There are two extremely good reasons why your portfolio may not be "performing" (whatever that means) either as well as you would like or as well as your buddies say that they have been doing... since last May anyway. But let's define our terms before digging any deeper. Most of the time, investors are content to observe the steady growth of their portfolio capital, as income and trading gains add to their asset base, while the ebb and flow of the markets remains in a relatively boring "trading range". They can see the steady progress being made toward the goals that they established for their portfolios. And most investment portfolios do have both a set of reasonable goals and a plan for moving in their direction. Performance is a measure of this movement toward our objectives and it is generally considered a long-term, personal proposition. Income securities are expected only to produce dependable income, and equities are expected to produce growth in the form of realized capital gains. Unfortunately, Wall Street has created its own definition of performance, one that has nothing to do with the structure and design of your portfolio.
The second definition concerns the design of an investment portfolio, as opposed to an investment account containing any number of unrelated speculations. Investment portfolios (by my definition) are comprised of both Equity (stock market) investments and Income Producing investments. Both have their separate purposes within the portfolio (growth and Income, respectively) and each can react differently to the same economic, political, and market stimuli. So don't get all worked up about some short-term divergence between the experiences of a portfolio based on quality, diversification, and income vs. one that is fueled by greed, speculation, and derivatives. (For nearly a year, value investors experienced upward-only account statements... that after a long-term positive run that had extended for nearly seven years, with Market Value growth four to five times greater than the DJIA in the same period.) Instead, spend some time trying to understand the nature of the alien speculations that are tempting you to consider a return to the dark side. The dot.coms have been replaced with Index ETFs, precious metals, and currency futures.
And then there's the Investment Plan, and it can't safely be: "I'm going to jump in at the end of every new trend, gimmick, product, and hot number so that I won't ever miss out on anything." Wait a minute, that's what wiped out your 401(k) the last time around! No, of course you don't know that it's the end of the run up. But it's sure not the beginning and its probably expensive to make the change. Now here's a plan that has worked for decades: "I'm going to buy high quality, profitable, dividend-paying companies when they are down in price, especially in unpopular groups of stocks when they fall from grace. I'm going to diversify, though, at the 5% cost basis level and take profits whenever I can. I'm also going to buy good diversified income producers, add to them when prices fall and take profits when they rise."
When investors start to question why their Municipal Bond portfolios are trailing the gain in the Dow, or when retirees start to buy gold bullion instead of groceries, something is wrong. And it's the same ole stuff that produces the greed and fear that lead to investment-program-destroying mistakes every time! So lets look at the performance of the Dow, to gain some perspective. The Dow is comprised of just 30 stocks, no bonds, no CEFs or ETFs, gold, currencies, or foreign companies. Those 30 stocks are not quite as special as you have been led to believe: (1) Only eight are A+ rated, or real Blue Chips, and two of those are down more than 20% from there 52 week highs, while four others are down 10%. (2) 60% of the Dow stocks are rated A - or lower, and nearly 10% of those are not even considered investment grade. (3) While the Dow sits near its highest level in seven years more than 100 Investment Grade stocks are down 15% or more from their 52 week highs. So what's actually up within the Dow?
The DJIA has gained only 2.6% per year since its last Peak, about seven years ago. (The S & P 500, in case you are curious, has not done nearly as well, gaining only .3% per year during the same period.) And during the dot.com bubble, you ask? While both averages were escalating, there were significantly more stocks going down than up, and many more striking new 52-week lows than 52-week highs! Yet you are mesmerized by this mystical illusion of portfolio analytical capability. This no longer prescient average is still worshipped as the Numero Uno Blue Chip Indicator, the pre-eminent gauge or benchmark for assessing the performance of any portfolio... irrespective of content, purpose, and cash flow, whatever. The Wall Street brainwashing machine is an amazing thing to behold.
The second obvious force that has impacted Market Value Growth over the past few months is the credit crunch in the financial markets and the serious rise in interest rates that preceded it. The Market Values of rate sensitive securities have suffered accordingly, and the Wall Street/Media mis-information machine has scared you to death about the viability of just about everything. But the fancy restaurants remain full, the roads jammed, and weekend public golf course walk-ons unattainable. Relax, buy bonds at lower prices, and don't sell them to lose money. There have been no defaults, and no dividend cuts. It's a perceptual problem for certain, it is part of the income investing playing field that you just have to become more comfortable with.
And then there is the greed food emanating from Wall Street, designed to make you uncomfortable with what you own and desirous of the new stuff that's ever so tasty... not to mention over-priced and more speculative with every up-tick. Index funds propel some stocks to higher valuations while others wind up begging for attention. This is the same spiel people, which propelled the no value "sector" to prominence in the late 90's. Index funds will crash just as every other fad has in the past. What will survive? Value stocks will survive. Municipal Securities will survive. REITs and CEFs will survive. When will it happen? Does it really matter?
May the force be with you!
The KGIS investment training package includes: Dinner & cocktails, optional Q & A on the golf course, one (optional) personal investment meeting that can cover anything you want to talk about, two private, on-line, workshops at your convenience (a $70.00 value), and a copy of "The Brainwashing of the American Investor".
