDonald's Corp (MCD), Altria (MO), NextEra Energy (NEE), Texas Instruments (TXN), and Verizon (VZ).

Bucket-2: Rotational Bucket

Most hedging mechanisms are expensive and have an ongoing cost that must come out of your portfolio growth. However, not the Rotational portfolio. This strategy provides an in-built hedging mechanism without an extra cost or fee. It does require monthly rotations (buying and selling), for these days, most brokerage houses offer zero-commission trades. The goals of this bucket are:

1. Limited drawdowns and preserving capital
2. Decent to high growth
3. Provide sustainable income that can be withdrawn without harming the long-term growth of the portfolio.

Note: It is important to know that the rotational strategies work best inside a tax-deferred account due to frequent trading.

Note: An important word of caution for new investors. We recommend that any new strategy (including Rotational ones) should be adopted gradually over time in smaller steps as one gains confidence in the strategy. Also, depending on the amount of capital, one could deploy should more than one such strategy to further diversify.

Two Rotation Strategies - Suited for Bull and Bear markets:

In a Rotational strategy, we would usually select a fixed number (usually one or two) of securities from a pool of a larger set. The rotation occurs on a monthly basis (or any other suitable period). The securities are selected based on a pre-determined method, usually by comparing the total performance of each of the securities during the previous period of defined length.

We will provide two such strategies:

I. Our first rotation strategy is pretty simple and straightforward. We only have three securities to rotate, and we select just one of them (the top-performing) every month for investment. Three securities are:

• Invesco QQQ Trust (QQQ),
• iShares 20+ Year Treasury Bond ETF (TLT),
• SPDR Gold Shares (GLD).

The back-tested performance and comparison with the S&P500 (from Jan 2006 to Apr 2023) are presented below.

Table-4:

Chart-3:

II. For our second Rotation strategy, we use a wide variety of nine securities, but we select only the top two securities to invest in for any month.

• Vanguard High Dividend Yield ETF (VYM),
• Vanguard Dividend Appreciation ETF (VIG),
• iShares MSCI EAFE Value ETF (EFV),
• iShares MSCI EAFE Growth ETF (EFG),
• Cohen & Steers Quality Income Realty Fund (RQI),
• iShares 20+ Year Treasury Bond ETF (TLT),
• iShares 1-3 Year Treasury Bond ETF (SHY),
• Invesco QQQ Trust (QQQ),
• ProShares Short 20+ Year Treasury ETF (TBF).

The back-tested performance and comparison with the S&P500 (from Jan 2010 to Apr 2023) are presented below.

Table-5:

Chart-4:

Bucket-3: CEF High Income Bucket

This bucket is for income investors who need income in excess of 4%. What this bucket does is boost the income of the overall portfolio by a couple of percentage points. Even a small allocation to this bucket will be enough to elevate the average yield of the total portfolio to over 5%.

The goal of this bucket is to generate an 8% or higher yield while still limiting the risk. We expect this bucket to provide an average of 10% total returns over the long term. The biggest risk is that this bucket may not provide much growth. But this is mitigated by the fact that we are allocating only a small percentage of capital to it.

This bucket will invest in high-income investment securities:

• CEFs (Closed-end funds),
• REITs (Real Estate Investment Trusts),
• mREITs (Mortgage REITs),
• BDCs (Business Development Companies), and
• MLPs (Master Limited Partnerships).

Please note that many of these instruments involve leverage, and leverage can lead to higher risk and volatility.

Our sample portfolio will include 11 high-income securities, mostly CEFs.

The funds/securities are: (BST), (BBN), (CHY), (EPD), (FFC), (PDI), (RQI), (THW), (USA), (UTF), (UTG).

Table-6:

Note: Please note that EPD is a mid-stream partnership and provides a K1 tax form instead of 1099-DIV (for corporations).

Concluding Thoughts

The market is going through an uncertain and conflicting period. There is quite a bit of turmoil and confusion. In recent months, many regional banks have failed, and there is fear of credit freeze due to the ongoing tightening and interest rate hikes by the Fed. There is a fear that Fed may overshoot (or may already have) in its fight to tame the high inflation and cause a recession. There is almost a sort of unanimity in views that we are going to have a recession soon. The only divergence of views comes from the severity of the expected recession. There are compelling arguments in favor of both a bull and a bear scenario.

That's why it is important to have an investment approach that can provide comfort in knowing that it can handle both situations with relative calmness. In this article, we have presented a relatively conservative and diversified investment approach with three baskets, which would provide lower volatility, lower drawdowns, and decent growth.

We may like to caution that just like any other strategy, the approach outlined in the article may not be appropriate for everyone. The NPP strategies require a long-term investment horizon, discipline, patience, and some regular effort on a monthly basis.

Financially Free Investor

Financially Free Investor is a financial writer with 25 years investment experience. He focuses on investing in dividend-growing stocks with a long-term horizon. He applies a unique 3-basket investment approach that aims for 30% lower drawdowns, 6% current income, and market-beating growth on a long-term basis and he focuses on dividend-growing stocks with a long-term horizon.

He runs the investing group High Income DIY Portfolios which provides vital strategies for portfolio management and asset allocation to help create stable, long-term passive income with sustainable yields. The service includes a total of 10 model portfolios with a range of income targets for varying levels of risk, buy and sell alerts, and live chat. Learn more.