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5 Investing Lessons I Learned In 2015

Summary Every year I like to do a recap of the lessons I learned over the preceding 12 months. A 50/50 diversified portfolio of stocks and bonds is likely sitting near the zero line in 2015. At some point we are going to see a turn in this commodity downtrend that leads to a new bull market cycle. In my opinion, a counter-intuitive mindset is still one of your greatest allies when navigating these markets. Every year I like to do a recap of the lessons I learned over the preceding twelve months. I find this exercise to be cathartic in examining past mistakes as well as reminding myself of successful portfolio management guidelines that will serve us well in the future. Many of these lessons also apply to other areas of my life outside of the financial markets as well. Part of this practice also involves reviewing my prior years’ lessons in order to stay mindful of the journey that has brought us to this point. So let’s dive in to the high-level topics that drove the markets and our portfolios this year … Trendless markets require endless patience. Looked at a chart of the SPDR S&P 500 ETF (NYSEARCA: SPY ) lately? It’s gone virtually nowhere over the last 12 months. However, that doesn’t mean it has been completely asleep. There have been gut-wrenching drops and face ripping rallies that virtually no one could have foreseen ahead of time. To add to this sense of frustration is the fact that returns in bonds and cash are virtually flat as well. A 50/50 diversified portfolio of stocks and bonds is likely sitting near the zero line in 2015. It’s years like this that truly test your patience with sticking to your plan versus trying to go find a better system or advisor that rose to the top. Of course, you have to ask yourself whether any supposed alpha this year was driven by a time-tested process or the result of simply stumbling into the right place at the right time. Be mindful of taking on too much risk by chasing performance in areas of the market that appear stretched or are outside your comfort zone. Just because an investment seems cheap, doesn’t mean it can’t get cheaper. Anyone who has been trying to find a bottom in commodities or energy stocks this year certainly can relate to this axiom. There have been plenty of pundits, pivots, and pirates in this group that have been unable to successfully navigate the deflation trade. At some point, we are going to see a turn in this commodity downtrend that leads to a new bull market cycle. This will likely fuel demand for beaten down areas of the market like junk bonds, MLPs, oil and gas stocks, or the futures contracts themselves. The bottom line: We aren’t there yet. Trying to pick a perfect bottom in this market is more than likely going to cause undue stress rather than simply waiting for a more discernible pattern to develop. My grandfather used to say that a little bit of lost opportunity is better than a lot of lost money. That certainly applies in this instance. A counter-intuitive mindset is still your best ally. Remember that crazy summer correction in the market? The one that caused a panic on Wall Street, a lockup in ETF liquidity, and decrees that the apocalypse has arrived? Yeah it turned out we overcame that pretty fast. It was scary for sure, but taking a measured approach to any portfolio changes versus full-blown panic was the better move. In my opinion, a counter-intuitive mindset is still one of your greatest allies when navigating these markets. There is a great deal of pessimism and fear out there. More tactical investors can capitalize on that by reducing a portion of your exposure as prices rise and adding to new opportunities on dips. Long-term investors should be looking to put new money to work on any pullbacks to maximize their average cost basis. Starting something new can be rejuvenating. We all get stuck in the grind of our daily life. Our normal routines can get boring, dull, and allow complacency to set in. One of the ways we combated that mindset this year is by introducing a new premium newsletter service to our blog. We call this the Flexible Growth and Income Report , which is designed for serious investors with intermediate to long-term time frames. Our primary investment vehicles are diversified, transparent, and liquid exchange-traded funds. It’s also one of the few services that implements closed-end funds to enhance yield or seek greater returns. The introduction of this new service allowed us the opportunity to evaluate new themes, interact with new clientele, and challenge our existing market thesis. All of this may seem like additional work at first, but it can be truly rejuvenating in the sense that we are creating dynamic content that is rabidly consumed and used as actionable material. It’s a humbling and inspirational process that we enjoy producing every week. Shoulda, coulda, woulda are a drain on emotional capital. Ever feel like there was that one trade you almost took and then decided it wasn’t right for you? Then it goes on to be a very profitable investment and you can’t seem to get that “I should have bought XX” feeling out of your mind. It’s even worse if there was a trade that you forced, only to find out that it was a big loser in time or money. This seems to be a reoccurring theme when I talk to individual investors about their portfolios. Even very successful investors are haunted by missed opportunities or trades they wish they could have back. There is nothing wrong with a short period of self-reflection if you feel you made a mistake with your portfolio. Nevertheless, spending too much time worrying about something that has already passed you by is a drain on emotional capital. It also keeps you preoccupied from being in the present and the future opportunities that will be afforded to you. It’s not always easy to live in the here and now when we are constantly bombarded with historical results in this business. Yet, filtering out the noise and letting go of nominal miscues will be a significant game changer in your long-term success. The Bottom Line 2015 was a difficult year in many respects. However, it afforded the chance to learn and grow as well. Make sure you take the time prior to 2016 to set goals for your personal, professional, and investment endeavors. This will enable you to benchmark your performance to ensure you are on the right track to meet your ultimate objectives.

SPY Vs. Dividend Growth Portfolio

A couple of weeks ago, I asked you why you think you can beat professionals? This led to an interesting conversation about the difference between beating the market and reaching your goals. I think the most important thing is to reach your financial goals. It’s like registering for a run; when you register for a 10K, you don’t mind if you win the run or not; you focus on your own running objective. As long as you reach that goal, your run is a success. This is also a good mentality to apply when investing. After writing this article, I received an email from a reader asking the question about the difference between buying SPY (Spider S&P 500 ETF index) yielding nearly 2% and building a dividend growth stock portfolio: More often than not, I choose not to buy individual stocks when I compare their yield to SPY, which is a core holding in my account. Can you perhaps do a write-up of SPY? It has all the same advantages a good dividend stock has. It has dividend growth, it has a reasonable yield, dividends reinvested in SPY will have the same snowball effect. But, it has a KEY advantage that individual stocks do not – diversification. So how can I determine if an individual stock is a better buy than SPY? When is the decision to to buy an individual stock for its dividend better than my default position of “keep it in SPY”? What return should an individual stock give me for the risk of abandoning SPY’s diversification? What risk premium? I found his question quite interesting as it positioned a global well-diversified and dividend paying investment vehicle trading with very little effort vs. a handpicked dividend growth stock portfolio requiring continuous management. Let’s dig deeper to see what both strategies have to offer… SPY is Not a Dividend Growth Portfolio First, let’s be honest, SPY is not a dividend growth portfolio. This is not its function, regardless if the members of the S&P 500 pay enough dividends to have a yield around 2%. When you look at its past 10 year dividend history payment, you understand better why SPY can’t really replace a dividend growth portfolio: As you can see, dividend payments are quite hectic. This is normal as within the group of the 500 biggest companies, you will have a little bit of everything: Strong growth companies not paying dividend Classic dividend growth companies Companies going through troubles and cutting their dividend Etc. Being a “big company” is not a gauge of success and it is also far from an indication you will see your dividend payments growing. It becomes obvious when you compare the dividend growth in % over the past 10 years compared to a classic dividend growth company such as Johnson & Johnson (NYSE: JNJ ): JNJ dividend payments increased steadily year after year and offer double the dividend growth payment than SPY over this period. Besides the dividend growth test fail, there are many other reasons why I’m not a big fan in investing in SPY as a dividend growth investor: It doesn’t follow my dividend growth investing philosophy. Dividend payments are hectic. SPY includes too many “bad companies” I wouldn’t pick. The overall market is not what I want to buy. In the end, there are very limited similarities between a dividend growth portfolio and SPY. The dividend yield may confuse investors, but don’t fall in the trap; if you are looking for a dividend growth investing vehicle, SPY is not the one . What About a Dividend ETF Then? One question leading to another, I wanted to finish this article with a comparison of a dividend growth ETF vs. a handpicked dividend growth portfolio. I’m all about efficiency in life and if I could spend a big three minutes to initiate a transaction in a dividend growth ETF and forget about my investing strategy for the rest of my life, I would gain several hours each year to do other things than manage my portfolio and reading about the stock market. Let’s take the Vanguard Appreciation ETF (NYSEARCA: VIG ) dividend growth and compare it to JNJ again: I’ve taken the five-year view as there were unrealistic increases back in 2007 (dividends doubled within three quarters) and it wasn’t giving a good comparable. Still, even by using the five-year dividend growth period, we can see how JNJ shows a pure and systematic dividend increase while the VIG payment increase is quite hectic. Nonetheless, VIG dividend payment growth is double that of JNJ, one of the most appreciated dividend growth companies on the market. As far as stock price goes, we are at the same pace: In other words; while VIG dividend growth is hectic, any investor would have been better with the ETF than with JNJ. However, it is unfair to compare a diversified ETF with a single company. This is why I did the exercise with my top 10 dividend growth stocks as a portfolio vs. the same ETF: Unfortunately, I can’t perfectly compared this growth portfolio with the VIG as not all data can be used in 2011 and Disney (NYSE: DIS ) decided to pay dividends twice per year instead of once a year explaining the virtual drop on the graph (but it will go back up once the year ends as a second dividend payment will be issue. One thing you can see is that the dividend payment for most companies is steadily increasing without any big jump (besides BlackRock (NYSE: BLK ) in 2011). However, I can compare the price evolution of the portfolio: The average stock price gain is 114.65%, more than double the VIG. Conclusion The conclusion of using ETFs vs. handpicked dividend stocks is similar to the conclusion of my previous post: First and foremost; as long as you reach your financial goals – you probably have the right method, Second; market index ETFs such as SPY are too wide to represent a dividend growth investing strategy. They are good products, but not for dividend investors, Third; similar to market index ETFs, dividend ETFs often includes a too wide number of companies. Handpicked dividend growth stocks, if done wisely, can beat such products. In order to make sure my investment strategy works, I use the VIG as a benchmark. So far, I’m very happy with my results and they justify the efforts I make to manage my portfolio. I think dividend ETFs can help you achieve your financial goals as well if you are not interested in taking the time to manage your own portfolio but still wish to invest in a vehicle paying dividends. Then again; there are no right answers besides the one that makes you comfortable with your financial objectives!

The Recent Insider Selling Tells You Zip. Insider Buying Says Much More

In the ongoing debate about whether stocks are cheap or too expensive, the bears got some assurance from news that insider selling is on the rise. Investors often watch what insiders do because insiders are supposed to be better informed about their companies than the rest of us. So if insiders are selling, it must be because they know stocks are overvalued. Right? Not necessarily. I’m in the camp that believes stocks in general are too expensive right now. I would not be surprised to see another round of insider selling in the near future. Yet insider selling activity has no bearing on my view. On the contrary, I believe insider selling tells us very little about overvaluation. That’s because there are so many reasons why insiders might sell stock. A conviction that the stock is overvalued is only one possibility. Insiders might sell stock simply to raise cash. After all, insiders sometimes receive a relatively large proportion of their total compensation in the form of stock or options. Actual cash might make up a smaller proportion. So if these insiders want to buy a new home or send their kids to college, they might sell stock to raise cash. Insiders might also sell stock to diversify. It’s simply too risky for anyone to have all of their labor and most of their wealth tied up in just one company. It makes perfect sense for insiders to sell stock every once in a while to spread their wealth into other assets. Here’s yet one more reason why insiders might sell. Many employees are compensated at least in part with stock options. As a result, they can get hit with a tax liability when they exercise their options. They might sell some of the stock they received from exercising the options just to pay Uncle Sam. That’s not to say that a sudden spike in the amount of insider selling couldn’t be something to worry about. However, knowing that there are so many reasons why insiders might sell, I have to conclude that insider selling activity is not a useful signal of a market top. Insider buying is another story entirely. There are many reasons why insiders might sell, but there is only one major reason why insiders would buy. They buy because they believe the stock is undervalued. It’s true that a new member of the board of directors might be encouraged to buy some stock just for appearance’s sake, but that’s an exception to the rule. If insiders are using their own cash to buy stock, that a bullish signal. This just happened at one of the companies on my Bottom Line’s Money Masters recommended stock list. This company recently announced quarterly earnings that fell short of expectations. As often happens in such cases, the stock sold off in response. Yet my analysis convinced me that this stock is extremely undervalued. Apparently, several insiders agree. At least five of them purchased shares following the selloff. The CEO bought the most, spending $185,000 of his own money. That might not seem like a lot, but he didn’t acquire the stock as a result of an employee ownership plan or the exercise of options. He made a direct purchase on the open market using real cash. This CEO already owned a large stake in the company. The fact that he is willing to add to that stake should send a clear signal to other shareholders that the guy running the company is convinced the stock is cheap – so convinced that he is putting his money where his mouth is.