My Stock Portfolio

Traditionally, my discussions herein have focused only on my 401(k) at a former employer. In the interest of full disclosure, I have several more investments than those five mutual funds. I have an active 401(k) with my current employer, a Rollover IRA with assets from a prior employer (which coincidentally happens to be my current employer) (it also has a very small past IRA contribution I made one year to shift my tax liability into a refund), a Health Savings Account with my current employer, and a Roth IRA with a brokerage account.

Primarily as a means to further educate myself on the how-to, I have been investing in individual stocks for the past five years. I have 35 active stocks, including one below zero that should close soon (but excluding a couple other inactive stocks that zeroed out). The reason I keep my stock portfolio in my Roth IRA is the tax-advantaged status of the account, so any profits I realize in this account will not be taxed later.

I was curious how my Top 10 holdings would look, if reported the same way mutual funds report theirs, so I mocked up the list below. 

Week-end 10 largest holdings

(75% of total portfolio assets) as of 12/4/2020

1. NVIDIA Corp. $NVDA

2. Tesla Inc. $TSLA

3. Alibaba Group Holding Ltd $BABA

4. Carnival Corp $CCL

5. Visa Inc. $V

6. WP Carey Inc. $WPC

7. Restaurant Brands International Inc. $QSR

8. Slack Technologies Inc. $WORK

9. Stitch Fix Inc. $SFIX

10. World Wrestling Entertainment Inc. $WWE

The brightest red flag is how my Top 10 represents 75% of my total portfolio assets, so the other 25 stocks only average 1% of the total assets each. Not all my Top 10 are huge winners either. Only the top two have >1,000% return. Unfortunately, my initial investments vary among stocks, although the reported Top 10 is strictly a reflection on the current balance. Only seven of my investments have doubled from the original investment, 11 are showing a loss (which excludes a couple stocks that were full losses), and I have pulled my initial investment amount out of four of my current investments (two in the Top 10).

The most meaningful lesson I have learned from investing in individual stocks is the importance of risk/reward scenarios. I am not lamenting my full losses or other losses. I becomes very apparent (especially after creating a spreadsheet of this portfolio) that the risk is limited to 100% while the returns are unlimited. This does not create a risk-free investing scenario, but it shows how huge returns (>1,000%) by one or two investments can exceed the losses in several losers.

To follow up on what I noted as a bright red flag is the poor allocation. If this portfolio were the bulk of my investments, then I would be more concerned about it. As it is, the total portfolio assets represent about 5% of my overall investments, so I am not inclined to manage risks that this top-heavy allocation could present.

The Full Motley -- 4Q, 2020

Risk management is the core of all forms of management. The definition of risk stems from uncertainty, often being classified by sources of uncertainty. Political risk refers to political instability, among other things. Conventional wisdom would suggest that presidential elections increase political instability. Therefore, if I were a betting man, I would have been placing bets that the market's reaction to an inconclusive election last week was erase all of its most recent gains. As we know now, the market's actual reaction was to soar higher! The Dow even set new record highs this week.

I was recently asked whether I thought markets would still be overpriced at 2018 values today. My response was that once I learned the market does not care what I think, I stopped gauging my market moves based on what I think should happen. I would have placed my money on markets retracting from its gains during a depressed job market and an intentional economic slowdown as a response to the global pandemic. Maybe I know better what the market should do than the market itself. Probably not.

Then again, the nature of risk is that the higher the risk, the higher the return. Perhaps it is not fully unreasonable to question this strong reaction in the face of such uncertainty (plus, the majority of the gains I am referencing occurred after most media outlets had projected a winner, and the latest included early reports of a Coronavirus vaccines). Whether or not I know better, it is truly irrelevant and my decisions should not be based on what I think, much less what I think I know.

In market lingo, those "betting men" are called day-traders. The size of their losses can match the size of their gains, and in the end, day trading results in a below average risk-adjusted return.

For wealth preservation, risk management is tantamount to its success. Thus, instead of taking bets on how the markets will react to any given situation, managing the majority of active portfolios through dollar-cost averaging and periodic reallocations will provide better risk-adjusted returns. When the market introduces strong elements of risk or volatility, an emotional response is innate to the human condition.

In my case, this quarterly reallocation consisted wholly of removing increases (approximately 1.3% of total portfolio assets) from all funds except Total Bond Market Index, so I directed those assets into that one fund.

Young & Wise

Conventional wisdom says that wisdom and youth are mutually exclusive. In life, we start off as young & dumb and grow old & wise.

That is, unless everything learned from all those years of life's lessons changes.

Conventional wisdom currently seems to be a liability in today's market, and truly much of that conventional widom no longer applies. Stocks and bonds have lost their inverse relationship. Interest rates have managed to fall below zero for negative rates. Momentum investing is not as precarious as it had been in the past. In short, we are learning a new set of conventional wisdom for the modern market.

The percentage of assets within index funds and ETFs of total money invested in U.S. equities went from 20% in January 2010 to over 50% by January 2020, a change that even outpaced expectations.

There's a false narrative that big banks prey on the individual investors to siphon their money first, as if they collude to share in the profits collectively. The better comparison would be to that of a poker game. Novice investors are the person at the table that cannot spot the sucker (to borrow a well-known adage).

Modern investing practices, however, may dispel that mindset however. If it is not individual investors preying on index funds, keeping large corporations buoyant after a decline, knowing full well that index funds will have to purchase more units to rebalance the large funds.

Some individual investors, and even money managers, hold to their beliefs that the way things have been is how they will be again. No amount of evidence to the contrary will break their thinking. In a way, it's the backfire effect at play. They reject new information that disrupts what they have seen for themselves in the past, what they have known to be true for so long.

Unfortunately, most truths are only true for so long before things change. Prolonged reliance on proven market wisdom creates its own reticence against it, the reluctance to adapt to meaningful changes in an industry sustained on salesmen repackaging the same products with gimmicks to spark FOMO and buy anew. Like the Gold IRA, for example.

Old jaded men who have achieved enough success to comfortably wrest on their laurels lack the proverbial wisdom that age allots them. Instead, the partly naive youth with wide eyes and open minds reap the rewards when systemic changes occur. To this end, they receive the best of both worlds: youth & wisdom. Until things change again.

The Full Motley -- 2Q, 2020

Only you are responsible for your portfolio.

"Only you can prevent forest fires" was ingrained into our American lexicon during the 1980s. The focus was on the importance of taking individual responsibility for our personal actions that may lead to greater issues, in this case a sweeping wildfire that creates billions in damage.

Personal responsibility has often been an online battlefield, but personal finance is unquestionably one area that requires individual responsibility for personal actions. Unlike uncontrolled wildfires, the consequences are often contained to the individual who is accountable. Social media often endorses both a victim mentality and self-empowerment simultaneously with minimal success. Those two mindsets are difficult (if not impossible) to maintain as an amalgamation.

While sweeping wildfires in the stock market are known as stock market crashes, we are helpless to prevent them. But protecting it from burning our personal accounts can be managed through a few general rules. Creating a target allocation, creating an investment plan and creating investment goals are important because they can answer how to manage through unexpected market crashes. For long-term investing, including wealth accumulation, market crashes are unlikely to disrupt allocations, plans or goals. It may modify them to varying degrees, but focusing on what you can control, instead of worrying over what you cannot control, will ease the anxiety that can be ever-present in a market crash.

My investment plan includes quarterly reallocations, resetting the account balance back to my own target allocation. In my case, when the market plummeted shortly after my first quarter reallocation, I knew that my next reallocation was only 10 weeks away. If the market furiously declined for the entire 10 weeks, then my reallocation would be hefty. If the market fell and then quickly recovered, then my reallocation would be insignificant. Instead, the market fell and then slowly started regaining its losses unsteadily, so this reallocation was relevant.

Unsurprisingly, I pulled money from my two bond funds to place back into the three equity funds. The biggest surprise was the fact that my domestic stock index fund received a very small amount ($50). The difference was mostly in the active domestic equities fund. Individuals selecting stocks had a slower recovery than the broad index. Ideally, those strategic choice will show up in a later reallocation. Otherwise, this active domestic equities fund is a losing investment (because the amount allocated into that fund is returning less than the next closest alternative, i.e. my domestic stock index fund).

Two Truths & A Paradox

Truth #1-Past performance is no guarantee of future results.
Truth #2-The definition of insanity is doing the same thing over & over, and expecting a different result.

Are these two truths a paradox, or is one (or both) simply untrue? The answer is largely in the semantics, as is often the case. Although past performance does not guarantee future results, doing the same thing repeatedly rarely generates different results (most other things equal).

Once I was discussing personal finance with a friend who questioned the benefits of setting money aside for the future with "what if you die early?" To which I sharply responded, "what if you don't?!" As I have discussed before, "what if" can be a precarious game that portends mistakes.

The drivers of personal finance are uncertainty and probabilities. Over time, stocks generally return better performance than bonds or cash equivalents. Likewise, human generally live 80 years. Neither generality ensures that stocks will outperform bonds and cash in any given year any more than it can ensure survival through the year. Regardless, if stocks outperform bonds and cash seven of every 10 years with higher average annual performance for each period, then expecting stocks to outperform bonds and cash over the long run is highly reasonable (the opposite of insanity).

Even when expectations change, it is generally best to stay the course, at least until the changes become more certain. Several years ago, I was talking to a friend about an obligatory market recession because the bull run had been going for so long. She referred me to a source, citing that the man had been projecting this downturn for the past five years, to which I quipped "So, he has been wrong for the past five years." She quickly defended him, before realizing what I had said was in fact true. That bull market has continued fairly strongly through today as the Dow Jones has 30,000 on the horizon.

Until domestic stocks prove to be unreliable performers, they are the best foundation of a growth portfolio for the next 10 year or more. Perhaps decades from now, international stocks will have proven to outperform domestic stocks significantly more often than not, in which case they may become a better foundation for growth portfolios. But projecting that shift today and shorting domestic stocks as a result has not been a reasonable strategy.

The Full Motley -- 1Q, 2020

Another anniversary entry today, starting my 11th year of financial blogging. In that time, I have gone from the recordkeeping department of a finance company to community college for a Paralegal Studies Program into work at a small bankruptcy firm to the legal department of a finance company. During this time, I have been contributing to my Roth IRA and my 401(k) accounts when available (too bad I missed out on that misunderstood myRA by a few months).

There were a couple years though that I did not max out my Roth IRA. Honestly, I did not even contribute to my Roth IRA for that year I was in school. Why? Due to those personal circumstances.

I have been of the mindset lately that financial bloggers need to put more emphasis on the “personal” in personal finance. It is misleading to promote personal finance as a series of rules to follow. Those rules are guidelines or self-discipline, adjustable to circumstances. I have been fortunate enough to max out my Roth IRA for many years, but when financial bloggers say to “max out your IRA,” people think “I cannot reach the max, so that advice won’t do any good.” The end result is a step in the wrong direction. Contributing half of the maximum amount would still be progress in the right direction (with the ultimate destination being financial security). I would love to hear that advice worded as “Contribute to your Roth IRA, maxing it out when you can.” That advice not only supports starting with smaller amounts, but even places that as an expected starting place. It is rare that someone has the financial freedom to adjust their finances immediately. Most have to not only learn good habits but also break their bad habits, and those steps may not happen concurrently.

My quarterly reallocations are almost always moving small percentages. This move saw about 0.7% of the account moving into domestic bonds and international equities, taken predominantly from the domestic equities and a sliver from international bonds. Although it was less than 1% of the account balance, the dollar amount equating 1% has risen significantly over the past 11 years because the account balance has almost tripled since April 30, 2011. There have been no new contributions since that time, and recently, I even learned that my employer put more money into this account than I did. The amount I set aside was not even a large amount (about the sum of my annual income when I was first hired there). Regardless, this account is currently the single largest portfolio of my net worth today.

Patience is a virtue, and patience pays, especially in the stock market. I have my own first hand testament to it, but I read an interview with John Hancock’s Retirement Plan Services CEO Patrick Murphy recently, and I wanted to share it because it is another voice saying what I have for years. His words rang more powerful to me, in large part through his current position and dismal early-life circumstances. (The following comes from Emily Laermer and some of his responses were edited for brevity and clarity by Ignites.)

Q: How did you get into the industry?

I got into this business not to help people accumulate wealth, but to help people avoid becoming poor.

I’m one of six kids. My parents got divorced when I was young, and then my dad died. He left us no life insurance, no savings, no nothing. My mom was left with six kids, and we had to figure out how to fend for ourselves. And we lived on welfare for a long time.

Fast forward, I muddle my way through high school, I get the opportunity to play college football and get an education. And then I took an economics class, and I learned about financial services. And I realized that what happened to my family never has to happen to anybody. It’s tragic enough to lose a parent and a bread-winner, but then to be plunged into poverty because of a lack of planning? That was a big, "aha!" moment for me.

I’m a big believer in the power of financial security. You can break the cycle of poverty by helping people acquire the skills and the habits.

Q: How do you get investors to actually start saving money?

Sometimes I tell them my story. I’m living proof that this stuff actually works — and it works well.

I started saving when I was 22 years old. It’s a real basic formula. Everybody’s trying to figure out how to time the market and how to outsmart the system. It’s not really that complex. I tell them to start early, save as much as they can and then increase over time. Then, just invest wisely.

Q: What plan design features tend to work best?

I’m a big believer in auto features. It’s not that people are stupid; people are nervous and stressed. That creates inaction.

If we can just auto enroll them and auto escalate them, and provide auto advice, then people eventually start to really engage. Then they get confidence, and then they start to learn more, and then they become more proficient. But trying to do all that up front is hard.

Q: You’ve been in the industry for over 30 years. What change has had the biggest impact?

Technology. Previously, it was really people-intensive labor to provide the kinds of services to participants that we can provide now. Now, it’s easy, scalable and cost effective to provide the level of real personalized service that was so expensive and cumbersome 30 years ago.

Now you can provide a better experience for the customer with greater levels of compliance. And quality and accuracy are more cost-effective. We can actually serve more people in a higher-quality way and run a profitable business at the same time.

Q: What trends will most impact the industry in the next decade?

The HSA market is really interesting. Health care is a big competing cost for companies and for employees, as it relates to what prevents them from saving for retirement.

HSAs are a way to invest for future health care costs. A lot of people today use them as a pass-through to pay for current-year medical expenses. But they are also a really powerful tool to help address a growing need in retirement.

What people forget is that their medical expenses might not be that high when they first retire, but their leisure expenses will be really high. And then later, that kind of flips. So they don’t really travel as much, but their health care expenses increase.

Q: What is the biggest challenge facing the retirement industry?

It’s helping customers understand the value that we provide. We’re in an era of fee compression, where everybody wants the lowest-cost thing. And everybody’s like, "Cheaper is better."

Cheaper is not better.

What adds value is helping customers understand the value that we provide to them.



Contact the reporter on this story at elaermer@ignites.com or (212) 542-1226.
Link:https://www.ignites.com/c/2635223/319293/living_proof_that_this_stuff_actually_works_hancock_retirement_chief