In this article, I will explain why it is so important to have anchor stocks in your portfolio. Then, after you’ve analyzed exactly what it is and why you should have one, I’ll tell you some of the best anchor actions out there right now in 2022, including my own personal anchors! Let’s get into it, shall we?
What is Anchor Stock?
First, let’s talk a little bit about what an anchor stock actually is. As you build your investment portfolio, you’ll want to own a wide variety of stocks that can help you spread your risk and protect you from over-investing in any industry or location. Anchor stocks are your fail-safe system, stocks where you can build your entire portfolio. They have several key features:
- It should be an act that you know, love and understand better than any other company.
- It must be a stock that will continue to recharge forever and will never sell well.
- These are usually large-cap or mega-cap stocks, which means the price won’t fluctuate too much, it will actually “tethere” your portfolio.
- You will have to pay, or at least have the potential to pay, hefty dividends, which can then be reinvested in your portfolio or used as another form of income.
- It should represent the bulk of your portfolio.
Some of you may have anchor stock without knowing it. The important thing is to identify it and make sure you build it with a solid long-term plan. If you don’t have one, don’t panic. You can always start building positions now for dollar costs with an average towards solid holdings.
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Why are anchor actions so important?
By building a solid core in your portfolio, you can minimize risk as you acquire more high-risk, high-reward stocks. Let’s face it, we all want to go up to the ground floor of the next 100th bagger, but it’s just as important to match your investment in that growth stock with your anchor. By doing this, you can protect your portfolio from plummeting to zero when an inevitable recession occurs.
What should be my Anchor Stock?
Unfortunately, that’s not a question I can answer. Everyone’s anchor actions can be very different, and should reflect their own circle of competence and investment knowledge. However, one thing I would say is that boring is often better. In the words of one of MyWallSt’s favorite investors, Peter Lynch:
“A perfect stock will be tied to a perfect company, and a perfect company must engage in a very simple business, and a very simple business must have a very boring name.”
So let’s take a look at some good examples.
- Berkshire Hathaway
First, is Berkshire Hathaway, a multinational conglomerate led by Omaha Oracle Warren Buffett. Berkshire has a stock portfolio spanning a wide range of industries, providing instant diversification. It has massively surpassed the S&P 500 over the past 50 years, and allowed it to leverage the wisdom of two all-time great investors in Buffett and his right-hand man, Charlie Munger.
Next up is the internet giant that is Alphabet, or as you probably know, Google. Alphabet is one of the most innovative companies in the world and has been going on for decades. It boasts a huge portfolio of products that we all use every day, from YouTube to Google Maps, your Android phone, and of course, Google Search. While it relies heavily on ads to generate revenue, its grip on the search space means it has a treasure of data that will keep advertisers coming back for more.
And finally, the stock of my own personal anchor, Apple. One of the most powerful and recognized brands in the world, Apple has become a beacon for technology companies around the world. With an estimated value of $2.5 trillion and with over 1.65 billion active and growing devices, there are still many reasons to become an Apple investor. It continues to innovate, having an army of evangelistic followers and a cash treasury that can cope with any market downturn.
What makes Anchor Stock good?
Now, I know what you’re thinking: none of these options are truly innovative. Any novice investor can probably tell you that Apple, Google, and Berkshire Hathaway are solid investments, but that’s the point. Remember, when it comes to docking actions, boring is better. With a solid anchor, you can really start exploring the company at the edge of your risk tolerance, knowing that you have a safety net to get back to no matter what.