Week 24 - Equity Summary

Situation: In the previous two blogs, we used virtual investments of $900/mo (beginning on 2/3/97) in representative Core Holdings (XOM, MMM, UTX, NSC) and Lifeboat Stocks (JNJ, WMT, NEE) to illustrate how we’d set up the equity half of a personal portfolio. Of our virtual dollars, two-thirds were invested in Core Holdings ($150/mo in each of 4 stocks, or $600/mo) and one-third in Lifeboat Stocks ($100/mo in each of 3 stocks, or $300/mo). This distribution reflects the ITR Goldilocks Allocation strategy (Week 3).

This week’s blog demonstrates the outcome of making 179 consecutive monthly purchases into those 7 DRIPs, ending on 12/1/11. <see attached spreadsheet> While the total investment was $161,100, the total return was a healthy $324,036 (TR = 7.74%/yr). The benchmark we are using is SPY, the Exchange Traded Fund the mimics the S&P 500 Index. SPY had a total return of 2.55%/yr based on 179 consecutive monthly purchases of $200 (commission of $4 per purchase). The total investment in SPY was $35,800, which then grew to $43,975. Inflation over that same 15 yr period was 2.32%/yr, as measured by the Consumer Price Index. In other words, our 7-stocks beat inflation by 5.42%/yr and beat the market by 5.19%/yr. In a future blog, we will provide a Credit Summary which will detail the outcome from investing $900/mo in bond funds as per a Goldilocks Allocation.

Summary: Do-It-Yourself (DIY) investing has obvious cost savings compared with going through an intermediary, such as a mutual fund manager. More to the point, it requires an investor to take personal responsibility for acquiring a working knowledge of investments and performing a modicum of research using the web. The goal is to “maintain what you’ve obtained” instead of participating in a market panic by selling your shares. Markets are moved more by fear than greed, such as the fear of a “margin call”. Many investors rely on help from borrowed money, i.e., by investing borrowed dollars and using the purchased stock as collateral for the loan. A “margin call” occurs when the broker requests additional capital (cash) from the investor to back an investment that has lost value. That is, the original loan is no longer backed with adequate collateral. As a DRIP investor on auto-pilot, however, you welcome a market panic because you are buying more shares than usual with your monthly investment. So, when should you sell a DRIP chosen from stocks in our Master List? We know of only 4 conditions that would trigger that:
   a) you need the money to retire;
   b) the company has gone 18 months without raising its dividend;
   c) the company has gone 18 months without having a dividend yield higher than the yield on the S&P 500 Index;
   d) the company has resorted to issuing bonds rated lower than BBB+ by S&P.

Bottom Line: Our ITR blog is for value investors who aren’t interested in buying stock with borrowed money or selling stock in a falling market. These are called "Rip van Winkle" investors, in honor of the off-hand comment from an investment guru that he’d have done better by not touching his portfolio for 10 or 20 years.


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