20 Years Of Blogging! Part 2

Part 1 took a look the evolution of the blog and for Part 2, I want to try to look at how portfolio process has evolved and track how I view life milestones as related to things like retirement. 

Starting with portfolio construction, we've always placed a emphasis on holding long term. The chart captures most, not all, of the names that I've held for clients since I started doing this at my old firm. It shows three stocks that have outperformed the S&P 500 and three that have underperformed.

The names aren't important for this post. The three underperformers are all names from defensive sectors with higher dividends. The chart is price only and the yields ranged from mostly around 3%, up to 4% occasionally (one has been closer to 4% than 3% pretty consistently). The total return lag isn't as big as it appears on the chart but they clearly lagged. The outperformers are growthier, with two out of the three coming from sectors you'd expect to see more growth and so larger declines potentially too. 

You see charts like this as a younger investor and maybe it makes less of an impression as opposed to having lived through it first hand. It has given me greater respect for the concept of ergodicity, the natural inertia for markets to go up far more often than not. Two of the three laggards went down far less in 2008 as did one of the outperformers. The third laggard was down a little worse than the S&P 500.

Here's the same batch just for 2022.

If they all go up together, then they will probably all go down together. I don't remember where I got that one but both charts show the importance of owning stocks or ETFs with different attributes that react differently to different types of market environments. If you are going to go narrower than broad based index funds, then I think it is important to have some holdings that at a minimum can be reasonably counted on to go down less. For my money, I would want to expand that to having some holdings that can be reasonably be counted on to go up when stocks go down. Obviously, if it can be reasonably expected to go up in a down market then is will probably go down in an up market. 

This has also reiterated how important patience is in investing. There's another batch of names in the portfolio that have been maybe been in there 12-14 years. Same thing, some big outperformers and some laggards but again they bring different attributes to the portfolio. 

The evolution of alternative strategies and my willingness to explore them has helped the portfolio too. They don't all work out as hoped but I believe they have helped considerably in smoothing out the ride. The ramp up process to using alternatives is also an exercise in patience. The other day I mentioned that original blog site is gone but that I can see the posts in the blogger template. On Christmas Day, 2005 I wrote about alternatives including a look at the Merger Fund (MERFX). I didn't add that fund in until two years later. Sometimes I just know it will work like BLNDX and BTAL, but plenty of times it takes a while for me to draw a conclusion one way or another. Where I am using more alts these days in place of traditional fixed income, I don't think the process has sped up any. 

I believe I place greater emphasis on smoothing out the ride. This is for two reasons. One is to spare or at least minimize putting clients through the emotional ringer like during the soon to be forgotten Great Hiccup of August 2024. Every time I tell a client "I don't know what the market will do but this decline will not impact your income needs," I can hear the relief in their voice. There is also the reality that all advisors have clients who take way more out than is safe. One client has been taking out 10-15% for 18 years. Smoothing out the ride lessens the damage from that sort of behavior. I don't know if he will ever deplete this account or not but he's very lucky to have made it so long without doing so. 

Another small change in portfolio management is that I've been willing to have zero exposure to the energy sector. Zero exposure to a sector is a big bet I used to say.

The simple observation is that the energy sector is broken. The volatility for a sector is off the chart but there has been no terrific growth to compensate for that volatility. From the top down, any argument for investing in oil is weak. At some point I'm sure it will heal but I have no idea when and so it just makes sense to avoid for now. 

On a personal level, not much has changed. Things have evolved but not really changed. At 38, I figured I would do the same work forever without much interest in retiring. From the standpoint of never knowing what the future you will want to do, I didn't wake up one day at 50 and say "oh man, I gotta make a change" which is something that happens to plenty of people, maybe not 50 exactly but you get the idea. 

In terms of lifestyle ideas that I've shared, I've tried to walk the walk on that. I've kept myself physically fit, invested time into creating income streams in the future if needed, stayed curious and we continue to live below our means. All of these things make life much easier. 

The biggest addition to my life might be that I've become much more of a health nut. I've always lifted weights and hiked but beyond saying "don't drink soda," my understanding of the role diet plays in successful aging was woefully lacking and so I've spent a lot of time trying to learn more. I'm far more involved with the fire department than I used to be. I went to training and responded to calls but being chief is obviously a significant leveling up of engagement. 

I've never been much of a goal setter in terms of thinking about the next 20 years but my priorities of being healthy, happy at home, owning my time and not having financial stress (this does not require being rich) are still front and center for me. My belief in very actively volunteering has not waivered, if anything, I believe that even more than I did. 

So much has happened in markets in the last 20 years, I'm not sure if hoping the next 20 are just as interesting is a good thing or a bad thing but I hope to be blogging about it all the way through. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.