Why We Don't Panic: The Brown Bag Portfolio January Review

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Includes: APLE, T
by: Michael Hesse
Summary

Wild swings in the market confirm the wisdom of holding stocks for the long term.

Why I write about the Brown Bag Portfolio each month.

Where is the Brown Bag Portfolio today and where's it going?

When I last wrote about the Brown Bag Portfolio in January, it had suffered the worst losses since the portfolio's inception. At that time, the portfolio was showing a -8.08% return and paper losses of more than two thousand dollars. However, just a month later, the portfolio is now positive and the paper losses have transformed into a small, but positive paper gain.

These past thirty days have been enormously instructive and reinforced my reasons for building a core portfolio around dividend-paying equities. The first and most important reason to focus on dividend-paying stocks is to capitalize on the enormous effects of compounding. When utilizing DRIP (dividend reinvestment programs), each payout is greater than the one before because each dividend payment is being made on the total number of shares you hold of that particular equity and each month/quarter/year that number of shares grows.

However, not to be forgotten is the second most important reason for building my core portfolio around dividend stocks... it limits my panic when prices fall. The reason for this is simple. Dividend stocks pay you to hold them every month/quarter or year depending upon their policy. This means that someone like me can feel comfortable holding a stock as long as they feel that the underlying reasons they bought the stock in the first place still hold. If you're utilizing DRIP, you may even get a greater number of shares or fractional shares if the price is depressed at the time you receive the dividend.

Now some investors don't utilize DRIP, preferring instead to receive the dividends in cash to either fund additional purchases elsewhere or for living expenses. To each his or her own, however, since I'm still building my portfolio and want to gain the advantage of compounding interest, I DRIP everything I own.

For those readers who may be new to my monthly updates on my portfolio, let me give you a brief recap. I opened my brokerage account on July 5, 2016, with an initial investment of $150. Since then, I invest whatever is left over from my paycheck after all my bills are paid. Sometimes, that's just $50 or $100, sometimes much more. I named my portfolio the Brown Bag Portfolio because much of the investment came from the savings I gained from brown bagging my lunches, and over the past two years, I've worked on eliminating my expenses as much as possible in order to increase my savings as much as I can. I haven't always been successful to the degree I'd like, but I work on it every check and set a goal of saving a bit more every two weeks.

For the past several months, I've made no deposits into the brokerage account as I struggled to pay down my credit card balance to zero (the initial 0 interest rate period having expired). With that now accomplished and a goal of returning the card to a zero balance every two weeks, I'm slowly building my cash position and looking for the right opportunity to deploy.

For those of you who wonder about these things, yes I do have a 401k and I fund it well above what my company matches, but I've chosen to take an active role in my retirement planning and not solely rely upon the averages and funds available within my particular plan. I do this because I believe that I'm a better judge of what risks I'm willing to take and where I'd like to place my money than someone who's never met me or understands my particular situation.

I write about the Brown Bag Portfolio every month because I believe that there is value in watching a portfolio being built from the ground up and the various pitfalls and peaks it will encounter along the way, especially for those of my readers who may be in a similar situation or point in their financial lives. A well-constructed, diversified, million-dollar portfolio may be a thing of beauty and a worthy goal, but it doesn't provide much insight into someone who is starting their investment journey.

Van Gogh's Starry Night might be an inspiration for an aspiring artist, but it's finished... complete... it doesn't show the young artist how it was created... where were the first brush strokes applied... which strokes were covered up as the masterwork took shape, where did it change direction? We don't know. All we see is the finished product. Although I very much doubt that the Brown Bag Portfolio will become the financial equivalent of Starry Night, I do hope that I'm able to at least reach "Dogs Playing Poker" and I'm going to display each hesitant stroke as my rough outline is defined.

The Brown Bag Portfolio as of Jan. 31, 2019.

As I noted at the beginning of this article, the paper losses that my portfolio showed at the end of December 2018 have all been erased a month later. Now that isn't to state that all losses have been reversed, but that the aggregate whole has been reversed and this is an excellent example of why one shouldn't panic and sell all their holdings immediately upon a market downturn. Had I sold in a panic as the markets fell, I would have locked in losses. Even if I'd been skilled enough to buy back at the exact bottom, I would have had fewer resources available to repurchase the stocks I sold. Also, I had a few (few) holdings that never fell to my cost-basis.

A better use of my resources would have been to keep a certain percentage of cash always available and deploy it during times of market uncertainty. Easy to say, but, in practice, difficult to do. This is especially true when (as I am) you are trying to broaden your portfolio. At some time (I expect two to three more years), I will have added enough positions in enough differing sectors that I can comfortably feel that I have a well-diversified portfolio. At that point, it will be easier to build up cash and only add to my positions when they dip or during a downturn like the one we experienced from October through December last year.

In the meantime, here is the Brown Bag Portfolio as of the end of January.

BBP January 2019

Symbol

Shares

Value

Cost Basis

Return

% Return

Div/shr

Annual Div

D

40.92

$2,874.35

$2,693.91

$180.44

6.70%

$3.67

$150.18

IRM

40.74

$1,515.34

$1,333.26

$182.08

13.66%

$2.44

$99.39

APLE

222.08

$3,644.37

$3,917.53

-$273.16

-6.97%

$1.20

$266.50

EPD

235.78

$6,521.62

$6,313.51

$208.11

3.30%

$1.73

$407.90

T

105.28

$3,162.58

$3,625.07

-$462.49

-12.76%

$2.04

$214.77

EPR

61.96

$4,528.26

$4,030.69

$497.57

12.34%

$4.50

$278.83

MAIN

73.77

$2,719.13

$2,814.28

-$95.15

-3.38%

$2.34

$172.62

OXLC

93.32

$963.04

$950.10

$12.94

1.36%

$1.62

$151.18

$0.00

$0.00

*New Position

** Increased Position

Total

$25,928.69

$25,678.35

$250.34

0.97%

$1,741.37

Div Goal

% of Goal

BBP Yield %

$16,800

10.37%

6.78%

As always, I also include the actual Out of Pocket chart because it truly displays the power of compounding dividends over time.

Out of Pocket

as of Jan. 31, 2019

Symbol

OOP Shares

$ OOP

Shrs from Dividends

Div Rcvd

Current Value

Actual Rtrn

D

40

$2,626.60

0.916

$67.19

$2,874.35

9.43%

IRM

40

$1,308.80

0.735

$24.44

$1,515.34

15.78%

APLE

205

$3,618.28

17.082

$298.30

$3,644.37

0.72%

EPD

215

$5,766.99

20.778

$541.53

$6,521.62

13.09%

T

100

$3,453.42

5.279

$171.65

$3,162.58

-8.42%

EPR

59

$3,839.26

2.963

$191.45

$4,528.26

17.95%

MAIN

70

$2,672.20

3.769

$141.71

$2,719.13

1.76%

OXLC

80

$810.40

13.318

$139.19

$963.04

18.84%

Total

$24,095.95

$1575.46

$25,928.68

7.61%

Now, where am I going in the future? At the moment, I feel that all of my holdings are over-priced except for Apple Hospitality and AT&T. Neither of which I'm interested in adding to at this point. Although I am very pleased with the low level of debt that Apple Hospitality carries, I'd like to see some sort of increase in their dividend. However, I'm not frustrated with the company or its management. It pays a steady dividend every month that I am more than happy to DRIP. I just haven't seen anything that inspires me to purchase more shares at this time.

AT&T tries my patience and I'm often thinking about taking the loss and moving the money into something with greater potential. However, management has made some moves to reduce the massive debt they carry and I remain willing to give them some time to see how this plays out. I must admit, however, part of my willingness to sit and wait is due to the fact that I haven't zeroed in on a replacement if I do choose to sell. Taking a real loss and selling just because I'm concerned with their ability to execute seems a little drastic when they are currently paying a dividend of almost 7%. I'm going to try very hard to give them another quarter or two before I make a final decision.

As far as the rest of my holdings are concerned, I think they are all at levels above what I am willing to pay for them. I'm not saying that they are over-valued; I'm simply stating that the price per share of these other six companies is above what I am currently willing to pay. I am building cash and watching the charts on a number of companies and will probably buy something near the end of March. If I don't, it's because I don't see the value that I want to see.

Although the Brown Bag Portfolio is currently REIT heavy, I don't expect to change that any time soon. Several of the companies I'm currently watching are REITs and I expect to add at least one of them this year. I'm well aware of the mantra of diversification, but I'm also firmly convinced of the long-term potential of REITs over the other sectors. I also believe that I can mitigate some of the potential rate sensitivity of REITs, in general, by diversifying the sectors in which those REITs are active. For example, Iron Mountain is a REIT in the industrial sector, while Apple Hospitality services the hospitality sector, etc.

Will this ultimately work out? I'm not sure at this time, but I'm willing to see.

Disclosure: I am/we are long D, IRM, APLE, EPD, EPR, T, MAIN, OXLC. 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.