2018 was a tough year for investors with virtually all asset classes ending the year in the red. And ‘oh my’ was it ugly…
Source: Market Watch
Looking back at my 2018 prediction for calm and steady price appreciation for the first 3 quarters of the year followed by an increase in volatility in Q4 (driven by the midterms), it appears to have been pretty spot on. Of course, I thought that volatility would mean some choppy trading, not a 20% decline… so I’ll only award myself partial points for 2018. Of course, any predictions of specific price movements are meaningless since no one predictably knows where the market is headed over the short term (and hundreds of years of history show it going higher in the long term). So please ignore the MANY year-end articles currently being written that predict where the market is going in 2019. Of course, a few of them are bound to be correct, but this is best explained by the infinite monkey theorem of a monkey eventually typing the works of Shakespeare.
So just ignore the predictions and focus on making your portfolio more robust. If you are a long-term investor with a good investment strategy like me, think of making trades as tuning a sports car (tiny tweaks to make things better) rather than looking for dramatic miracle (which risks putting you in a ditch). I know that I certainly did some of this in 2018 as I sold off assets in the summer (when prices were high) and have been putting idle cash to work in Q4 (as prices have dropped). However, I never sold at the highest price or bought at the lowest price for any of my trades (and it seems that I have a bad habit of both buying and selling too soon to maximize returns)… so I know how it feels to be a bit paralyzed by wondering if the trade you are making is at the best price. Well, I don’t have a good answer to that question, other than to go back to my tuning a race car metaphor of looking to make incremental gains (oh, and try to avoid FOMO!!).
This year my portfolio was not immune to these downdrafts as my unrealized returns were -4.9% on the year (though my real return was just above breakeven once dividends are included). However, this website is all about seeking alpha (meaning results ahead of the markets), even when the beta (or market return) is negative. Therefore, while I hate to lose money like anyone else (even if they are just paper losses), I judge my performance based on how I do versus the market (as should you). So it is with some pride that I can announce that in the 3 full years that I have been posting my personal portfolio, I have beaten the S&P 500 in 2 of 3 of those years on a principal basis. Furthermore, a major strategic decision of mine has been to focus on yield (my portfolio has consistently averaged a yield of over 5%), so I have generated tens of thousands in passive income even without making trades. Each year, my ~5% yield gives me a 3% advantage versus the S&P 500’s ~2%, so my realized alpha is even higher.
But enough of my celebrations as I hope that your portfolio brought you success as well (dancing on the graves of others has never brought me pleasure). The past is set, but the future is uncertain… so I’ll focus there. As J.P. Morgan once famously said when asked about the future of the market, “it will fluctuate.” That prediction will doubtlessly be true again in 2019. However, while we cannot predict stock price fluctuations, we can more accurately predict corporate earnings and GDP output (aka recessions). Based on all the data that I have seen, corporate earnings and GDP should continue to grow (albeit slowly) with no imminent recession. Here is a great article by Larry Swedroe laying out the facts. Also, for those who don’t yet receive Jeff Miller’s weekly Dash of Insight, you really should… but here is the most recent dashboard:
Source: Dash of Insight
My layman’s translation: the trading technicals are trashed (resulting in increased volatility), but the fundamentals are still solid (based on the low recession indicators)… so the potential equity returns have increased in the last quarter (as confirmed by the increased equity risk premium and a not shown reduction in P/E). Like it or not, equities are still the best bet for most investors (though volatility will likely stay elevated until the market settles back on its ‘slow but steady’ growth narrative). I see these conditions continuing through at least the first half of 2019 with plenty of twitter fueled volatility creating ebbs and flows… one day there will be another recession, but I just don’t see it coming soon. So I’m buying this dip and think that you should too.
December 2018 Review
December 2018 was tough for all long-biased market participants, but my portfolio fell -6.9% versus the dismal -9.8% for the S&P 500. This brings my 2018 total to -4.9% versus a -5.2% for the S&P 500; however, my 5.4% forward dividend yield on invested capital keeps crushing the 1.8% yield of the broader index… so I’m going to declare myself the winner this year.
December 2018 rewarded me with realized dividends of $1,453 (versus $2,003 in 2017), but, for all of 2018, my portfolio delivered $13,645 in cash to me (an increase of 8% from 2017). My realized yield for 2018 was 4.7% for my full portfolio including cash reserves. My 2018 goal was to increase dividends by ~5% to $13,500 for the year, so I feel good that I beat this goal. In 2019, I will plan for another ~5% increase in 2019 to $14,000. Fear and greed are hard to balance, but I am happy with where I am overall. My yield focused strategy still makes the most sense to me as paper gains may come and go but cash is forever!!
Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires.
- GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns.
- STRATEGY: 'Enhanced' dividend growth or DGI strategy that focuses on a core of diversified high yielding holdings (ETFs and individual companies - my general screening criteria: growing companies (YoY EPS growth >0%) with attractive valuations (PEG <1.5 and P/E <20) and strong and safe dividends (yield >4%, payout <90%, and market cap >$500M)… no tobacco stocks or micro caps), supplemented with return enhancing tools like hedges (derivatives and shorts), commodity exposure, etc., as well as some crazy picks.
- BALANCE: Blend of ETFs (domestic and international) and individual companies (where there is a compelling reason to own). Seek to not overweight any one sector unless there is a compelling reason to do so (although the nature of these investments leads me to be overweight in traditional dividend paying sectors like financials, REITs, and energy).
Note: I violate these guidelines constantly, so please call me out on it!
Portfolio Composition as of December 31, 2018
|Security||Type||Div Yield||Market Value||Last Month Value||Gain/Loss(%)|
|SPDR Portfolio S&P 500 High Dividend ETF (SPYD)||ETF||4.1%||$13,628||$15,084||-9.7%|
|Oppenheimer S&P Ultra Dividend Revenue ETF (RDIV)||ETF||4.2%||$13,392||$14,506||-7.7%|
|First Trust Dow Jones Global Select Dividend Index ETF (FGD)||ETF||4.8%||$10,930||$11,910||-8.2%|
|SPDR S&P Emerging Markets Dividend ETF (EDIV)||ETF||3.5%||$9,085||$9,286||-2.2%|
|Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)||ETF||4.0%||$7,640||$8,290||-7.8%|
|SPDR S&P International Dividend ETF (DWX)||ETF||4.4%||$7,168||$7,529||-4.8%|
|FlexShares International Quality Dividend Defensive Index ETF (IQDE)||ETF||5.9%||$6,141||$6,314||-2.7%|
|Invesco S&P International Developed High Dividend Low Volatility Portfolio (IDHD)||ETF||5.2%||$5,144||$5,370||-4.2%|
|iShares Nasdaq Biotechnology ETF (IBB)||ETF||0.3%||$4,822||$5,455||-11.6%|
|iShares Evolved U.S. Innovative Healthcare ETF (IEIH)||ETF||1.9%||$4,711||$5,242||-10.1%|
|Schwab U.S. Dividend Equity ETF (SCHD)||ETF||2.7%||$4,697||$5,155||-8.9%|
|UBS ETRACS Monthly Pay 2xLeveraged US High Div, Low Vol ETN (HDLV)||ETN||10.7%||$4,449||$5,237||-15.1%|
|VictoryShares Emerging Market High Div Volatility Wtd ETF (CEY)||ETF||4.8%||$4,394||$4,515||-2.7%|
|Horizons NASDAQ 100 Covered Call ETF (QYLD)||ETF||11.2%||$4,262||$4,666||-8.7%|
|iShares Asia/Pacific Dividend ETF (DVYA)||ETF||5.9%||$4,031||$4,285||-5.9%|
|iShares MSCI Australia ETF (EWA)||ETF||4.8%||$3,850||$4,160||-7.5%|
|iShares MSCI Malaysia ETF (EWM)||ETF||7.1%||$2,977||$3,006||-1.0%|
|Global X NASDAQ China Technology ETF (CHIC)||ETF||2.9%||$2,281||$2,397||-4.8%|
|Franklin LibertyQ International Equity Hedged ETF (FLQH)||ETF||1.4%||$2,239||$2,440||-8.3%|
|VanEck Vectors Gold Miners ETF (GDX)||ETF||0.9%||$2,109||$1,909||10.5%|
|iShares MSCI China Small Cap ETF (ECNS)||ETF||3.9%||$1,955||$2,137||-8.5%|
|Tanger Factory Outlet Centers (SKT)||REIT||6.8%||$10,110||$11,825||-14.5%|
|Blackstone Mortgage Trust (BXMT)||REIT||7.7%||$9,558||$10,530||-9.2%|
|Royal Dutch Shell (NYSE:RDS.B)||Company||6.3%||$8,991||$9,305||-3.4%|
|Ventas Inc. (VTR)||REIT||5.3%||$8,789||$9,524||-7.7%|
|New Residential Investment (NRZ)||REIT||13.8%||$7,304||$8,841||-17.4%|
|Omega Healthcare Investors (OHI)||REIT||7.5%||$7,030||$7,588||-7.4%|
|Iron Mountain (IRM)||REIT||7.6%||$6,482||$6,794||-4.6%|
|Sabra Health Care REIT (SBRA)||REIT||11.0%||$5,537||$6,481||-14.6%|
|Cardinal Health (CAH)||Company||4.3%||$4,460||$4,530||-1.5%|
|General Mills (GIS)||Company||5.1%||$3,894||$4,231||-8.0%|
|KKR Real Estate Finance Trust (KREF)||REIT||9.0%||$3,830||$3,900||-1.8%|
|Ford Motor (F)||Company||7.7%||$3,060||$3,764||-18.7%|
|Kinder Morgan (KMI)||Company||5.2%||$2,830||$3,141||-9.9%|
|Teva Pharmaceutical Industries (TEVA)||Company||0.0%||$1,542||$2,154||-28.4%|
|VARIOUS POSITIONS OF <$1,000 VALUE||VARIOUS||2.0%||$2,236||$2,428||-7.9%|
|FIXED INCOME TOTAL||5.5%||$17,123||$17,831||-4.0%|
|Goldman Sachs (GS) - Pref D (GS+D)||Pref||6.1%||$5,250||$5,635||-6.8%|
|Bank of America Corporation (BAC) - Pref L (BML+L)||Pref||5.1%||$4,184||$3,926||6.6%|
|Goldman Sachs (GS) - Pref A (GS+A)||Pref||5.4%||$3,512||$3,848||-8.7%|
|WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (HYZD)||ETF||5.1%||$2,242||$2,346||-4.4%|
|WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (HYND)||ETF||5.0%||$1,935||$2,076||-6.8%|
|SCHWAB ROBO-ADVISOR TOTAL||2.0%||$11,513||$12,325||-6.6%|
|TOTAL + CASH||$15,695||5.1%||$294,331||$314,809||-6.9%|
Portfolio Moves in December 2018
SHARE BUY – VictoryShares Emerging Market High Div Volatility Wtd ETF: Bought 200 shares of this emerging market ETF at $22.55 on Dec. 6.
- Reasoning: Another volatility driven purchase of a 4.8% yielding emerging markets ETF… I just can’t help myself.
SHARE BUY – AT&T: Bought 100 shares of this mega telecom company at $29.75 on Dec. 10.
- Reasoning: In addition to the general market selloff, AT&T’s merger with Time Warner has not been well received (which has pushed the dividend yield over 7%).
SHARE BUY – Cardinal Health: Bought 100 shares of this drug distributor at $45.25 on Dec. 21.
- Reasoning: Despite the politics of drug pricing, I don’t think there will be any action (and even if there is, the distributors will probably get spared) so I was excited to add this 4.3% yielder.
SHARE BUY – Oppenheimer S&P Ultra Dividend Revenue ETF: Bought an additional 100 shares of this domestic dividend ETF at $32.95 on Dec. 24.
- Reasoning: Taking advantage of the market selloff, I added more of this 4.2% yielder!
SHARE BUY – FlexShares International Quality Dividend Defensive Index Fund: Bought 100 shares of this international dividend ETF at $19.95 on Dec. 27.
- Reasoning: I can’t seem to get enough of these international dividend ETFs… if only they would stop falling in price someday!
SHARE BUY – Goldman Sachs Preferred D (GS+D): Bought 100 shares of this bank preferred stock at $17.50 on Dec. 31.
- Reasoning: The whole market for floating rate bank stocks got crushed in Q4, so I decided to add some more of this 6% yielder while it was on sale.
SHARE SALE – ProShares Short S&P 500 (SH): Sold all 250 of my shares in this short S&P 500 ETF at $31.05 on Dec. 17.
- Reasoning: I think this is the pullback that I had been waiting for to get rid of some of the hedge positions that I have (unprofitably) held. Shorting is hard and I don’t recommend you do it!
Bear markets separate investors from pretenders, but challenging markets don’t have to cause anxiety if you have the right mindset and strategy. However, if your gains persistently trail the market, it might be a sign that you need more beta and less alpha in your holdings (so get some low-cost ETFs). There is no shame in modifying your behavior to swim with the market (harvest beta) instead of against it (seeking alpha). Over decades long time periods, the most proven winning strategy is a simple diversified buy and hold.
Wishing you and yours a happy and prosperous new year!
Disclaimer: The author is an amateur who has a history of getting calls both right and wrong with zero predictive power. Trade at your own risk and never rely solely on this author's opinion. Also, as I have no knowledge of your circumstances, goals, and/or portfolio concentration, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am/we are long ALL POSITIONS AS MENTIONED. 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.