Darcy Howe, a VP with Merrill Lynch reportedly said,
I've always felt that investing is like a bar of soap. The more you handle it, the smaller it gets.
Over the last few days, I examined my portfolio performance and proved to myself the validity of Howe's maxim with regard to my first Dividend Growth Portfolio (innovatively called DGP-1).
I somewhat arbitrarily selected a start date of 30 June 2011 (a couple of months after I rolled my TSP over to an IRA and about the time I began buying companies for that portfolio) with an end date of 31 July 2015.
I compared how I actually did with how I would have done if on 1 July 2011 I had bought equal dollar amounts of the 31 stocks I currently hold.
At close of business on 30 June 2011...
DGP-1 (a IRA) was valued at $223,698.47 ...
my actual value on 31 July 2015 was $319,288.76 for a "Compounded Annual Growth Rate" or CAGR of 9.16%.
If I had sold on 30 June 2011 whatever I then held and on 1 July spent an equal dollar amount ($7,200 plus $14 each for commissions) buying stock in each of the 31 companies I currently hold ...
I would now have a portfolio valued at $344,932.43 (dividends reinvested quarterly) for a 11.25% CAGR.
The 31 companies are: CLX, CNP, COP, CVX, DLR, ED, GIS, HAS, HCN, HCP, HP, JNJ, KMI, LMT, MAT, MCD, MO, NNN, O, OXY, PG, PM, RAI, SO, T, TRP, VGR, VTR, VZ, WEC, WPC.
Over the last 49 months, I lost the equivalent of $25,643.67 or 7.43% of what my DGP-1 portfolio could have been and reduced my effective annual portfolio growth rate by 2.09%.
If I fumbled the wet DGP-1 soap bar then, by analogy, I left the DGP-2 and DGP-3 soap bars in a sink with running water.
In other words, those two portfolios until recently suffered from malign neglect. I tossed whatever into the portfolios without any overall rhyme, reason or rationale and ignored the results until about a year ago.
I excused my lack of action with:
- I didn't need the income "right now" as my pension and savings covered my current expenses.
- I was too busy with the other "stuff" that absolutely had to be done in early retirement (which included remodeling the Houston townhouse, prepping it for sale, and getting the farm operational) to do what needed to be done with the portfolios.
And the result of my neglect is very apparent.
At close of business on 30 June 2011 and ignoring the 2,300 shares of Central Fund of Canada (NYSEMKT:CEF) throughout...
DGP-2 (a ROTH IRA) was valued at $61,106.30 ...
my actual value on 31 July 2015 was $65,298.61 for a CAGR of 1.76%. If I had not revised the portfolio eleven months ago, the performance would have been even worse (with a current value of $61,235.77).
If I had sold on 30 June 2011 whatever I then held (in the various accounts which eventually became DGP-2) and on 1 July 2011 spent an equal dollar amount ($3,040 plus $14 each for commissions) buying stock in each of the 20 companies I currently hold ...
I would now have a portfolio valued at $88,607.89 (dividends reinvested quarterly) for a 9.66% CAGR.
The 20 companies are: BNS, CNP, DLR, GAS, HCP, KMI, MAT, MDU, MO, MSEX, NNN, O, POT, RAI, SJR, SO, T, VGR, VZ, WPC.
Over the last 49 months, I lost the equivalent of $23,309.28 or 26.31% of what my DGP-2 portfolio could have been and reduced my annual portfolio growth rate by 7.90%.
At close of business on 30 June 2011...
DGP-3 (a ROTH IRA) was valued at $66,043.22 ...
my actual value on 31 July 2015 was $60,438.54 for a CAGR of -2.06%. If I had not revised the portfolio eleven months ago, the performance would have been worse (with a value of $58,674.53).
If I had sold on 30 June 2011 whatever I then held and on 1 July 2011 spent an equal dollar amount ($3,870 plus $14 each for commissions) buying stock in each of the 17 companies I currently hold ...
I would now have a portfolio valued at $98,325.39 (dividends reinvested quarterly) for a 10.34% CAGR.
The 17 companies are: AVA, CNP, COP, CVX, DLR, HCP, HP, LNT, MO, O, OXY, PM, RAI, SO, STR, VGR, WPC.
Over the last 49 months, I lost the equivalent of $37,886.85 or 38.53% of what my DGP-3 portfolio could have been and reduced my annual portfolio growth rate by 12.40%.
About a year ago, I turned off the water, and extracted my two long neglected portfolios before they vanished down the drain.
My education proved expensive, as I learned what not to do, and eventually what to do. It cost me nearly the equivalent of a DGP-2 portfolio:
$25,643.67 + $23,309.28 + $37,886.85 = $86,839.80.
I'm glad I learned, and I'm thankful the lesson was not even more expensive.
What did I learn?
- Defined and documented operating rules are critical. Sun Tzu said, "Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win." Using good operating rules (especially when I can "borrow" good rules from someone with a proven track record) helps me "win first."
I have defined and documented rules for all three portfolios. I've sold off most of what did not fit those rules (from DGP-2 & 3); and I am buying what does.
- Rigorously documented performance is essential. I don't know I have a problem if I don't know where I am, and where I want to be. To know where I am, I have to ask and answer results-based questions. To ask and answer those questions, I have to keep and examine relevant data.
Each month I write a performance document for each portfolio. The document is based on accumulated data from Quicken and a number of spreadsheets that process the data in ways Quicken cannot.
- I must not be afraid to admit I made a mistake. If I don't acknowledge it, I cannot learn from it. If I cannot learn from it, any improvement is at best accidental.
Ignoring DGP-2 and DGP-3 for as long as I did was both foolish and expensive.
- I don't have all the answers. However, to twist a quote, "the data is out there."
Nowadays, I periodically go to Value Line (free via my library account) and screen for high-quality companies with my target yield. I match those against David Fish's Champion, Contenders and Challengers list (aka CCC). Companies common to both lists form a pool of about 100 companies that I check against Chuck Carnevale's FAST Graphs and then additionally examine for possible purchase.
- Reduce transaction costs to improve performance.
Scottrade's Flexible Reinvestment Program (aka FRP) cut my purchase commission costs to zero, even when the accumulated dividend amount I'm investing is relatively small.
Without FRP I waited until the purchase commission was 1% or less of my accumulated dividends. As a result, I invested dividends infrequently to minimize the transaction costs.
Because I'm moderately numerate, I've always realized the importance of dividend reinvestment, but transaction costs often made implementation almost unbearably painful.
With FRP, my dividends are invested monthly. FRP has literally changed my portfolios' projected income performance and removed the pain of dividend reinvestment.
- Buy quality.
I now buy companies with a Value Line safety ranking of 1 or 2 and a financial strength rating of B+ or better. For REITs I require a S&P credit rating of BBB or better, a debt/capitalization ratio of 60% or less and a FFO growth rate of 2% or better.
- Buy yield.
I look for a minimum purchase yield of 3.0% and I am exceedingly cautious if the purchase yield exceeds 6%.
- Buy yield growth.
I look for companies with a chowder rule of 12% (yield + yield_growth) or better with at least 10 years of dividend growth. For REITs and Utilities, I look for a chowder rule of 8% or better with at least 10 years of dividend growth.
I hope you learn from my examples of what not to do:
- Don't handle your soap more than necessary.
- Don't leave your soap in a sink with running water.
Disclosure: I am/we are long AVA, BNS, CEF, CLX, CNP, COP, CVX, DLR, ED, GAS, GIS, HAS, HCN, HCP, HP, JNJ, KMI, LMT, LNT, MAT, MCD, MDU, MO, MSEX, NNN, O, OXY, PG, PM, POT, RAI, SJR, SO, STR, T, TRP, VGR, VTR, VZ, WEC, WPC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.