10 Oct2009

A full year has passed since MM & Family sat down and purchased a hypothetical stock portfolio valued at $200,000, read the original post here. That post (and a follow-up post a week later) received a lot of hits and quite a few comments, some of which chided me for treating investing money as though it might be a game. A few readers even privately emailed to taunt me that I had gone too far, and that they were so sure my portfolio would crash and burn, bitter souls that they seemed to be (maybe disgruntled over my “rent vs. own” a house post), and that I would just embarrass myself on-line. But it was an educational opportunity too good to pass up on, and the Teen got her first lesson in investing in common stocks. Precisely when everyone else who was invested in stocks were in shock and licking their wounds from one of the most massive drops in equity markets the week before. The news was definitely all doom and gloom a year ago. And we were supposedly headed into the dark days of another Depression, similar to that in 1929. I precisely posted our hypothetical stock picks on the site so that we would indeed be able to follow the performance of those stocks, in other words, no “cheating” possible. Up or down, I thought it was a worthy exercise. ☺

Six months later, and after a highly volatile ride in-between, the stock portfolio was up 11%, or an annual return of 22%. And yes, the portfolio had declined as well as risen in value, so it was definitely not a one-way ride up. Read about the performance in the first half of the year in this post. At its worst, I think the portfolio was down roughly 10% around March 2009.

Now that a year has passed, here are the results by stock:

Apple +116.44%
Coca Cola + 36.25%
Goldman Sachs +110.33%
Boeing + 25.45%
CVS Drugstores + 20.00%
General Electric – 14.84%
PLDT + 17.13%
Amazon + 70.91%
Hershey + 14.49%
Microsoft + 16.32%

Total Portfolio + 43.00% (Including dividends and less brokerage fees)

Some readers will think that it was just dumb good luck. That everything went up in the last year. And frankly, I wouldn’t mind at all if I was just lucky, would you? ☺ But here are what the largest stock indexes did in the past year, the exact same period as this experiment:

Dow Jones Industrial Average – 4.46%
NASDAQ Index + 9.85%

The problem is, how often or consistently can you make 43% return in one year? I would think very rarely indeed. Stocks on average historically have yielded returns of some 12-15% per annum on average. And yes, a lot of people DO LOSE money when investing in stocks. But as this exercise has clearly shown, if you see a huge drop in the stock market, so severe that everyone around you is talking like it’s the end of modern civilization, and you have some understanding of companies that trade their common shares, as well as some cash and a lot of cojones, then you could do very well indeed.

Just a paragraph on performance. Out of 10 stocks, 9 went up, with GE being the only one that dropped. The Teen’s two picks were winners, Amazon which was up some 71%, and Hershey up 15%. Her average gain for the year was roughly 43%, equivalent to the portfolio as a whole. Apple and Goldman Sachs both yielded greater that 110% returns in one year, utterly stunning!

So what would I do now? Hold on or sell? Personally, if I had this portfolio, I would sell now and book my 43% gains. The original hypothetical investment of $200,000 would now be worth some $286,000. Then even if I only kept it in ridiculously low interest time deposits or treasury bonds at say 3-4% per annum for the next year or so, I would still average above 24% annual returns for two years running. Not bad at all. Or maybe it would be time to look at a very modest apartment in a large global city, like New York, where prices have recently dropped between 15-25% instead. With interest rates on mortgages at record lows, one could trade up from 10 stocks to the fringes of the Upper East Side of Manhattan by putting a $250,000 down payment on an apartment, with extra moolah to spare for furnishings. But please read my post on why I rent and don’t own a house first before you call your real estate agent.

Finally, let me reiterate that I am NOT encouraging you to go risk your entire life savings in the stock market. Period.

 

COMMENTS:

  1. Joyce says:

    interesting! positive news that the world economy might just be recovering albeit slowly. one question though, how much should one invest in stocks at a minimum to yield good returns?is there such a figure? phils? u.s.?thanks!

    Oct 10, 2009 | 6:18 pm

     
  2. paolo says:

    hi MarketMan. since last year i have put some of my savings on the local stock market and currently have 5 companies that i bought some stock and have done very good since i bought them during the low prices last year.
    my stockbroker has advised to sell them within the year but i would like to sell the 3 of the stocks this year and sell the other 2 next year.
    any comment MarketMan?
    thanks in advance

    Oct 10, 2009 | 8:05 pm

     
  3. Marketman says:

    paolo, I haven’t followed the local market much, but understand that it too is up. I suppose your moves depend on the stocks you hold, but personally I would want to “lock in” some gains now rather than keep it all in play. But there are many other considerations you may have to think about. I tend to be “sigurista” and if well ahead, I take my gains and have a good meal. :) And don’t get upset if the stock continues to rise after you sold it. You already made your profit. But I am not a stockbroker, so my guess is as good as yours.

    Joyce the returns will be the same whether you invest PHP10,000 or P1,000,000. Except that brokers might have a minimum lot size of number of shares purchased, and a minimum commission on a transaction. But if the stock rises or falls by 10%, then your gains or losses will still be 10% regardless of the size of your investment.

    Oct 10, 2009 | 8:45 pm

     
  4. bertN says:

    If I can get a 10-12 percent annual return on my investments, I’ll be very happy.

    Oct 10, 2009 | 9:26 pm

     
  5. Gener says:

    Good for you guys! im still suffering caused by this financial crisis,,,I lost more than hundred of thousands of dollars of my own investments in the gulf…Im weathering it to be fine few more months ahead if i should not battle first with grape of the wrath …

    Oct 10, 2009 | 10:27 pm

     
  6. paolo says:

    thnX marketMan! anyway will maybe sell some and hold on to the others for the long term

    Oct 11, 2009 | 1:12 am

     
  7. Jody says:

    Excellent topic Marketman. I was also quite fascinated reading your related post on housing .

    I believe all asset classes have been hit by the events of the last year including my own field of rare books. My BIL believes wine is an excellent investment going foward.(ie, buying good wine in the South of France and having the vineyards store it)

    People went quite mad with property and I guess blame can be spread all over the board.

    I believe people should be a little wary of jumping back into the market. I would recomend that all your readers should use dollar cost averaging, if they do wish to slide back in.

    I am very pleased with the emerging markets and I own a Vanguard mutual fund called VWO.
    I do not own individual stocks. I buy mutual funds (mainly index funds) that have very low maintenance fees and I generally hold them no matter what is going on. If I were to buy individual stocks, I would buy only those companies that have a history of paying regular dividends.

    You are doing a huge service to the community, by posting on such topics from time to time, and I commend you for the time and effort that you spend.

    Now back to my lurking ways

    Best

    Jody

    Oct 11, 2009 | 7:29 am

     
  8. Bernice says:

    i don’t really know much about stocks but i think that this is a great idea for teaching kids (and myself) about investing.

    Oct 11, 2009 | 8:45 am

     
  9. macpower says:

    There is this an available free web-based application that I use for stock hypothetical play. You may want to try “www.kaching.com” and let your friends register as well so that you can have mini-competitions. It includes portfolio analytics, researches, daily records, tips from groups, monitoring friend’s portfolio, etc. And so far, in the last 6 months I have been playing it, my portfolio rose to about 16%. Thanks.

    Oct 11, 2009 | 9:16 am

     
  10. mary kim says:

    We also thought it was a bad move because the economy wasn’t that good last year, our stocks were down like -47% and this month it’s +27%, maybe we’ll sell it sometime later on, the houses here are all goin up.^ ^

    Oct 11, 2009 | 6:48 pm

     
  11. Lava Bien says:

    Wow MM, saludo ako sa ‘yo. Wow!

    Oct 11, 2009 | 8:36 pm

     
  12. JR says:

    MM,

    We lost almost 30% of our retirement investments due to the weak & volatile market conditions at that time. I made mistake last June when the market was at 6300 or 6700 points. I accidentally re-balance all our investments and didn’t realize my mistake until two weeks later. I thought I was re-balancing for future allocations. I was reviewing our investments with the portfolio manager and he commented on my good buy when the market was down. I felt really stupid when I realized what I had done and it could have gone the other way. My friend later told me that he should have taken a picture of me because I turned ashen white and it was priceless.

    Well the moral of the story is I should be more careful next time before I point and click. I don’t know if I should call it plain luck or just stupidity on my part.

    The best news is we will probably break even by the end of the year according to our portfolio manager and be up 2% to 5%. I also got the statements and we made 25% this year as of the 3rd quarter.

    Jr

    Oct 13, 2009 | 12:42 am

     
  13. ted says:

    I don’t put all my eggs in a basket, diversification i think is key (75%stocks/25%bonds is my preference). I did not re-balance or withdraw from the acct but religiously kept putting money into it, which is the way you should be doing when you are a long term investor. Mind you i’m only putting 5% of my pay plus the 5% match from my employer. I have all my statements from my vanguard mutual fund acct and from Dec 31, 2007 to Dec 31, 2008 All my investments were down by an average of 36%, From Dec 31, 2008 to present I’m up 42.6%. Comparing my balances from Dec 31, 2007 to present i’m still down by a mere 8%. But let’s just wait till end of year, things are moving up for the better, and my forecast is again at 91% that I can retire comfortably.

    Oct 13, 2009 | 9:35 am

     
  14. ariel says:

    there will be no complete economic recovery while millions of Americans are still unemployed. Obama now and in the future months cannot just talk about jobs he has to actually produce some. in california, 2 out 5 are unemployed and the true unemployment rate (U6 which includes self employed and independent contractors – which make 40 percent of the work force) is 17 percent. if America does not bring back some manufacturing there will also be no recovery.

    just my 2 cents, still dangerous times to play the stock market.

    Oct 13, 2009 | 1:21 pm

     
  15. peter v says:

    can’t agree more with ariel. no jobs = unstable economy. with the dow getting close to 10,000 again i think it’s just superficial. i’m still on the sideline watching and waiting.
    can’t really trust the current administration

    Oct 13, 2009 | 3:17 pm

     
  16. mon g says:

    Hmm haven’t read that rent v own bit. I’m renting now and damn lucky I am with the way the economy is. At least I can sleep at night knowing I don’t have to worry about a mortgage.

    Oct 14, 2009 | 2:47 pm

     
  17. Lava Bien says:

    Before Everything tanked, I was making 25%-30% gain on my Siemens Stocks and was able to cash out before the crash and end my Siemens employment also, juct got lucky on the timing.

    For some reason I missed your post for the rent v own thing, glad I caught it, and really helped me get my perspective right. I’d rather invest my money somewhere else than buy another real estate property in the Philippines. I’d admit I didn’t know it wasn’t tax deductible like it is here in the states. Shame on me. I’d just buy a place there when I’m ready to go live there fulltime and do business. My folks still got a house and a farmland so I could always stay there whenever I visit (though they haven’t lived there neither for deacades)

    Oct 14, 2009 | 8:29 pm

     
  18. Lava Bien says:

    @ Jody – look into buying wines from either Argentina or Chile they are one of the top 5 best selling countries when ti comes to wine. Look it up.

    Oct 14, 2009 | 8:31 pm

     
  19. Jack Hammer says:

    Well Done MM !!!!!!
    Most people Invest in Stock Portfolios as a Buy and Hold Strategy !!! or to make a quick Killing.
    In my opinion, one should look at a Portofolio, to use a Metaphor as a garden of Beautiful Flowering Plants that bear fruit when carefully nurtured and looked after like pruning, fertilizing, etc.
    The same way with a Portfolio to succeed you need to pick up 10-20 Value Stocks and buy and sell the same stocks when they go down and up, using Technical Analysis like Fibonnacci and Elliot Wave.

    Good Luck !!!!!!!

    Nov 16, 2009 | 8:34 pm

     
 

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