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The beginner portfolio: 13 stocks for the new investor

October 14, 2021, 9:00 AM UTC

For the millions of investors who got into the market last year, the past 19 months have been a wild ride.

The stock market rebounded over 94% from its March 2020 pandemic lows through mid-October, while novice investors rallied around so-called meme stocks like GameStop and AMC in 2021 in a frenzy that sent ripples through the rest of the market.

“The foundation [on] which this new era of investors is founded is built on uncertain times and probably one of the craziest moments in market history,” Douglas Boneparth, president of Bone Fide Wealth in New York City, coauthor of The Millennial Money Fix, and a fixture of so-called Financial Twitter (or FinTwit), tells Fortune. “So I’m kind of cautious in that their first foray into investing is synonymous with ‘stocks only go up.'”

On the bright side, Boneparth notes, “it’s making investing cool and relevant and piquing interest in an area that’s normally boring.”

But for those who cut their teeth on fast-growing stocks, Matt Benkendorf, chief investment officer of asset manager Vontobel’s Quality Growth Boutique, suggests a bit of prudence: “Investors shouldn’t get into this with the mindset that it’s a FanDuel account and they’re betting on the game,” he says of investing. Benkendorf argues that “there is a general reason to be cautious” right now given the myriad headwinds facing investors as we head into next year—including lower GDP and earnings growth, potential tax increases, and supply-chain issues.

In fact, “investing is not even the place we typically start” when talking to newcomers, says Boneparth. “Robinhood and YOLO trading is much more exciting than, ‘Hey, can you tell me how much you’re spending each month?’ Or, ‘What can you consistently save each month? Do you have a cash reserve? Are you taking advantage of tax savings?'” But that’s precisely what he suggests young investors ask themselves before they begin stock picking.

But for those new investors who are ready to move beyond their initial stock bets and graduate into their first investing portfolio, experts have a few ideas of where you should start.

Once you understand your financial picture, figuring out how much risk you want to shoulder with your investments is an important next step. “If we’re talking younger investors, this is traditionally where you can afford the most risk,” notes Boneparth. That doesn’t necessarily mean going all in on AMC call options, however. Financial planners suggest such bets should be reserved only for the money you can afford to play with once you’ve built yourself a “strong asset base.”

Another thing new investors should keep in mind, especially in the coming year, suggests Saira Malik, head of global equities at Nuveen: The ever-accommodating Federal Reserve likely won’t be so giving moving forward. The Fed is shifting into a more contractionary stance with signals it may begin tapering its asset purchases before year’s end, while the rock-bottom interest rates that have been a boon for growth and tech stocks, in particular, may start rising as soon as next year. “We are past the peak in earnings growth, and…that support we’ve had for earnings, which is expansionary policy, is not there anymore,” says Malik.

For beginner investors aiming to buy individual stocks, Benkendorf suggests, “Buy things you know, buy things you identify with, buy great growth businesses.” For the most part, money managers emphasize having a balanced portfolio, mixing growth stocks with more dependable dividend payers and even some international exposure.

But what could a beginner portfolio actually look like? Fortune asked finance experts and portfolio managers which stocks they like that could work together nicely for a new investor.

Steady growers

Especially when you’re starting out on your investing journey, growth stocks are your friend.

“We’re finding more interesting, exceptional growth companies today across a broader range of industries than at any point in the recent past,” Gary Robinson, a portfolio manager at asset manager Baillie Gifford’s U.S. Equity Growth Fund, tells Fortune. But while the term “growth stocks” may conjure up ideas of high-flying (and perhaps more risky) names, money managers highlight plenty of stocks that can continue posting strong—and steady—growth.

If there was a “no-brainer” stock pick for any beginner portfolio, it would be Amazon (AMZN, $3,247), suggests Benkendorf. The company’s virtues for investors are many, from its quintessential e-commerce business to its powerhouse web services unit. It’s “a business that continues to get better as it gets bigger,” he believes. But while new investors may “sit there and think, ‘Well, I missed it,’ you know, ‘Amazon is so great and big,’ I would disagree that they’ve sort of missed it,” Benkendorf argues. Though you’ll still be paying a hefty forward P/E of 59 for the stock, it’s down roughly 13% in the past three months, giving new buyers a small discount. In particular, Benkendorf points to how Amazon has been investing in distribution and logistics capabilities all while its e-commerce business has been booming during the pandemic. “Those are typically good times to invest in a company too, because they’ve gone through this very, very heavy investment phase over the last couple of years,” he adds. “You’re going to start to see them bear the fruits of that massive investment.” The Street, meanwhile, expects Amazon to grow revenues by over 18% next year.

Some money managers don’t think a beginner portfolio would be complete without tech stalwart Alphabet (GOOGL, $2,729). According to Malik, “It’s a trifecta of strong online advertising, continued penetration of the cloud, and margin expansion—trends that should stay in place for a long time, offline to online, in terms of advertising. They’re also capturing customer transition to the cloud,” she adds. Product innovation to help with that transition, Malik estimates, “should lead to greater market share for Alphabet” and “could be a $20-billion-plus segment in 2022.” At these levels, you’ll be paying about 28 times forward earnings for the stock, a fair bit less expensive than some of its tech peers.

Eric Schoenstein, a managing director and portfolio manager at Jensen Investment Management, favors Microsoft (MSFT, $293), pointing to the company’s “steady” revenue growth indicating “the pandemic has had little impact on the business and demand” for Microsoft’s products—which, to Schoenstein, “suggests that a drop back to pre-pandemic growth levels won’t likely happen for Microsoft, unlike for many companies that saw a pandemic spike.” Like Alphabet, Microsoft’s cloud business is a particular bright spot, booking a 30% increase in revenues in the most recent quarter. Margins, meanwhile, “have been growing at rates equal to or higher than revenue growth, suggesting continuing operational efficiencies that translate to more free cash flow—fueling additional growth investments,” adds Schoenstein. The stock also doesn’t trade at nosebleed levels, at roughly 33 times forward earnings, and analysts believe Microsoft can grow revenues by over 14% in the next fiscal year (ending in June 2022).

Whether you’re currently using the platform to send money or hold crypto, money managers favor growthy payments titan PayPal (PYPL, $256). If new investors aren’t keen on riding the cryptocurrency roller coaster themselves, Benkendorf notes they can “benefit from other people’s euphoria around it by buying PayPal, so they’ll make money by other people simply transacting in crypto.” But apart from the secondhand crypto exposure, Benkendorf likes PayPal for its ability to continue to grow beyond just being a “payment mechanism into a more financial services app, providing a bunch of other services for these new generations of consumers” who are weaning themselves off brick-and-mortar banks. (PayPal’s services could soon include stock trading.) Though the stock is up roughly 9% so far this year, trading around 50 times its estimated next 12 months’ earnings, PayPal has sold off double-digits in the last three months and is more than 17% below its 52-week high—providing a potential entry point for first-time investors.

If you’re angling to get in on the trend of companies increasingly transitioning onto the cloud, Nuveen’s Malik favors Salesforce (CRM, $279) and HubSpot (HUBS, $758), two software providers that help businesses with everything from marketing to customer service. Malik notes “front office is a trend that only accelerated through the pandemic,” and in order for businesses to “drive more revenue growth going forward, they’re more reliant on front-office software companies,” she says. Salesforce, the more well-known of the two, is expensive: It trades at over 70 times forward earnings, but it’s expected to grow revenues by over 20% next year—a nice clip if Malik’s predictions of high single-digit earnings growth across the broader market are borne out in 2022. HubSpot, which focuses more on small and medium-size businesses, could grow revenues by nearly 30% next year, per analyst estimates, though it’s not expected to be profitable until 2024.

Paying dividends

Many of the high-flying and eye-catching meme stocks in 2021 didn’t offer investors much in the way of consistent returns, but experts suggest having a few dividend-payers to bolster your portfolio and provide some security when times are a bit tough.

“Dividends don’t seem very sexy,” notes Schoenstein. “And yet, if the market’s not going up but you’re still getting paid 3%, 4% on those stocks, guess what? You’re making a 3% or 4% return while everybody else is maybe not making much at all.”

If you or your portfolio are feeling peckish, Schoenstein likes food and beverage giant PepsiCo (PEP, $157) for its 2.7% dividend yield and its “breadth of products that people like,” including snacks, juices, and, of course, sodas. Pepsi recently raised its revenue forecast for the full year of 2021 on the back of higher third-quarter earnings, and Schoenstein believes they’ve “built an incredible brand” by investing in new products and advertising. Even amid industry- and companywide supply-chain issues, Schoenstein suggests that “because of their market share, they do have pricing power and they can push through subtle price increases or they can alter package design or sizes, and frankly, consumers are willing to continue to pay.” Pepsi trades right around the consumer staples sector average, with a reasonable P/E ratio of 24 times next 12 months’ earnings.

Schoenstein also favors pharma giant Johnson & Johnson (JNJ, $158), which you may be particularly familiar with if you got the company’s vaccine jab this year. He likes J&J’s sizable 2.7% dividend yield and argues that the stock’s longtime catalysts remain in place: “Health care is a consumer need and something we all are willing to pay for to live healthier lives.” He points to an aging population in need of health care, the potential FDA approval of J&J’s vaccine booster shots, and the company’s broad offerings including pharmaceuticals and consumer products (think Neutrogena skin care, for one) as highlights. Trading at roughly 16 times forward earnings, the stock is on the cheaper end, and J&J recently raised its full-year earnings forecast. Plus, if there are leaner times ahead in the stock market and investors go “looking for things that are a little bit more resilient and a bit more defensive,” a stock like J&J could be “fulfilling that role quite well,” argues Schoenstein.

Though its yield is a bit more modest compared to some of the other stocks, at 1.9% (though still better than what you’ll get from the S&P 500 and the 10-year Treasury both), Benkendorf favors Comcast (CMCSA, $52) because young investors “understand the importance of high speed broadband at home, particularly over the last year and a half or so.” The company has a “very utility-like business,” he says, “providing this very high-quality” service. Trading at around 15 times forward earnings, Benkendorf suggests the stock is “pretty reasonably priced for a nice runway of growth” with “very nice margins.” It’s also got a little bit of a cyclical boost with the company’s Universal theme parks as the economy continues opening up, Benkendorf notes.

Outside the U.S.

If there’s one thing you’re likely to hear over and over from the experts, it’s diversify, diversify, diversify.

One way investors can do that is by looking outside the states, as those like Malik “think international markets could be more interesting [as] U.S. growth is slowing” into 2022, while many economies are still lagging in their recovery.

For online shoppers, Canada-based Shopify (SHOP, $1,357) is becoming a formidable player in the global e-commerce space and a winner for investors, with its share price up over 300% since March last year. But those like Baillie Gifford’s Robinson don’t believe Shopify’s best days are behind it. “The size of Shopify’s business has been completely transformed through the pandemic,” he says, and the growth hasn’t stopped since lockdowns have eased. The company has posted big revenue growth in 2021, and the Street estimates it can continue to grow sales by 34% next year. The company is “starting to become the partner of choice when other platforms are looking to integrate e-commerce,” says Robinson, pointing to partnerships with heavy hitters like Walmart, Instagram and Facebook shops, and TikTok. He also highlights Shopify’s expanding services, including fulfillment for merchants and its partnership with buy-now, pay-later provider Affirm in 2020. You’ll pay a pretty penny for that growth, however, as the stock trades at over 200 times forward earnings, though shares are off roughly 17% from Shopify’s 52-week high.

In Asia, a stock that’s currently at the epicenter of one of the most in-demand products in the world right now is Taiwan Semiconductor Manufacturing Co. (NYSE:TSM, $109), the world’s dominant contract chipmaker. Semiconductors are “basically becoming ubiquitous—they’re used in everything from manufacturing plants, autos, 5G, to artificial intelligence,” notes Malik. “We think that’s a multiyear trend that will continue.” And Schoenstein notes the company has been at the “forefront of building capacity,” so it’s key in helping resolve the chip shortage problem.

Others, like Benkendorf, “still think Europe still has some of the better staples companies,” he says. One name he likes there is Switzerland-based Nestlé (OTC:NSRGY, $121), the consumer goods titan whose brands include Cheerios, DiGiorno pizza, and Nescafé coffee (talk about “buy what you know”). While the stock is “maybe not as exciting,” Benkendorf argues Nestlé is “a phenomenal global consumer staples company that runs a very dynamic portfolio,” and he commends its chops with R&D and innovation. The stock trades at a reasonable 25 times forward earnings (the current consumer staples sector forward P/E is 21).

And if you’re feeling a bit more adventurous, both Malik and Schoenstein like Tencent (OTC:TCEHY, $61), the China-based Internet and gaming giant. Regulatory headwinds that have shaken up Chinese tech stocks en masse have also sent the stock down more than 15% this year. But those like Malik argue such worries might be somewhat overstated for Tencent’s business in particular. She points out that gaming players under 16 years old account for less than 3% of Tencent’s gross gaming cash (through the second quarter this year), and since China’s recent regulation, which bans video game playing during weekdays and limits it on weekends, targets only minors, “it is not a significant part of Tencent’s business,” she notes. Though Malik does expect domestic gaming revenues to remain “largely flat” over the next few quarters owing to those regulations, she’s “optimistic on overseas gaming growth.” Meanwhile, Malik believes the company’s popular communication tool WeChat positions the company well within the broader China Internet ecosystem.

All stock prices calculated as of Oct. 12, 2021.

This article is part of Fortune’quarterly investment guide for Q4 2021.