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 â€œcheatingâ€ possible. Up or down, I thought it was a worthy exercise. â˜º
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:
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 wouldnâ€™t mind at all if I was just lucky, would you? â˜º 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 itâ€™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 donâ€™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.