Everything You Need To Know About Anchor Stocks

In this piece, I'm going to explain why you absolutely need to have an anchor stock in your portfolio. Then, once I've gone through exactly what it is and why you should have one, I'm going to tell you some of the best anchor stocks out there right now in 2022 -- including my own personal anchor! Let's get into it, shall we?

What is an Anchor Stock?

First, let's talk a little bit about what an anchor stock actually is. As you build up your investment portfolio, you're going to want to have a diverse range of stocks that can help spread out your risk and protect you from being over-invested in any one industry or location. An anchor stock is your failsafe -- a stock that you can build your entire portfolio around. They have a couple of key characteristics:

1. It should be a stock that you know, love, and understand better than any other company.
2. It should be a stock that you'll continue to top up forever and never sell.
3. It's usually a large or mega-cap stock, meaning its price won't be too volatile -- quite literally 'anchoring' your portfolio.
4. It should pay, or at least have the potential to pay, a strong dividend, which can then either be reinvested into your portfolio or used as another form of income.
5. It should represent the largest portion of your portfolio.

Some of you might have an anchor stock already without even realizing it. What's important is identifying it, and making sure to build around it with a solid long-term plan. If you don't have one, don't panic. You can always start building up a position in one now by dollar-cost averaging your way to a solid holding.

Why are Anchor Stocks so important?

By building a strong core in your portfolio, you can minimize the risk as you take on more high-risk, high-reward stocks. Let's face it, we all want to get in on the ground floor of the next 100-bagger, but it's just as important to match your investments in those growth stocks with your anchor. By doing this, you can protect your portfolio from plummeting to nothing when an inevitable downturn happens.

What should my Anchor Stock be?

Unfortunately, that's not a question I'm able to answer. Everyone's anchor stock could be totally different, and it should reflect your own circle of competence and investing knowledge. However, one thing I will say is that boring is often better. In the words of one of MyWallSt's favorite investors, Peter Lynch:

"The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name."

So let's look at a couple of great examples.

1. Berkshire Hathaway

First up, it's Berkshire Hathaway (NYSE: BRK.B), the multinational conglomerate headed up by the Oracle of Omaha, Warren Buffett. Berkshire has an equity portfolio that spans multiple industries, giving you instant diversification. It has massively outperformed the S&P 500 over the past 50 years, and lets you take advantage of the wisdom of two all-time investing greats in Buffett and his right-hand man, Charlie Munger.

2. Alphabet

Next up, is the internet behemoth that is Alphabet (NASDAQ: GOOG), or as many of you will probably know it, Google. Alphabet is one of the world's most innovative companies and has been for decades. It boasts a huge portfolio of products that we all use every day, from YouTube to Google Maps, its Android phones, and of course, Google Search. Despite a heavy reliance on advertising to generate revenue, its sheer dominance of the search space means it has troves of data that will keep advertisers coming back for more.

3. Apple

And finally, my own personal anchor stock, Apple (NASDAQ: AAPL). One of the world's most powerful and recognizable brands, Apple has become a beacon for tech companies across the globe. Worth roughly $2.5 trillion and boasting over 1.65 billion active devices and growing, there are still plenty of reasons to be an Apple investor. It continues to innovate, has an army of evangelistic followers, and a treasure trove of cash that can see it through any market downturn.

What makes a good Anchor Stock?

Now, I know what you're thinking -- none of these picks are really that groundbreaking. Any novice investor could probably tell you that Apple, Google, and Berkshire Hathaway are solid investments, but that's the point. Remember, when it comes to anchor stocks, boring is better. With a solid anchor in place, you can then really begin to explore companies at the edge of your risk tolerance, knowing that you have a safety net to fall back on no matter what.