When we hold index-based funds, we simply have to wait for the total market or sector to come around.
When we invest in individual stocks, we face a unique set of circumstances and we have to wait for the market makers to change their opinion on one company.
When a stock goes out of favour, the "bad news" can come out of everywhere in rapid-fire succession.
My stock-holding experience has taught me (so far) to ignore all of the noise and short-term projections - good companies will eventually show their true worth.
Investors who embrace index funds and those who create portfolios of individual stocks face many of the same emotional and behavioural challenges. It can be difficult to stay the course when your investments are fluctuating in value and the market prognosticators are hitting you with bad news from every angle.
It's difficult to ignore the noise.
An indexer might have an "easier" time of it given that they might only pay attention to the broader economic or total market sentiment. And when we invest in exchange-traded funds, we are often buying the total or broad markets that reflect a significant portion of the investable public stocks. An indexer likely will not pay much attention to reports and speculation on individual stocks. At least we hope they are not paying attention to stock reports.
When we hold a portfolio of individual stocks, we might get news from many fronts and expose our email inboxes and Seeking Alpha feeds to input on every stock that we hold. We get hit from all sides. We get the company financial reports, we get the analyst projections, we get speculative articles. We are told to buy. We are told to sell. We are told to hold. And mostly, what trips us up is we get the bad news. Throw that bad news in tandem with a declining stock price (more investors listening to bad news and sentiment) and it can be daunting. And certainly, at times, that bad news can include or be the result of poor performance from one or our companies. Bad numbers beget more bad news begets more price declines.
If you hold 30 stocks, you get all of this wonderful news and speculation times 30x.
I'll give you an example with an investor in the Vanguard Dividend Appreciation Fund (VIG). Here's the price action from January 2015 through to end of 2016, courtesy of PortfolioVisualizer.com:
Not too much going on for the period. A smallish dip with a drawdown less than 10% (including dividends). But here's what was "going on" under the hood. As my readers will know, I skimmed 15 of the largest-cap constituents of that Dividend Index back in early 2015. My 15 individual stock holdings essentially track the total index, but the returns dispersion is surprising and erratic.
While an index investor only had to watch a 9% decline, a stock investor had to sit through a 37% decline for Qualcomm (QCOM), a 32% decline for Walmart (WMT), a 30% decline for CVS Health Corp. (CVS), a 26% decline for United Technologies (UTX), a 23% decline for Nike (NKE)... and on and on. This is true bear market territory for individual stocks. We could say those who invest in individual stocks face bear markets when indexers do not.
It's obviously more difficult to be a hands-off and patient investor when we hold individual stocks.
I bought 'em without looking. I added without looking.
Here's the first article on Buying Dividend Growth Stocks Without Looking. Of course, while I did no further evaluation, the index certainly looks, and it takes an incredible company to make it into the Dividend Achievers index and into that Vanguard Dividend Appreciation Fund. I trusted the index methodology.
And from there I continued to trust the index, and that meant trusting the management of each individual company. The majority of the companies have come under news and analyst attack at one point or on an ongoing basis - see CVS and Walgreens (WBA) and Qualcomm.
I ignored everything and everyone and added to many of the companies. Please have a read of my article "Can You Simply Add To Your High Quality Dividend Growth Stocks When They're Down, Because They're Down?" Yup, not only did I ignore the bad news, you could say I embraced it. I ran into the burning barn. You can even go ahead and say that I put the blinders on and tried to find the barn door entrance (that was often on fire, by the way). I wasn't really looking where I was going.
And yet, I have continued to watch my losers list get smaller, one by one. I am now down to 2 "losers". Here's the total returns for 2015 to end of April 2019.
And as you can read in that article about buying dividend growth stocks when they're down, the strategy worked more often than it did not. Even up to a month ago, Qualcomm was on the list of losers. And then, this happened.
Qualcomm went from a loser to a winner virtually overnight. My personal rate of return is greater than what is shown by PortfolioVisualizer.com, as I had lowered my personal cost base - I added to QCOM a couple of times when it was down and out. And who would have known that Qualcomm and Apple (AAPL) would settle their legal differences, and then that analysts would immediately jump all over the stock with outrageous earnings and revenue projections? No one, of course. Only blind "luck" can find out that kind of event.
Abbott Labs (ABT) ran into trouble soon after purchase in 2015.
Of course, the stock got some love. I watched it recover. That one's in my wife's freaky market-crushing portfolio. Thanks to those reinvestments, it has the greatest weighting in that more growth-oriented retirement portfolio, even greater than Microsoft (MSFT), which has been on a non-stop tear and then some.
Nike tripped up a couple of times.
I threw it a couple of bucks. It started to look for and run to the retirement finish line for us. Walmart did the same for us. It was supposed to get eaten alive by Amazon (AMZN), but that does not appear to be happening.
And yes, I have those losers, CVS and Walgreens. I am still trusting the investment strategy and management. And just this week, Mr. Market gave us this with CVS:
The stock is still in a hurtful position for us, but the company is doing well, and now analysts feel that the acquisition of Aetna is starting to pay off and perhaps the company will be successful in the creation of a hybrid pharma retailer and insurance "blend" giant. Here was the news from May 1:
Is this biggest loser starting to look like a winner? How long will it take for this to (hopefully and potentially) turn into a winner? I don't know. But I'm going to stick around to find out. And you certainly don't mind seeing that "crush" word in use.
Consistency and patience is the most important part of it all
Whether you are an indexer or a stockholder, or you hold a mix of stocks and funds, the key is to have a simple plan and stick to that plan like glue. We can't let the market noise and speculation throw us off course. Most of us need to keep it simple and keep it cheap. Especially my Canadian friends, who pay the highest mutual fund fees in the developed world.
On that, I also looked at adding to the Canadian holdings when they are down.
My stock-holding experience has taught me that the stock prognosticators don't really know what is going to happen with an individual company, even though they make very educated guesses. They don't know the future. And certainly, it's not always going to work out when you buy your companies when they go out of favour. But the strategy only has to work more often than not. And that means being consistent across the stock board. If you let your winners run, they might be able to pick up any slack.
With my index-skimming exercise (done by way of real and meaningful monies, by the way), I wanted to demonstrate that one could replicate an index with 15 or 20 holdings. I also wanted to show that patience and consistency might win the day.
Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.
Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, WMT. 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.