Welcome to our weekly passive-income portfolio (PIP) update—#11 in the series! Before we get to the update, I wanted to take a moment discuss why dividend-growth investing success is all about the process!
Investing success requires the consistent and unemotional application of process. There are no free lunches and no short cuts.
While most retail investors understand this at some base-level of their consciousness, they often fail to grasp the equally important corollary: You must understand that process!
Notice that I didn’t say: success requires a particular process. The truth is that there is an infinite number of feasible processes (or strategies) that one can use to find success in investing. There is no one “best” process or investing silver bullet. Rather, you have to find the best fit for you—based on your risk profile/tolerance, strengths and weakness (KSAs), and personality.
However, what is critical is that you UNDERSTAND the process you are using.
You simply can’t effectively apply an investing process that you don’t fully understand and, if you try, it will be very difficult to resist the physiological urge to become emotional when unexpected outcomes occur in the short-run. (I say unexpected because they will be if you fail to understand the process you are utilizing)
The market provides us with a plethora of real-world examples that illustrate this truism. Let’s examine three and see what we can learn…
The best performing mutual fund over the decade from 2000-2009 produced an amazing +18% annualized gain—and it did this even though the market, as a whole, was flat over that period!
However, the average retail investor in that fund managed to lose -11% a year on a dollar-weighted basis!
Because the average retail investor didn’t understand the fund manager’s process! They were simply chasing past performance and bought-in high, only to panic when the fund then underperformed in the short run—selling at the worst possible times.
This pattern of turning victory into defeat repeats itself if we look at asset class performance over the past 20 years (1999-2018):
If retail investors had simply bought and held an S&P 500 index fund (e.g., SPY), they would have generated around a +5.6% annualized gain over a twenty-year period.
Or, if they had employed a 60/40 or 40/60 strategy, they would have received a roughly +5.1% annualized return (with less volatility).
And, with the right process, the potential for far greater returns was possible–REITs as an asset class delivered a +9.9% annualized return.
However, the average retail investor managed to generate a dismal +1.9% annualized return—less than inflation!
Again, because the average retail investor engaged in investing processes they didn’t understand! As such, they bought-in and sold-out at all the wrong times.
Finally, if we look at the best performing institutional funds over the same decade in example #1 (2000-2009), we find that:
Of the top quartile (top 25%) of fund managers… roughly half (47%) spent at least three (3) of those years in the bottom decile (10%) of performance!
Volatility is a constant in investing—it can be managed but never fully escaped regardless of whether you are a professional (institutional) investor or a retail investor. Whether you manage your own portfolio, let others (e.g., fund managers) manage your holdings, or you simply invest passively through index funds (i.e., ETFs), you must understand the process!
If you don’t, then you would have more than likely bailed on those top performing managers during those underperforming years! Rather than capturing their top-quartile returns over the decade, you would likely have lost as you blindly chased past-performance.
If so, then the only way to capture that success is to stick with it. And the only way to stick with it is to understand the process!
If you don’t understand it, you will ultimately succumb to emotionally-based investing decisions—chasing past performance and bailing when you find yourself temporarily in that bottom quartile or even decile!
But if you bail, you’ll never find yourself in that top quartile or decile over the longer time-horizon. Rather, you’ll guarantee an outcome similar to those investors that lost -11% in a fund that produced a decade’s worth of +18% annualized gains!
This is especially true for dividend-growth investing (and value investing as a whole) because it inherently requires a contrarian approach (process)—one that buys quality at a discount when stocks are out of favor with the market.
Since (1) we can’t pick bottoms and (2) the discount is based on a poor short-run outlook, we must embrace the reality that short-run underperformance within longer-run outperformance is an inevitable fact of life for dividend-growth investors.
Understand your process and trust in it over the long run!
As Joel Greenblatt so aptly notes, the best investment process is the one you understand and can stick with.
Dividend-growth investing is about value investing through a dividend-growth filter—with a long time-horizon to fully capitalize on the time-arbitrage edge.
To successfully do this, you have to understand and embrace the process! I highly recommend reading my article Paradigm Shift: The Dividend vs. Growth Investing Mindset to learn more!
Once you understand the broader DGI process, then you’re ready to build your specific dividend-growth investing process.
The possibilities are virtually limitless when it comes to developing your unique process. However, regardless of what your particular process will be, you must fully understand it in order to be able to stick with it… and you must stick with it if you want to achieve investing success!
One final note: This is why I advise that you should never buy a fish (stock pick). When you do this, you have no idea what the process was behind the pick! If you’ve thought about buying fish, please read my article Dividend-Growth Investing: Why You Should Never Buy a Fish!
Now let’s get our weekly passive-income portfolio update!
As we close out the week and our fifth month since portfolio inception, we currently have a portfolio value of $3,232.92—up from our starting value of $500 on March 13th.
In terms of market performance, we are down -11.0% since inception, down -7.4% over the past quarter, and down -5.7% over the past month.
I know that’s a lot of red—but I’m actually very excited about that. We are seeing tremendous opportunities to increase our yield-on-cost in a large number of undervalued stocks.
As I eluded to above, this is part of the dividend-growth investing process. You will spend some time in the “penalty box” (lower quartile/decile) before you soar to the upper quartile of outperformance over the long run!
Winning at the dividend-growth game long term requires a very different mindset. Please, I highly encourage you to read my recently published article Paradigm Shift: Dividend vs. Growth Investing Mindset.
It will open your eyes to how you need to play the game and the counter-intuitive mindset you need to approach it with!
We have earned $59.41 in dividends since inception, $47.34 over the past quarter, and $33.47 during the past month. We’re looking forward to the end of the month, when we can share the information on our dividends paid—including our updated trend.
Dividends continue to trend in the right direction with basically 56% of our earned dividends coming in the last month (representing 17% of the portfolio’s lifespan).
Our yield-on-cost (YOC) has risen to 7.73% and our current yield is 8.31%. Again, as I noted above, we are seeing lots of opportunity and plan to continue deploying capital to build our YOC.
Below is a graph of our YOC and current yield since inception. From a portfolio-level perspective, anytime YOC is below the current yield, it’s a targeted buy zone—there is opportunity to increase our capital efficiency (i.e., raise our YOC).
As you can see, our YOC is trending up and chasing current yield as we deploy additional capital into specific opportunities.
To wrap up, here are our current allocations by capitalization, asset type, and sector:
We hope you’ve enjoyed this week’s update on our public-view dividend growth portfolio and my always-opinionated (but usually valid and hopefully beneficial) discussion.
You can always view our Wicked Capital dividend growth portfolio at https://m1.finance/1zUclN2JL
If you’re interested in starting an M1 Finance portfolio, please consider using our referral link https://mbsy.co/sZVS3 and we’ll both get some free cash!
That’s just one more reason to start your dividend growth investing today! It’s never too soon to start working towards your financial freedom!
Remember, when it comes to investing… always understand the process you are utilizing!
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