Dear Mr. Market:
The holiday season is upon us! We will soon be spending time with friends and family at gatherings as we celebrate this time of year. Let’s take a moment to look at a conversation that commonly takes place this time of year:
John – “How are you doing? I heard you moved on to a new job a couple of months ago, how is that going?”
Jane – “I am great! Yes I did start a new job and am really excited about it, the company is doing great and I am excited about the future.”
John – “I’ve heard it’s a great place to work – their stock has been doing really well! How about the stock market this year, crazy huh?”
Jane – “Their stock is amazing! It’s helped my portfolio a ton, I’ve also got a couple of stocks that got me back on track and might make retirement come much faster than I thought!”
John – “Really? I haven’t invested much in individual stocks. Do you do this yourself or have somebody that helps you out?”
Jane – “I read a lot and buy some newsletters but basically I do it myself. It really isn’t that hard.”
John – “I just don’t have the time for that. What has worked out so well for you?”
Jane – “Well here are a couple of names you should look at that have been doing really well for me this year…”
And so the story goes… John writes a few stocks down on a cocktail napkin and puts it in his pocket with a smile as he thinks about the incredible growth his portfolio will soon experience. On Monday he signs into his online brokerage account and without doing any research or due diligence he buys large positions in 3 different stocks with the blind assumption that they will go nowhere but up…but do they?!
Let’s take a moment to look at some specific examples and bring this conversation back to reality. The market has delivered some impressive results, as of this writing the S&P 500 is up 12% for the year. You don’t have to look far to find a handful of stocks that have posted amazing returns this year, for example: Intel Corporation (INTC) +40%, Southwest Airlines (LUV) +103%, Under Armour Inc. (UA) +61% and Facebook (FB) +38%. These are just a handful of some large and well-known companies that will most likely come up in conversation this holiday season. If you dig into some lesser-known companies, returns up to +300% are not hard to find. Now let’s not get carried away here…we are not saying you should run out and buy these stocks right now…in fact we are going to say something that might surprise you! We would suggest that you don’t buy any of these names and not allow yourself to get caught in this never-ending game of chasing returns.
Take a look at the first name we mentioned regarding YTD returns – Intel Corporation (INTC). We actually just sold this stock for most clients and as you might know…selling a stock is much harder to do than buying one! The performance this year has been stellar and who wouldn’t want to see a portion of their portfolio increase 40% or more? If you compare the results to a broad index like the S&P 500 the short-term performance (YTD and 1 year) is impressive but when you look out at longer time frames (5 year and 10 year) the story suddenly starts to change…
INTC S&P 500
YTD 2014 40% 12%
1 Year 52% 14%
5 Year 88% 89%
10 Year 50% 76%
Often investors are caught only looking at the short-term numbers that catch their attention when in reality what they need to look at is a much longer time frame. Are you planning on retiring in the next few weeks or is it several years down the road? Don’t be caught chasing returns as they rarely come to fruition. Is it more exciting to invest in high-flying stock that you can share at cocktail parties instead of saying that you own a ‘boring index’ like the S&P 500? Sure it is… but the average investor doesn’t have the time or energy to manage individual stocks effectively.
What many investors don’t realize is that when anyone starts sharing impressive investing results over a cup of holiday cheer is that they can actually own many of the same names if they own the S&P 500! This ‘boring’ index is comprised of 500 large-cap companies and accounts for about 75% of the U.S. equity market by capitalization. In case you’re curious…INTC is number 15 on the top holdings of the S&P 500. Owning an index might not have the sizzle of many other investments but it delivers long-term returns that can help make any investors goals a reality.
“Don’t look for the needle in the haystack. Just buy the haystack!”
― John C. Bogle, Founder of the Vanguard Group
We aren’t saying that individual stocks don’t warrant a place in your portfolio! What we are saying is that you need to have a plan and you have to be disciplined to stay on course and stick with it. The trap that many investors fall into is they get a tip on a ‘hot stock’ and then rush to put 10% or more of their portfolio into a company they know zilch about! Having a concentrated position like this in a portfolio can have a profound impact on returns both on the positive side and the negative! Below is a summary of the 10-year performance of INTC:
That is quite the roller coaster ride for the average investor! What are the chances that investors timed their purchase or sale of INTC to perfection and locked in some impressive returns? It is safe to say that once emotions come into play that most investors did not walk away with double-digit positive returns.
As we have stated in previous articles, investors need a plan before they need a stock. They need to understand what their goals are and how much risk they are willing to take in order to reach those goals. Once the plan is put in place it should be revisited at least once a year and most importantly it is vital that individuals are disciplined and don’t deviate from their plan. Make sure the plan is specific to each individual and not a boilerplate allocation from a website or presented by the employee of a financial firm or bank with bright colored pie chart on a laminated sales piece! Your plan should be customized and specific to you and your situation.
A properly constructed investment plan will allow for some flexibility within it and that is where individual stocks can come into play. Could a company like INTC warrant a place in your portfolio? It most certainly could; just make sure your premise for buying it or any stock goes deeper than “Jane” telling you she read a lot about it. In our little mock dialogue above, John is inclined to buy a stock based on absolutely zero credentials or investment rationale given to him from Jane. He simply is willing to buy something based on a casual conversation.
A properly constructed investment plan will give you peace of mind that you are on track to reach your goals. If you find yourself in a conversation over the holidays where someone is sharing their ‘hot stocks’ you won’t be tempted to rush out and blindly purchase anything. Instead you can simply nod in agreement and know that with the plan you have constructed you might already own that company as well. You can then move the conversation to other topics that you truly enjoy.
If you need help developing a plan or would appreciate a review or your current portfolio we would encourage you to contact us with the form provided below.