Newspaper article Sarasota Herald Tribune

Time to Reflect on Portfolio's Performance and Start to Think

Newspaper article Sarasota Herald Tribune

Time to Reflect on Portfolio's Performance and Start to Think

Article excerpt

The period between Thanksgiving and the start of a New Year is an excellent time to work on your portfolio. In doing so, you should strive to create a return that exceeds the sum of what a 30-year Treasury bond would pay, along with what you will lose through taxes and inflation, along with an equity kicker for risk.

The guideline I give my students is a minimum annual return of 12 to 15 percent. A prudent stock selection process should enable you to meet that objective. On the other hand, investors like Warren Buffett believe that future long-term stock market returns can be estimated as nominal GDP growth, plus expected dividend yield.

According to that formula, next year's estimated 2.8 percent nominal GDP growth rate, plus an average 3 percent dividend yield, equals an expected return of 5.8 percent. Many believe an additional 3 percent should be added for the risk you underwrite by investing in stocks, bringing the minimum expected return to 8.8 percent. As I mentioned, however, I believe in a goal of about 12 percent.

To achieve that goal, you will need to become a market-trouncing master strategist. Your knowledge of a given company must be superior to that of others. To help you in your search, each year at this time I offer 12 possible research candidates, whose performance I review a year later. (Note: Abbott spun off AbbVie, resulting in 13 companies this year.)

Here are the stocks from last year and their percentage gain or loss: Looking at the equities, Apple (AAPL), down 3.4 percent; AbbVie (ABBV), up 43.3 percent; Abbott (ABT), up 23.1 percent; Aflac (AFL), up 24.2 percent; Gilead (GILD), up 95.9 percent; MWI Veterinary Supply (MWIV), up 55.5 percent; PetSmart (PETM), up 4.6 percent; and Valspar (VAL), up 14.5 percent.

The capital appreciation for this group was 21.78 percent, with a dividend yield of 2.01 percent, for a total return of 23.79 percent, versus about 29 percent for the S&P 500.

To offset the aforementioned low dividend yield, the other five issues were split between master limited partnerships and real estate investment trusts, both of which pay out about 90 percent of their earnings to avoid federal income tax. …

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