Monday, January 12, 2015

Stock Market Volatility and Falling Oil Prices ... What to Do? ... DIY Ownership of Dividend Paying Boring Blue Chips Beats Fund Managers' Performance

Oil prices dropped a huge ~5% again yesterday, while stock prices fell considerably less than 1%. Oil companies were the big losers. Oil prices are lower again early this morning by an additional ~2%. See Oil Extends Selloff on UAE Minister's Comments.

January has already been a most interesting month as oil prices have fallen almost 20% in less than two weeks of trading. How low will they go? Nobody knows, of course, but two things are virtually certain: (1) they will fall more, and (2) they will end the year higher than they are currently.

That's likely to be the case for stock prices, too. We will likely experience lower share prices at some point this year, but they will be substantially higher than current prices by year end. At least that's how I see things.

So with all this volatility and uncertainty early in 2015, what to do is the relevant concern now for many individual investors. And in my view, the simple answer is to invest for the long haul in boring blue chip stocks that pay decent and growing cash dividends, then just sit tight and watch the money grow.

Key to Beating the Benchmark in 2015? Try 'Big, Old and Ugly' Stocks' contains this solid advice for individual investors:
Only 19% of active large cap active funds beat the Russell 1000 last year, according to Lipper Analytical Services and BofA Merrill Lynch US Quantitative Strategy.

"Active stock pickers lagged badly last year, that much we know.

Bank of America Merrill Lynchs’ Savita Subramanian says that just 19% of large cap active managers topped the Russell 1000 by total returns, while only 14% bested the S&P 500.

But why? Subramanian says that one culprit was low volatility that dominated for the first three quarters of last year. Calm markets tamped down performance dispersion to a record low in 2014, meaning that the spread of returns across all managers fell into an unusually tight range:
“Even with the benefit of hindsight, if one owned the best performers, the outperformance spread touched the lowest level we have seen in 2014.”
Combine low volatility with the fact that the most crowded trades of last year did badly. Subramanian writes that the most 10 overweighted stocks by active managers underperformed the most underweighted stocks by 3.2% last year.

And, since many active managers seek their fortunes in off-the-radar names, weakness in small caps all year dinged performance (large-caps bested small by the widest margin since 1998).

What does it all mean? Subramanian says that managers will have more chances to outperform this year should volatility rise. Beyond that, the stodgiest stocks might be worth a look, she says. Of course, buying into these names might reduce how differently funds might look from the benchmark, making it harder to justify higher fees:
“If large caps outperform small again in 2015, as we expect, managers may need to revisit their persistent underweight in mega-cap stocks. We think ownership may also continue to matter, and thus some of the ‘big old and ugly” stocks – cheap large caps which have been shunned by managers and are more likely to be shorts than longs by hedge funds, but many of which are high quality and offer attractive cash return and growth potential — could be the route to outperformance.”
Unfortunately, Subramanian’s report doesn’t come with an itemized menu for which big, old and ugly stocks to pick."

Summing Up 

In my view, some of the blue chip dividend paying stocks that are worth owning are Boeing, GE, Honeywell, Apple, Microsoft, Intel, Cummins, Cisco, Chevron, Exxon, Pfizer, Merck, Johnson & Johnson, Ford, WalMart, Cummins, Wells Fargo, JP Morgan, US Bank and Whirlpool.

There are others, but these diversified holdings serve as a good example of a diversified personal investment portfolio of common stocks.

Thanks. Bob.




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