INVESTING CAN AND should be simple—and yet sometimes I make it so hard. Blame it on my ego and a faulty belief in my ability to pick winners among exchange-traded funds (ETFs) and, once in a while, individual stocks.
Problem is, I’ve had a few things go my way this year. Now that know-it-all feeling is rearing its ugly head again—“hey, I can pick stocks and sectors”—even though it’s hurt me badly in the past.
Convincing myself that I don’t know how to pick winners, and that no amount of research will help, is the key to sticking to indexing and avoiding costly investment blunders. Even so, some proponents of indexing devote a small portion of their portfolios to what they call a “fun money” account. A young Merrill Lynch financial advisor hoping for my business recently called that portion of a portfolio the “sandbox.”
I don’t care for either phrase, yet I do have some investments that aren’t market-capitalization-weighted index funds. I pick more narrowly focused ETFs and stocks when I’m trying to get an edge on the market or hedge against some potentially adverse development.
On the days when I feel an unbridled enthusiasm for my ideas, I enjoy being an active investor. But on other days, I can be beset with anxiety over my holdings. You see, I know most of my investment moves haven’t worked out in the past. The closer I’ve stuck to indexing, the better my performance has been—both in relative and absolute terms.
Still, this year, I’ve lucked out big time with the only individual stock I’ve purchased in several years, plus I’ve had another winner with a stock I inherited but opted not to sell right away. I was bequeathed a relatively small position in Exxon Mobil (symbol: XOM) late last year. The shares have soared 85% from my stepped-up cost basis, but I’ve resisted selling.
What was the other stock? Despite the fact I’ve lost a lot of money trying to predict and profit from geopolitical trends—that was always my poison—I made another such move. In October 2021, about four months before Russia’s full-scale invasion of Ukraine, I thought to myself, “What could derail this bull market?”
No, I didn’t predict inflation or spiking interest rates, though I did own a Treasury Inflation Protected Securities fund in the hope it would offer some defense against inflation. Instead, I surmised we were closer to a significant military conflict than most investors wanted to accept. Challenges to Uncle Sam were growing and I was well acquainted with Russia’s ongoing aggression toward Ukraine. This led to my successful stock purchase.
I didn’t originally set out to buy defense giant Lockheed Martin (LMT). But for several reasons, I didn’t find the available aerospace and defense ETFs wholly satisfying. Thinking that a modest position in Lockheed Martin would be a hedge against conflict, I figured the worst outcome would be that this blue-chip, high-dividend stock would muddle along but lag the market.
Instead, a little more than a year later, my shares are up 35%. At one point recently, the stock hit an all-time high, even as the overall market has fallen double-digits.
This success has encouraged more geopolitical investment hunches. There’s always the risk—perhaps growing—that China will attack Taiwan, a critical producer of semiconductors. On top of that, there’s now a U.S. chip war with China. That made me wonder whether we’re going to need more semiconductor plants in the U.S. and elsewhere.
As of late October, the stocks of firms that sell chip-making equipment were down 40% or more on the year. I was sorely tempted to pull the trigger and buy shares. But I also recalled that my old self always lusted after volatile stocks, like oil drillers and chip equipment makers, only to be proven wrong. I was torn between what I thought was a good idea and the fact that I couldn’t trust my instincts.
According to the news, many investors were worried about a global recession, a chip glut and the potential of lost business with China. Despite all this pessimism, the chipmaker shares I was watching soon started to climb. My emotions kicked in. I squirmed—but still didn’t buy.
Then, on Nov. 11, the Dutch company ASML did indeed tell analysts that tensions with China could cause other countries to invest in new chip plants, so they’d have reliable domestic supplies. Soon, stocks of chip equipment makers were up 20% or more from when I started tracking them, versus a 3% gain for the S&P 500.
I started kicking myself, but not too hard. I know I have to keep my ego in check, and that I need to limit my fun money investments because they take me away from indexing. Even if I might get lucky sometimes.
It took a weekend of enjoying life—and not obsessing over stocks—to break my fever for chip equipment. I hope I’ll continue to remember that, for my peace of mind, stock picking is not my game anymore.
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.
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