- Buy and hold does work, but not on stocks.
- Don't be ignorant in portfolio management.
- Index investing can be a safer investment strategy.
In August 2000, Fortune magazine published an article called, "10 Stocks To Last The Decade: A few major trends will likely shape the next ten years. Here's a buy-and-forget portfolio to capitalize on them." We are well past the decade mark, but I still track the portfolio. This is an update to that portfolio 14 years later.
Let's assume a $1,000,000 portfolio with $100,000 allocated to each security. As of the close of the market on 08/14/2014, the portfolio would be down almost 60%. Here's a summary of what happened.
Fortune Magazine's "Buy and Forget" Portfolio
|Charles Schwab (NYSE:SCHW)||36.00||27.63||-23.25%|
|Morgan Stanley Dean Witter (NYSE:MS)||89.00||32.17||-63.85%|
|S&P 500 Index||1491.56||1955.18||31.08%|
Three stocks, Nortel Networks, Enron and Univision are no longer around. They accounted for 30% of the portfolio. That 30% is gone forever and never coming back. The result is a $300,000 loss. Genentech was acquired by Roche, so shares in the portfolio would have been sold at the acquisition price of $95. That's another permanent 36% loss on the books or a $36,667 loss. Univision was aquired by Broadcasting Media Partners Inc. (ìBMPî) at a per share cost of 36.25, resulting in a loss of $67.920. The rest of the companies in the portfolio are still around, some tickers have changed slightly, but they are still being traded today. However, their prices have come down from their lofty levels. Only one company out of the original ten managed to generate a profit of 17%, but at the cost of nine losing positions. As of 08/14/2014, the portfolio's average return is around -59%.
However, if an investor would have simply bought and held the S&P 500 index, either through an index mutual fund or an exchange traded fund, they would have done much better. They would have eliminated specific stock risk, but they would have to hold through some very deep corrections. A quick glance at a historical chart of the S&P 500 or the NASDAQ for the past 15 years would reveal that although the indexes did get hit hard during a couple of bear markets and quite a few corrections, the indexes are still trading and the longer-term uptrend is still intact. You can't say that about most of the picks in this portfolio.
The lessons here are simple, if you must "buy and forget" an investment, don't let it be a stock. Most stocks have a lifecycle... birth, growth, maturity and death (or takeover or M&A). An index fund replicating the S&P 500 would have performed better during the last 14 years. The index fund, or ETF, would have been up just over 30% without any specific stock risk, before fees. Second, "Diversification is protection against ignorance," according to Warren Buffett. Diversification is supposed to help manage portfolio risk. It didn't help this portfolio. The point here is "Don't be ignorant!" A little education in stock charts and some risk management would have minimized the damage done by this portfolio. Finally, don't turn to the media for financial advice. Use a trusted source. You wouldn't self diagnose a medial issue using advice from a morning talk show... would you? I hope not. Treat your financial health the same way you treat your physical health.