The Market Took A Dive - Here's What Happened To My Portfolio And My Head (II)

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Includes: AAPL, D, ENB, HRL, ITW, IVSBF, KMB, MO, OAK, OMC, PEP, PM, WELL
by: Stockles

October turned out to be a volatile month. News tried to trick investors to panic and sell their shares, that the bear market was finally here and now was the time to accumulate cash and wait for the asset prices to come down.

Market sell-off shares parallels with 1987 crash, strategist says.

Become friend with volatility instead of hating it

The defining characteristic of future change, according to Taleb (who continues a line of argument developed in previous books like Fooled by Randomness and The Black Swan), is that it is impossible, and foolhardy, to try to predict it. Instead, the author argues, it is essential to make peace with uncertainty, randomness, and volatility. Those who do not - who insist not only on trying to predict the future but also on somehow trying to manage it - he disparagingly calls "fragilistas."

What did I do during the correction?

I tried to remember that stocks should fluctuate.

That it's natural that they move up and down.

That random stock movement is one of the major reasons why stocks as an asset class offer higher returns than bonds.

In portfolio optimization strategy, it's essential to understand the difference between systematic risk and unsystematic risk. Systematic risk (market risk) is risk which you can't control. Sometimes all stocks decline, no matter financial strength or what they produce. This just happens from time to time. Accept this.

Systematic or Market Risk

Unsystematic risk is the risk which lies within a specific asset class or security. If you can't handle high volatility, then you can go for securities with lower beta numbers. Most of the stocks in my portfolio don't move much in either direction and that helps me sleep well at night.

Unsystematic or Asset Risk

Another important point about unsystematic risk is that you can control which sector you think is safer than others. For a long time, I have meant that the technology sector is overvalued, but I admitted that I found the sector highly difficult to value.

Instead of using too much energy on this highly complex sector, I focused on value investments and hoped that there would be a sector rotation at one point from technology to safer firms such as PEP and KMB. That's what we observe now (partially at least).

Here's my DGI portfolio. Do note that while I beat the index now, I have underperformed before. Crazy enough, that's what I aim to do. My goal is to have a SWAN portfolio, a sleep well at night portfolio. This often means that I go for boring and unsexy securities with far less growth potential than firms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN). This normally means that in bull markets, I underperform.

And for me, that's okay. Life is so much more than just generating more money.

Also, keep in mind that I have a very firm focus on generating dividend income.

My income does not change when prices fluctuate. That's another positive thing about being a dividend investor. It's easier to stay calm and safe in bear markets.

At least now in the beginning of my DGI career that's how I think.

Stockles vs. NASDAQ 3 months

Stockles vs. NASDAQ 6 months

So, instead of panicking like the news wanted me to do, I wrote a buying list.

  • Buy more EM/Global/Nordic index
  • Buy PEP ~ $100, KMB ~ $99, ENB ~ 41 CAD, PM ~ $80, OMC ~ $68, D ~ $63, HRL ~ $32, INVE B ~ 350 SEK, WELL ~ $54, ITW ~ $133.

Some people asked:

Not waiting on a bigger fall?

My answer was quite simple:

Well, my plan is easy. I figure out which firms I want to buy and why, and then I buy in pieces, as we go down. No point mixing emotions to the picture. For me, nothing really changed, rather than that the price of my stocks is cheaper now than a week ago.

But sure, now SMA200 for QQQ broke, so I do suspect that tech should fall, even though Google and Facebook stood hard today. There will never be a "right time" to buy shares when people are panicking, but many are still expensive. Most of the firms I listed are trading close to fair values around my TP, IMHO

What did I buy?

I bought many securities during the past month. Some positions were new and some were plain additions to current holdings.

To find capital, I used my saved dividend income, some savings, and sold Oaktree Capital (NYSE:OAK) with the following argument:

Investment thesis was that OAK had negative correlation to the general market and especially towards the rising U.S. 10 year treasury yield. As we saw last week, OAK actually dropped 5% while they should (under my thesis), be happy for a rising interest rate, since they do focus on distressed debt. I might be wrong, might be right, but the following discussion showed me that I don't profoundly understand the case, so selling this position. Total Return 4%.

Purchases

Altria (NYSE:MO)

Apple (NASDAQ:AAPL)

Enbridge

Illinois Tools Works

Investor ABB (OTCPK:IVSBF)

Omnicom

Philip Morris International

Fund and ETF portfolio

Added to all of my holdings.

Future returns in the stock market by Morningstar

According to Morningstar, the emerging market index should significantly outperform US securities.

Right now, most global indexes operate with a 60% weighting in USA. It shall be interesting to see if this changes within the next 10 years.

With respect to GPS growth estimates, China and India should be the new growth case if we look 10 years forward. Since I don't know anything about the future, I just hold both, but I do own a larger portion in EM than US mostly because my DGI portfolio is heavy in USA.

Source: Morningstar Markets Observer.

Takeaway

So, the takeaway is that you should accept that stocks go up and down. You should also see this correction as a test for how your portfolio looks like and how much stress you can handle. If you felt that you barely could cope with it, I suggest lowering the risk. What we saw now wasn't really something crazy. Within the next decade, we will see a greater fall and then you better be prepared.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.