We all make mistakes. Mistakes are the greatest teachers on the planet. Investors know that fact all too well. We can learn from our own mistakes. It's a little more cost effective if investors can also learn from other's mistakes. I'm happy to pick up that tab for you.
I am glad to say that I think my investment mistakes are a thing of the past. It took me a long time to realize my mistakes, and own up to my mistakes. It took me decades to get a real plan. In fact, I did not create a viable plan until my late 40's. Guess I'm a slow learner, or very stubborn - or a bit of both.
1. Picking stocks.
2. Lack of diversification.
3. Lack of international exposure.
4. Lack of patience.
5. Having no plan.
I recently was reminded of the challenges and pressures of stock picking while reading articles on SA from Bob Johnson and David Van Knapp. Bob wrote an article entitled "We all make many mistakes, what do we do?" Bob was very honest about what he felt were mistakes, purchasing companies (or a sector) that he did not understand well enough and he was caught off guard by some severe price declines. He admitted to chasing some income and got caught in the cross fire.
David Van Knapp also wrote an article discussing the challenges of managing a dividend growth portfolio in his personal portfolio review. Like many DG investors, he has purchased Intel (INTC) for dividend growth. Intel has not raised its dividend for more than 4 quarters. That's a red flag. Many investors on SA are now considering cutting Intel from their portfolios. That's a tough decision for them.
I sure can't pick em!
That's not a decision I will have to make. I have exposure to Intel through the ETFs (DIA) and (VYM). I'm not making the call on that one. And the fate of Intel will not affect my portfolio or my sleep patterns. I bought DIA and VYM for the 9-10% long-term capital appreciation (potential) and the impressive history of dividend growth of both DIA and VYM, and the exposure to the U.S. dollar. I will hold DIA and VYM, and add to DIA and VYM regardless of whether Intel turns out to be a great long-term investment, or not. My stock picking days are over. Any stock picking mistakes are over.
And these are not tough days for equity investors. Difficult days are the 2008's and 2009's. Those tough days include holding companies such as GE (GE) and many of the financials that got hit real hard, with many investors losing real money selling companies at a loss. The next correction will be the time period when my hands off approach likely reaps the greatest benefits.
Tons of Diversification.
By buying the broad market indexes and some very well diversified dividend and bond ETFs, I now have the diversification that I lacked in previous decades. When the Canadian markets are sluggish - as they have been coming out of the recession, the U.S and international (EFA) indexes and ETFs have been there to pick up the slack. I have greatly reduced my home bias. But I was certainly late to the party.
That said, the mistake of having over exposure to Canadian markets (EWC) from 2003 to 2008 turned out to be a lucky break. Canada outperformed the U.S. markets by a considerable amount from 2001 through 2008.
Here's the Canadian market vs. the S&P 500.
Once again that was a lucky mistake.
Conversely, my under exposure to U.S. markets has handicapped my returns coming out of the recession. Here's the S&P 500 in red vs. the Canadian markets in blue coming out of the recession.
I have made some decent re-allocations to the U.S. markets over the past two years. I still have some "de-homebiasing" do to and that will be taken care of organically with income created by the self-directed portfolios being reinvested into U.S. and the international EAFE. Much of my new money being added is via the Streetwise Portfolios at ING Direct Canada. They offer a disciplined mix of equal amounts of the Canadian, U.S. and International stock markets.
My lack of international diversification is history.
I never used to have time for patience. Now I understand that it is perhaps the most important character trait required for successful investing. I had patience through the market correction of 2008 and 2009. Incredibly this scaredy cat was mostly all-equity during that major correction. I held on during the most severe correction since the great depression. I also prospered somewhat during that period.
Here are my returns from 2007 to present. These returns are real, and from one of our retirement accounts. The returns and holdings are typical of our other accounts. There were some new monies added in this account during that period, some of the portfolio increase is due to those new funds. The column Market represents the Market Value, Growth represent the portfolio value change year over year.
As I bragged in my very first article Confessions of a Scaredy Cat Investor I had a 74% total return from January 1, 2007 to the end of 2011, when looking at our investment accounts. The recession was very good to me. But again, my mistake turned out to be a lucky event. And I then paid the price for my weak exposure to U.S. markets.
Stick to the plan, Stan!
I now have a very simple plan moving forward. I am building a reliable and growing income stream. It's a Frankenstein approach that combines dividend growth ETFs with broad market ETFs and various bond ETFs (mostly on the shorter side with a 1-5 year laddered corporate bond ETF as the core bond holding). There is also a REIT and Utility ETF in the mix. And yes there are three individual stocks in there that were already halved for profits and continue to grow back like weeds. They are perpetual outperformers Tim Hortons (THI), Enbridge (ENB) and TransCanada (TRP).
Quite simply, in our self directed retirement portfolios, the income from the holdings is redirected to dividend ETFs. We are currently at 50% equities (or slightly above) to bonds. Those new investments will continue to increase our equity exposure and increase the dividend growth exposure. They are hybrid portfolios if you will, in that they are self propelled. You can see my income projections in this article Dividend Growth and Asset Allocation - Together at Last.
Any new funds being invested are going into the wonderfully balanced Streetwise Portfolios through the employee plan. They match a generous amount. The portfolios are simply 20% each of Canadian, U.S. and International indexes, with 40% to a broad based bond index.
There's really no thinking required. I can send my personal investor brain on an early retirement. Though I'll still need that brain for advising clients on strategy and adopting their own simple investment plan.
Investing ain't rocket surgery as I argued in this article.
I invite you to learn, and prosper, from my mistakes. More importantly, learn from your own mistakes. Most importantly, get a plan. And stick to that plan like teenagers on Facebook.