What to invest in August 2020?
Before realizing $42000 gain from my gold and silver ETF trades, I already have a lot of cash in my portfolio. Now, the US government is working on another stimulus bill, it is very likely that my cash will lose purchasing power to inflation. Some say that the best offence is the best defense. After a long thought, I decided to start purchasing stocks again. In this article, I am going to explain my stock investing strategy.
Why invest in stocks now?
I wrote about the high valuation of the stock market in April 2019. Shiller PE ratio, a.k.a. PE10, (refer to Robert Shiller’s book Irrational Exuberance: Revised and Expanded Third Edition) was at 30 at that time. Fast forward to August 2020, it is even higher, at around 31. There were only a few times in the history PE10 higher than this, which were before the 1929, 2000 and 2008 market crashes. Stock investment at this time requires determination and patience.
Conservative investors like myself would think that I am out of my mind to invest in stock at this moment.
Investing in long term
It may seem that I am reckless. The truth of the matter is I am starting to invest in stock in the long term. This week marks the beginning of the new journey. It means that I am not only buying stock this week, but also next week, the week after next and many more years to come.
Had I started doing it in January this year, I would have acquired shares at much lower prices. Below are the S&P 500 index ETF (SPY) historical prices from Yahoo Finance.
|SPY ETF adjusted Close|
|Aug 07, 2020||$334.57|
|Jul 01, 2020||$326.52|
|Jun 01, 2020||$307.01|
|May 01, 2020||$302.99|
|Apr 01, 2020||$289.21|
|Mar 01, 2020||$255.12|
|Feb 01, 2020||$293.24|
|Jan 01, 2020||$318.45|
|Average cost (1/1/2020-8/7/2020)||$306.85|
If we purchase shares on the 1st of each month since the beginning of 2020 til today (8/7/2020), the average cost is about $306.85. We would buy at both highs and lows. If we hold onto the shares all along, the unrealized gain would be $27.72 per share (8.7% gain YTD). This method is called ‘dollar cost averaging’.
By investing in the long term and doing dollar cost averaging, one not only survives the stock market crash, but also thrives. However, it will take determination. In fact, this was my investment approach a long time ago. I took a detour in my investment journey because I became more and more conservative. I methodically got out of the stock market by selling my shares a bit at a time in the last few years worrying about the potential crash. Only to realize that it is not the best to keep cash and bond for me in the long run because I still have a long investment horizon. My portfolio value may drop should there be a stock market crash in the future, but I should be fine in the long run.
What did I buy?
I opened a new account on M1 Finance this week and already gained 3.5% in my new portfolio. It is very easy to set up. I was able to fund my account and trade on the first day.
I put in $10000 on August 3rd and bought shares of 50 companies (refer to Growth Portfolio in the screen shot above). I deposited another $2500 on August 5th and purchased additional shares of the same companies through auto-investment feature in M1 Finance . As you can see, the portfolio value jumped to $12901.65 ( stock $12871.49 + cash $30.16 ) in one week. This is impressive because SPY and QQQ ETFs returned less than 2% in the same week.
In order to further diversify, I added another ‘pie’ called ‘ARK inspired’ during the weekend. That portfolio includes additional 23 companies that make up of the largest holdings in ARK Invest. At the moment, I have $0 invested in those 23 companies. However, by Wednesday next week, M1 Finance will transfer money from my bank account and purchase shares for me automatically. My trades will be periodic and totally not based on emotions.
To show the 50 companies that I purchase, you could click on the “Growth Portfolio” icon in the “Slices” section. It expands and shows the following breakdowns. My initial allocation was 2% for each company.
I was lucky that some of the positions appreciated a lot due to positive earning reports.
How did I pick the stocks?
I will go over this in more detail in the future articles. But, some of the stocks in my portfolio were chosen based on the following criteria:
- Market cap > $1 Billion
- PE ratio < 20
- PEG < 2
- EPS growth last year > 10%
- EPS growth next 5 year > 10%
As you can see, I am focusing on growth stocks with low PE ratio and moderate price to PE.
Some of them (Amazon, Nvidia, Facebook, etc.) do not meet these criteria technically, but I included them because they seem to have long term potential.
On M1 Finance, they also show the historical performance of a portfolio. Had I owned these companies since 3 years ago, they would almost quadrupled my investment. Of course, history does not guarantee future performance.
I am just pointed out that I am seeking high growth in my stock portfolio. Another reason for owning growth stock is that they tend to pay no or very little dividend because they re-invest their profit to fuel the growth. This is also a good news because it would be more tax efficient for me as I hold these stock outside of my 401K or IRA accounts. I would pay no or very little tax on dividend with growth stocks.
In my future blog posts, I will explain why I am interested in the companies that ARK invest is holding and give an update on how my stock investment portfolio perform. Please stay tuned.