I was having dinner with a friend the other day and the discussion moved to the concept of risk and reward.
My friend Sam couldn’t understand why he was underperforming the S&P 500 despite owning shares like The Procter & Gamble Company (NYSE/PG), General Electric Company (NYSE/GE), Wells Fargo & Company (NYSE/WFC), and Intel Corporation (NASDAQ/INTC).
My immediate response was that his portfolio lacked growth stocks, instead focusing on large-cap dividend paying stocks. These are excellent long-term companies, but for that added push in returns, you need to look at small-cap stocks and the risk and reward growth opportunities.
Sam said he added Intel for growth. Of course, my response was that Intel was dead money at this time and is not the growth stock it used to be prior to the drive in the mobility space that it missed. I suggested I would be adding tech plays that focused on the mobility market, as that is where the money will likely be made over the next few years as the sector blossoms.
So I told Sam to add some NASDAQ 100 stocks for some added risk and reward growth, along with some small-cap stocks to help drive an otherwise boring portfolio.
Diversification and risk and reward are key to a good portfolio, regardless of the market conditions. I don’t really like mining stocks or gold, but you should have some nonetheless, especially now with the threat of the war intensifying in Syria.
Sectors like the housing market and the big banks have made the easy money, so you need to be selective and search for market opportunities in areas that can return some above-average risk and reward gains.
The Internet and mobile spaces are the two top areas for risk and reward growth now and, in my view, going forward. The rapid rate of development in these spaces is unbelievable and will likely continue.
Sam asked me about Tesla Motors, Inc. (NASDAQ/TSLA) and its glorious rise on the chart, questioning whether he should buy in. (Read “Consider This Surging Automotive Company.”) I like CEO Elon Musk’s ambition and his goals, but I just can’t get around the valuation assigned to the stock that’s trading at 97X its 2014 earnings per share (EPS). In the auto sector, I would probably stick with market leader Honda Motor Co., Ltd. (NYSE/HMC), or General Motors Company (NYSE/GM) if you want to buy American and see growth in China.
I think Sam understood the concept of risk and reward and the need for some growth. I also offered up the need to have some capital in foreign markets for that added risk and reward. Chinese small-cap stocks have been showing some strong momentum on the charts and Europe is looking better.