Investing Daily Article of the Week
by Roger Conrad, Investing Daily
Every investor makes mistakes. Hopefully, you will learn from them. But above all, you never want to be in a position where one false move can wipe you out, particularly if you’re actually trying to live off your portfolio.
This past week, I’ve been presenting at the Orlando “MoneyShow” and was privileged to participate on a panel chosen and moderated by Mark Hulbert. Hulbert Financial Digest is the definitive rater of newsletter performance.
His first question to each of the panelists was simple: “What are the five biggest mistakes investors will make in 2013?” Here are my responses, along with how I plan to avoid making them in the year ahead.
1. Overweighting. This year’s economy and stock market hold more than the usual amount of uncertainty, from the ultimate impact of global austerity on what’s been a tepid recovery to dramatic energy price differentials between Alberta and the US Gulf Coast. In addition, it’s a sure bet some companies will falter as businesses, due in large part to a less than optimal big picture.
When so much is unknown, the best and only course is to be diversified and balanced. Diversification comes from owning a large array of investments from a range of sectors. That includes sectors that will perform better if there’s more growth, as well as those that will do better with less. Balance is not letting a single position get so large it can sink you in a worst case.
By overweighting a stock or sector, rather than diversifying and balancing, investors may win big in an uncertain year. But the potential reward just isn’t worth the wipeout risk.
2. Buying bond funds for safety. It’s a seller’s market for bonds. That is, corporations are selling bonds at record low yields, slashing interest costs, eliminating refinancing risk and raising low cost capital to finance future growth. Bond investors, in contrast, are locking in the lowest rates of return ever seen, and exposing themselves to huge potential capital losses should interest rates rise.
Most exposed are those in bond funds that yield far above the going rate on individual bonds. They’re only able to do that with leverage, and the losses will be massive when the tide does turn. One warning sign it may be sooner than later is the recent drop in mortgage REITs. And if history is any guide, things could get really ugly.
3. Avoiding resource stocks. It’s all too easy to assume current market conditions will last forever. And with austerity the rule now in most countries, many now assume the underperformance of natural resource producer stocks will continue.
As a result, the group is cheap. My preferred targets are the best of the big such as PF Growth Portfolio pick BHP Billiton (ASX: BHP, NYSE: BHP). Global mining and energy production have become hugely capital intensive businesses, as companies have to go ever-further, ever-deeper, ever-more dangerously to meet the giant long-term call on natural resources Chinese growth represents. Big companies can absorb the inevitable dry holes and political setbacks. And they ‘re quite cheap at the moment.
4. Not buying enough dividends. In a market where investors have flocked to bonds for safety, the gap between stock and bond yields is one of the highest in history. And not only are stock yields much higher, they can grow along with underlying companies, while bond yields are mostly fixed. That’s why dividend paying stocks keep up with inflation, while bonds can’t with the exception of inflation indexed bonds. Dividend paying stocks are also by far your surest return in a market that may or may not produce capital gains.
5. Mixing politics with portfolio management. America is divided on political lines as rarely before, so it’s only natural that even financial media would become intensely political. The problem is politics is inherently emotional, while successful investing depends on keeping rational.
The worst example in recent years of disastrous political investing is many investors’ decision in late 2008 and early 2009 to sell their stocks for fear of what an Obama administration would bring. They locked in losses from an historic bear market, condemned themselves to miniscule yields and missed out on one of the greatest rallies in stock market history.
There are certainly stocks and industries for which politics and government do matter. The Environmental Protection Agency’s policies toward coal-fired electricity, the Federal Communications Commission’s spectrum auction biases and the Nuclear Regulatory Commission’s approval process for nuclear plants are three places where the second Obama administration’s policies could change from the first. It’s important for investors in these sectors to monitor developments that could have a big impact on returns.
But for the most part, returns in stocks will depend on how companies perform as businesses. Politics can be fun to keep up with. But it’s on the ground, where companies are performing or not, where your attention should be, always.
