Portfolio Review – February 2018 – Stock market volatility makes a comeback

Stock market volatility came roaring back in a big way this week. We saw days where the stock market moved more in an hour than it moved on a weekly basis in the past year. It wasn’t wholly unexpected given the flat stock market volatility we’ve had for such a long time. As an example of these calm investing waters, my portfolio has gone up 16 straights months before this one. That’s a big testament to how good we’ve had it as investors.

The S&P hasn’t had a monthly loss of -1% or more since October 2016. That’s a crazy run of solid returns that had to end eventually. One has to look all the way back to January/February 2016 to find a month like this one. Back then the stock market fell over 5% and my own personal portfolio was down 4.5%. The good part was it rebounded in a big way the month after with my portfolio growing over 11%. Will the same happen here or are we due for a longer correction?

During times like these, it’s important to remember that the stock market is often volatile. Returns won’t always come as easily as they have since 2008. The recent week may seem horrendous but the S&P 500 is only down 4.8% since my last update. 4.8% seems like a lot but it wouldn’t even crack the top 20 of the worst S&P 500 losses in a DAY.

Losses on paper are just that if you’re a long term investor. History has proven that holding tight and buying more in times like these has rewarded investors. We’re still far from what could potentially happen as stocks have historically had a max reduction of 50%. If this month bothered you then know that it’s far from the worst that can happen if you’re fully invested in stocks. Keep that in mind going forward and maybe revisit your asset allocation if 4.8% sends you running towards the sell button.

The truth is that the Schiller PE ratio is still elevated and may give credence to further downward movement if worries about interest rates persist. The plus as I see it is that after years of stalled earnings, earnings growth is emerging again. According to factset, earnings increased 13% from 2012 to 2016. That’s not per year, that’s the total earnings growth for that time period! That’s a terrible rate any way you slice it and is one of the big reasons why the P/E 10 has expanded so much. Stock prices have soared despite earnings staying pretty flat. That changed in 2017. 2017 growth is nearly 11% and 2018 is slated to grow at nearly 19% due to the new tax law.

So why is the stock market dropping now?

Earnings growth is great news for sure but it doesn’t always mean growing stock prices. One of the reasons the stock market has returned so much over the past years are expanding P/Es. Low treasury yields and the lack of alternative investments have mean investors have flooded into the stock market sending valuations through the roof.

Now, we that we see growing earnings, we’re also seeing growing yields. Growing earnings mean a good economy and growing salaries and potentially inflation as well. On top of that, the fed is unwinding their QE program which impacts yields as well.

All that is causing yields to rise and giving investors another place to hold their cash. If yields on treasuries are suddenly more appealing then investors may not be as willing to pay such high P/E ratios for stocks anymore. I talked about this effect in a post before where I argued that low yields meant that the stock market isn’t expensive.

Now that the yield is rising, is the stock market expensive? Growing earnings SHOULD indicate high stock market returns but not if the market P/E shrinks closer to historical norms. P/E expansion has driven the stock market returns of the past few years. It’s possible that the shrinking of the P/E may mute the stock market returns of the future even as earnings grow.

As always, it’s impossible to say where the stock market goes from here. I’m not worried if they go up or down. As I recently on twitter, it may get worse, it may get better, as long as you’re sleeping fine, what’s it matter?

From the perspective of a long term investor, months like this aren’t bad. They allow me to buy securities at a better price and higher yield than I was going to buy them for last month. That’s not a bad deal.

From the perspective of someone who likes to see my portfolio growing every month, months like this aren’t great. I was $500 away from 500k last month and I’m pretty sure I’m even further away this month.

As a reminder, my portfolio was at $499,535 last month. 

The Portfolio

portfolio

My portfolio now sits at $482,642.91!

I was so close to 500k but now I’m nearly 18k away! There was a point before the recent correction where I was up above 500k so I did taste being a half-millionaire for a brief time but I’ll have to wait some more before it actually happens during an update.

This month, my portfolio fell by nearly $17,000 or a decrease of 3.38%. That’s the biggest dollar reduction I’ve had an investor since I started tracking this metric. However, the loss from January 2016 to February 16 was bigger on a % basis as my portfolio dropped by 4.35% that month.

It seems bad but the reality isn’t that terrible. My portfolio was down nearly 17k here but that brings me back to just about my 12/10/17 total. In that month, my portfolio was up nearly 16k. That was preceded by months where I was up 12k, 12k, 11k, 11k, 10k, and 9k respectively. On top of that, I haven’t had a portfolio reduction since my 9/11/2016 update.

It’s been a great run to be an investor and if this month is the start of the reverse for a while then so be it. That sort of risk comes with investing.

This time last year, my portfolio was sitting at 384k so I’m still up nearly $100,000 even with this month’s drop. I definitely didn’t put in 100k into the market since then, probably around 30k at best.

I’m a long term investor so months like these aren’t terrible for me. I don’t need the money for quite some time so I’ll keep buying when stocks are up and keep buying when stocks are down. If they stay down for an extended period of time then that just means I’m now getting a slightly better deal than I did a month ago. As long as earnings keep growing and the economy stays healthy in the long run, then this is a winning strategy.

My return of -3.38% was better than the S&P 500 and that’s to be expected. Bonds in my portfolio are there for a reason and its to help with months like this one.

My biggest holding UNH also had a slightly better negative return due to healthy earnings. In fact it soared into the $240s and became more than 20% of my overall holdings. Knowing that my large cap was already overweight, I decided to sell a few shares. The other reason to sell was that I’m not a huge fan of having 20%+ exposure to one security. That turned out to be lucky timing. Amazon announced their healthcare partnership right after and then the market tanked. I still hold a large position in UNH but it’s slightly smaller now.

My taxable account was down 6.7% this month, a good part of that driven by the sale of UNH. Tax-advantaged account was down 4.1%. My cash position was up 21.9%.

Cash now makes up 7.4% of my overall portfolio. That’s high but still below the 10% maximum my investment plan calls for. This cash position may be good if stock market volatility continues. I’m eager to take a look at my asset allocation after all these moves and see where I can deploy this cash.

Asset Allocation

asset allocation

I spent a good portion of the last few months attacking my bonds. Once the stock market started to move south, I knew I was probably OK there and moved purchases towards REITs which were also behind and falling quickly due to rising rates.

This turned out to be a decent strategy as I’m not too far from target anywhere. Let’s see the results.

assets

Poor performance in the U.S. stock market is the driver of the changes this month as is my sale of a few shares of UNH. Those two took almost all of my US securities down versus last month. My recent purchases targeted U.S. REITs and those are doing better this month.

As expected in a stock market sell off, bonds are above target now. It’s good that certain things zig when others zag as that’s the point of an asset allocation plan. I was able to sell UNH at an opportune time and buy more bonds because of this plan. The theory is that I’m buying asset classes when they’re priced well in relation to others. Recently I was buying bonds because my stock allocation was too high and now I can switch back to buying stocks. I avoided buying right before the correction and can now buy at lower prices. Thanks asset allocation plan for helping me make reasonable decisions!

International didn’t change much from last month as those securities did slightly better than the U.S.

My strategy right now isn’t to sell securities to buy new ones. Since I’m so close to my targets in most classes, I can just push new contributions towards the underweight ones and fix my shortfalls that way.

That means the strategy for next month is as follows;

  • Target contributions towards US REIT, US Small Cap and US Mid Cap in that order.
  • Utilize cash to purchase attractively priced individual securities.

My 401k has all those asset classes represented so it’ll be easy to direct contributions that way. My small bonus is due in a few weeks so that might allow for an opportunely timed contribution if this stock market volatility continues.

I’m also keeping a keen eye on any high quality individual stocks that drop to an attractive range. If there’s a few down days in the next week then some good bargains may start to emerge. I have my eye on GOOGL, DLR and a few others if there’s another sell of next week. Down months are never great but it’s part of being an investor. Long term investing is all about continually investing during good times and bad and if bad times are ahead then I’ll keep pumping money in until the good times return.

That’s it for this month’s update. Thanks for reading and let me know how your portfolio weathered this month. Are there any stocks that look good to you now?

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8 thoughts on “Portfolio Review – February 2018 – Stock market volatility makes a comeback

  1. Nice article TITM! I like how you talk about diversification in all aspects. My portfolio is about 1/100 of your total so the drip last week caused something like -300 Euro or something like that. I didn’t really flinch and doubled my position in O. 🙂

    1. It’s a bit harder to bear the losses once the portfolio gets bigger but still no big deal as long as one is comfortable with their asset allocation.

  2. Hi Time, Nice summary. The last 2 weeks has certainly taken a chunk out of my holdings. The good thing is it’s easier to find some more reasonable values that at the market peak. I have added to VYM and SO, but have largely been sitting on the sideline watching the action. Tom

    1. For sure, I won’t complain about the money flowing into stuff that’s better priced right now. I actually have a few individual stocks that are nearing my price target too which hasn’t happened in quite some time.

  3. Nice article and review mate. Excellent buying opportunists for all. I love your overall diversification. Other then Bonds I think our portfolio is very similar. Instead of bonds I hold cash in my savings account.

  4. Looks like you took a nice little hit TITM. I’m glad to hear that you plan to stay the course and to keep investing during the correction. You will be updating from above that 500k mark in no time. Thanks for sharing.

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