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It Takes 1 Stock to Crash Your Portfolio And 1 Stock to Bring It Back to Life
Posted by: The Dividend Guy Blog (IP Logged)
Date: August 13, 2012 08:09AM
Investing can be pretty frustrating sometimes. You can make a lot of okay and good trades to make some decent profit. But if you have the bad luck to pick a poor company, your whole portfolio can be damaged. I just wrote the word “luck” in an investment blog… man! I should have written “if you have the lack of discipline to deviate from your investing strategy”! It is true that you might run into some bad luck when you select your own stocks. But most of the time, when a trade goes wrong, it’s because you haven’t followed your investment strategy. If you have followed this blog for a while, you probably know that I didn’t stick to my investment plan and I’m paying the price for it this year.
I recently published a rare guest post on this blog called The Big Miss. It was a very good article that mentions if you concentrate solely on avoiding the big miss (e.g. not gambling your money in the hopes of high returns), you will become a successful investor (or at least you won’t be losing your money stupidly!). You know already that I’ve lost a lot of money on my VNP trade. Out of curiosity, I wanted to see where my portfolio was when I looked at the overall picture starting at the beginning of the year. Here are my year-to-date results (as at August 6). No proportions are calculated.
Please note that I recently bought STX and therefore, I don’t have a stock showing 92% year to date in my portfolio. I didn’t calculate the real proportion as I just wanted to see how my stocks were performing compared to each other. The purpose of this exercise was to see how one stock can influence the overall result of the portfolio. This chart shows 10 stocks: one superstar, STX, and one incredibly bad stock, VNP. Let’s see what the numbers have to say:
The overall portfolio return is 9.14% (if you only do an average of all year-to-date returns). But things get interesting when you take off STX (after all, I only bought it a month ago). The investment return drops to -0.07%. If you look carefully at the chart, you’ll notice that I have only one losing position VNP. The problem is the position lost 60% since the beginning of the year. If I take off my Big Miss, I get an overall portfolio return at 7.45% plus dividends (which is over 3%). Then, the total return of this portfolio is over 10% if I count the dividend payout. Not too bad for an “amateur.”
This small experience shows you, once again, the importance of selecting the right stock and not trying to hit a home-run with a risky stock pick. If I had stuck to a dividend investing strategy, I would be making some good money right now. In fact, all my trades are currently making money. It is true that I lost money on ZWB not so long ago, but I used the proceeds to buy STX which has already recouped the loss from my previous trade.
I’ll be keeping VNP for the moment for two reasons:
a) The future looks brighter for the company (solar energy is going better than we think and First Solar, a major client, is going in the right direction after several speed bumps).
b) The forward P/E ratio is interesting and should reward patient investors.
For now, I just hope that my bad trade will eventually pick up. Since the rest of my portfolio is doing great, I just need this one stock to recover so it doesn’t sink my entire account!
Stocks Discussed: STX, ZWB, VNP,