It has been nearly two years since our journey began with the Team Alpha Retirement Portfolio. While we began slowly, we developed a portfolio that consists mainly of dividend winning stocks that not only pay regular dividends almost without fail, but also increase those dividends just about every year.
Currently, the portfolio consists of Apple (AAPL), AT&T (T) BlackRock Kelso Capital (BKCC), Cisco (CSCO), CSX Corp. (CSX), Chevron (CVX), Exxon Mobil (XOM), Ford (F), General Electric (GE), Intel (INTC), Johnson & Johnson (JNJ), Coca Cola (KO), McDonald's (MCD), Newmont Mining (NEM), Procter & Gamble (PG), Realty Income (O), and Wells Fargo (WFC).
While there is nothing about this portfolio that makes it better or worse than many other well rounded dividend income portfolios, and each of the stocks are mega cap blue chip dividend winners (aside from BKCC, a business development company with a fluctuating dividend), this portfolio can be easily derailed by the bad habits of regular investors.
Some Of The Worst Bad Habits To Avoid
As of now, this portfolio has grown over 40% (an update will be forthcoming this weekend) with a current yield on cost of over 4.99% which gives us an income of about $6,500/year (based on $130k invested and 10k in cash). Now that we have rotated OUT of most of our risk laden dividend opportunity stocks, such as Annaly Capital (NLY), LinnCo (LNCO), KKR Financial (KFN), and American Capital (AGNC), we have removed some of the clearest risks to the overall value of our portfolio.
Based on the comment thread of my most recent article (click here) it has become quite clear that many investors might be in the position of hurting themselves financially, simply because of some of the worst bad habits in the investing world. While there are more bad habits than what I list here, if you can avoid at least these, you will become a much better portfolio manager, and be able to give your retirement years the best chance to have financial security.
Far too many investors let the emotion of fear get in the way of making prudent decisions. It can work in several ways, yet the most common is selling a position because the price has dropped, even though the stock has the same foundations as when you bought it, and nothing has changed to make the stock a riskier investment. Fear also works in reverse, as some investors actually fear selling at a loss! I know of no investors who like or want to lose money, but everyone should check their own risk tolerance level when it comes to stopping the "bleeding" with a stock that has fundamentally changed from when it was first purchased.
Forget what Gordon Gecko said, greed is NOT good, and can derail an entire retirement portfolio very easily. A case in point would be Apple. It was not long ago that the stock had a parabolic move upward that simply could not be maintained. I wrote this article which urged that some chips be taken off the table. The share price was $663.
I do not know many folks who held on to their entire position in Apple when they bought shares at $10, but I do know many folks who bought shares at $350, $375, and $400 who refused to sell ONE share when the stock price hit $705. The irrational thinking was that Apple could do no wrong, and since the street had "unfairly" valued Apple at so much less than Amazon (AMZN), then the share price would most definitely redouble and continue its parabolic move.
The investors who had virtually doubled their money in less than a quarter, gave it all back. Some of the better investors of course, spiraled out of the shares and sold at least half of their position and let the rest ride, but far too many folks held on, and might have even sold at a slight loss, depending upon what they originally paid (fear and greed working together is how we buy high and sell low folks). Ask yourself this: How often will you make 30%, 40%, 50% on your money in 3 months, let alone double it?
- Getting Married To A Stock
I suppose this goes along with greed, and by using the Apple example once again, I believe you can understand a bit better now. "Marrying" a stock because you love its products, its management, even its dividend yield, will cause even the best investors to take no action when basic fundamentals are screaming that it is time to move on.
In the case of the mREIT sector it is the absolute ridiculous interest rate environment and Federal Reserve influence that is YELLING for retired folks to move on. The same goes for LNCO which has far too many question marks for an investor with a short time horizon, to just let the headwinds play out. That high yield carrot has simply carried beyond "lust" for a short duration, and is now "love" through thick and thin.
This ain't your High School sweetheart folks. It is a risk investment that could erode your portfolio value, as it has, in short order. Why in the world would anyone want to play with fire when the fire is burning??
- Not Taking A Profit
Call me old fashioned, but I can recall the days when I would bring cash into my bank and get my passbook savings account stamped with the interest received for that period of time. Even though it might have been only 1.5%, I felt wealthier than before. In the world of investments, many investors who might have made 25% or more on a stock refuse to sell one share. Why? I suppose that greed is also at work here, but try to follow this logic: If you have 200 shares of Bank of America (BAC) which you bought at $5.00/share, does it NOT make sense to sell at least 1/2 of your position to book 100% gains, and redeploy the money elsewhere?
So what if you missed out on another $4.00/share. You already have more than doubled your money. Take the profit. You can always buy the shares back if you want to. The stock will be there, I promise.
Even if you sold your entire position, as I did because the stock was not paying me to hold it (a puny dividend) what could possibly be wrong in taking a great profit? Taxes??? Please, give us a break. Look at this for fun and see how I was vilified just for taking a profit. Keep in mind that taking profits can increase your "dry powder" and cash reserves to deploy into bargains when they present themselves, or in better dividend paying stocks. Perhaps even some of the stocks you already own and know very well, like GE.
A Change Is Blowing In The Wind
While bad habits will derail your retirement security, I would also like to let you know that storm clouds are forming and I believe that the market, once again, is ready to correct. I have been wrong before, as the correction never seems to arrive or lasts about 12 seconds (sic.), but we are also going into the 4th quarter which has not been as generous, and the economic, and political landscape is becoming even more precarious.
I would get a bit more defensive in selecting investments right now. XOM, JNJ, CVX, KO, PG, and MCD all look very appealing to add to right now. GE seems poised for some growth, and T has a wonderful dividend yield (5.30%).
I will be looking to add to these stocks on any decent pullbacks.
The Bottom Line
I realize that there are many more bad habits than the ones I listed, but in my experience, those are the most hazardous to our financial health and should be completely avoided. Yes it does take discipline, which is what portfolio management is all about.
Even if your best friends think you are crazy.