ITA Wealth Management

It is time for another round of comparisons between highly recommended individual stocks and their corresponding ETF or asset class. Here is how I went through this process. 1) I looked up a financial service to find out the stocks that showed up on the “recommended” list approximately three years ago. 2) I then used Morningstar’s nine asset class style box system to find which asset classes each stock fell into. 3) Using Yahoo’s comparison option, I compared the percentage performance of the stock with its appropriate ETF over the three-year period and then rounded off to the nearest 5% or 10%, depending on the scale of the graph. Here are my results, and as you can see, the results are quite mixed.

• ACS - Lost 10% to ETF
• AMAT - Even with ETF
• BBBY - Lost 45% to ETF
• CAH - Lost 20% to ETF
• CSCO - Even with ETF
• DLTR - Gained 30% to ETF
• FITB - Lost 65% to ETF
• HD - Lost 40% to ETF
• LLTC - Lost 40% to ETF
• MAS - Lost 55% to ETF
• NUE - Gained 165% to ETF
• ORCL - Gained 40% to ETF
• PAYX - Lost 15% to ETF
• QCOM - Gained 35% to ETF
• RHI - Lost 20% to ETF
• SYK - Gained 30% to ETF

If one had used this advice, five of the sixteen stocks gained on their appropriate ETF, two were essentially even, and nine lost ground to their ETF benchmark. The gains and losses are only part of the story. Upon closer examination, one finds such a portfolio of stocks would be skewed toward large-cap and growth stocks. For example, six of the stocks are Large-Cap Growth, only two are Large-Cap Value and one is Large-Cap Blend. Two stocks fall into Mid-Cap Value and only one is Mid-Cap Growth. The remaining four are Mid-Cap Blend stocks. There are no Small-Cap stocks. In addition, one might ask, where are the international investments or REITs?

A portfolio made up using this group of sixteen stocks do not exhibit stellar performance, nor does it meet our diversification standards or risk reduction requirements. This example, and similar ones I’ve discussed in the past, show the difficulty of building a portfolio around a limited number of individual stocks. At least it is difficult if one is interested in reducing risk and having a well-diversified portfolio.

Lowell Herr

Photograph: Hand carved horses and wagon at the Ringling Bros. museum in Sarasota, Florida.