October turned out to be a volatile month. The news tried to trick investors to panicking and selling their shares. The bear market was finally here, they said, and now was the time to accumulate cash and wait for the asset prices to come down: Market sell-off shares parallels with 1987 crash, strategist says.
The defining characteristic of future change, according to Taleb (who continues a line of argument developed in previous books like Fooled by Randomness and The Black Swan), is that it is impossible and foolhardy, to try to predict it. Instead, the author argues, it is essential to make peace with uncertainty, randomness, and volatility. Those who do not — who insist not only on trying to predict the future but also on somehow trying to manage it — he disparagingly calls “fragilistas.”
What I Did During The Correction
I tried to remember that stocks should fluctuate. It’s natural that they move up and down. Random stock movement is one of the major reasons why stocks as an asset class offer higher returns than bonds.
Systematic or Market Risk
In a portfolio optimization strategy, it’s essential to understand the difference between systematic risk and unsystematic risk. Systematic risk (market risk) is a risk which you can’t control. Sometimes all stocks decline, no matter its financial strength or what they produce. This just happens from time to time. Accept this.
Unsystematic or Asset Risk
Unsystematic risk, on the other hand, is the risk which lies within a specific asset class or security. If you can’t handle high volatility then you can go for securities with lower beta numbers. Most of the stocks in my portfolio don’t move much in either direction and that helps me sleep well at night.
Another important point about unsystematic risk is you can control which sector you think is safer than others. For the longest time, I have suggested that the technology sector is overvalued, but I must admit that I found the sector highly difficult to value.
Instead of using too much energy on this highly complex sector, I focused on value investments and hoped that there would be a sector rotation at one point from technology to safer firms such as PEP and KMB. That’s what we observe now (partially at least).
Here’s my DGI portfolio. Do note that while I beat the index now, I have underperformed before. Crazily enough, that’s what I aim to do. My goal is to have a SWAN portfolio, sleep well at night portfolio. This often means that I go for boring and unsexy securities with far less growth potential than firms such as Netflix and Amazon. This normally means that in bull markets, I underperform.
And for me, that’s okay. Life is so much more than just generating more money.
Also, keep in mind that I have a very firm focus on generating dividend income.
My income does not change when prices fluctuate. That’s another positive thing about being a dividend investor. It’s easier to stay calm and safe in bear markets.
At least for now, at the beginning of my DGI career that’s how I think.
Stockles vs NASDAQ in 3 Months
Stockles vs NASDAQ in 6 Months
Instead of panicking like the news wanted me to do, I wrote a buying list.
- Buy more EM/Global/Nordic index
- Buy PEP ~ $100, KMB ~ $99, ENB ~ 41 CAD, PM ~ $80, OMC ~ $68, D ~ $63, HRL ~ $32, INVE B ~ 350 SEK, WELL ~ $54, ITW ~ $133.
Some people asked:
Not waiting on a bigger fall?
My Answer Was Quite Simple:
What I Bought
I bought many securities during the past month. Some positions were new and some were plain additions to current holdings.
To find capital, I used my saved dividend income, some savings and sold Oaktree capital with the following argument
Investment thesis says OAK had a negative correlation to the general market and especially towards the rising U.S. 10 year treasury yield. As we saw last week, OAK actually dropped 5% while they should (under my thesis), be happy for a rising interest rate, since they do focus on distressed debt. I might be wrong, might be right, but the following discussion (https://seekingalpha.com/article/4180468-oaktree-capital-time-yet) showed me that I don’t profoundly understand the case, so I sold this position and earned a Total Return of 4%.
Illinois Tools Works
Investor AB B
Philip Morris International
Fund and ETF portfolio
These were all added to my holdings.
Future Returns In The Stock Market By Morningstar
According to Morningstar, the emerging market index should significantly outperform US securities.
Right now, most global indexes operate with a 60% weighting in the USA. It should be interesting to see if these changes continue within the next 10 years.
With respect to GPS growth estimates, China and India should be the new growth case if we look 10 years forward. Since I don’t know anything about the future, I just hold both, but I do own a larger portion in EM than the US mostly because my DGI portfolio is heavy in the USA.
Source: Morningstar Markets Observer.
So, the takeaway is you should accept that stocks go up and down. You should also see this correction as a test for how your portfolio looks like and how much stress you can handle. If you feel that you could barely cope with it, I suggest lowering the risk. What we saw now wasn’t really something crazy. Within the next decade, we will see a greater fall and then you better be prepared.
How did you respond? What happened inside your head? Let me know, and focus on the negative aspects more than your positive. That’s how we all learn from each other. Thanks!