The Tortoise vs. The Hare

Jeffrey Viksjo CFA, CFP®

Jeffrey Viksjo CFA, CFP®

Apple, Microsoft, Amazon, Facebook, and Google make up more than 20% of the S&P 500. These “one-decision” or “buy and hold” stocks that seemingly only go up — are responsible for most of this year’s markets gains. The S&P 500 is up 5.5% through the first three quarters of this year; excluding these five stocks, the index is actually down 6.0%.


These five stocks, as of April of this year, now make up just 7% of our clients’ portfolios. We understand these companies are earning monopoly-sized profits. We understand that they make products or deliver a service that we all use every single day of our lives. But we also understand that price matters. And right now, these stocks are priced for perfection.


Let’s talk about Apple. Two years ago (FY 2018), Apple earned $59B in profits. Over the last twelve months, Apple earned $58B in profits. And yet over that time, Apple’s stock price increased 175%, adding more than $1 trillion in market value. How can that possibly be? Simply put, investors are paying a lot more for Apple’s earnings today than they did two years ago, hoping someone will pay them even more later. But what if this greater fool never materializes? In the future, they may actually pay a lot less.


The Tortoise Portfolio – Since April, we shifted our portfolio to focus on quality. That means firms that are highly profitable and not only pay a dividend, but have a history of increasing dividends each year.  The core position in that strategy is the Vanguard Dividend Appreciation ETF (Symbol: VIG), which currently makes up roughly half of your U.S. stock portfolio.


VIG only holds stocks that have increased their dividend for ten straight years, obviously an exclusive list of companies. The ETF tilts towards larger firms with resilient business models able to withstand any economic climate. The strategy has proven to outperform across various market cycles. In the past three years, VIG has returned 12.9% annually versus 11.7% for the overall market. In the past five years, VIG leads 13.6% to 13.2%. While these returns aren’t flashy, it’s important to note that VIG also comes with significantly less volatility. Over the last 3 and 5 years, VIG has captured just 75-80% of the market’s downside. Higher returns, less volatility, what’s not to like?


Unfortunately, we’re experiencing it right now. Just because VIG has outperformed over long stretches, doesn’t mean it’s outperformed over every stretch. The incredible run-up in the markets since March (with the five big technology stocks leading the way) is one such example.  While VIG rallied more than 42% off the March lows through to September 1st, the S&P 500 rose 54%. When the market goes in a straight line up, VIG tends to underperform.


Judged over an entire market cycle, however, VIG passes the test. For example, since September 1st, the S&P 500 is down nearly 4%, while VIG fell just 1%. Year-to-date, which includes both the drop in stocks in February and the subsequent climb back up, VIG and the S&P 500 are basically equal, both up around 5%.


We believe it’s a classic case of tortoise versus the hare. With the market set for greater volatility ahead (stimulus talks breaking down, election day and the possibility for ensuing political turmoil, and vaccine progress or lack thereof), we’re happy to be in the camp of the tortoise. Markets simply to do not go up in a straight line forever, and we believe a portfolio offering some downside protection is a good bet moving forward. There is a time to be aggressive. But we don’t think that time is in the middle of a pandemic with stocks at record highs. Over the long run, we think VIG stands a good chance at ultimately winning the race.


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Ogorek Wealth Management, LLC

Ogorek Wealth Management, LLC