WMT - My Crazy 8 Stocks Teach The Market A Lesson From 2020

Summary

• The world changed in 2020 with the first modern-day pandemic. Utility-like big tech led the way.
• The "Black Swan" of 2022 was the invasion of Ukraine that set the stage for inflation and perhaps a recession in 2023.
• We've experienced economic regime change where only specific assets deliver positive returns.
• We also see defensive assets and short-duration stocks (value) lead the charge.
• My personal all-weather retirement portfolio was well-positioned, by design.

The world changed in 2020. We experienced the first modern-day pandemic. While historic levels of stimulus staved off a severe recession, eventually the fiscal stimulus and free money stoked the flames of inflation. We are experiencing the first high-inflation environment since the '70s and early '80s. What worked in previous decades of disinflation stopped working in 2022. Inflation and then fears of a recession changed the investment landscape.

For the U.S. component of my retirement account, I hold a concentrated portfolio of 8 stocks. It's a mix of growth and defense, but slants towards defensive stocks. The U.S. portfolio was well-prepared for the pandemic and then the change in economic regime (circumstances).

I'll start with our total U.S. stock portfolio that populates my own portfolio and that of my wife's. In early 2015, I skimmed 15 of the largest-cap dividend achievers, now called the dividend growth index. That investment approach insists on at least 10 years of dividend growth, and applies financial health screens. I also have 3 picks by way of Apple ( AAPL ), BlackRock ( BLK ) and Berkshire Hathaway ( BRK.B ).

Here's the post on our U.S. stock portfolio .

The crazy 8 U.S. stocks

Here's the 8 stocks in approximate weighting in my retirement account.

Here's the total return performance vs the S&P 500 Index (SP500) from 2020 to the end of 2022.

For the period, the 8 U.S. stocks delivered 13.3% annual vs 7.5% for the S&P 500. Here's the breakdown by year.

The success is due to greater growth from 2020 to 2021, then helped by a lesser drawdown in 2022.

Here's the returns of the individual stocks. CAGR represents the Compound Annual Growth Rate (annual return).

For the period, the S&P 500 delivered 7.5% annual.

The stock picks delivered on the growth. That said, all of the stocks outperformed except for the only loser - 3M. The defensive assets did their thing when recession fears surfaced. Also, consumer stocks such as PepsiCo ( PEP ), Walmart ( WMT ) and CVS Health ( CVS ) can provide some inflation protection. Johnson & Johnson ( JNJ ) is a perennial healthcare rock in many dividend growth portfolios.

Here's the performance of the stocks by year.

Walmart was flat in 2022 and hence does not show in the chart for that year. As expected, we have a clear delineation between the growth and defensive assets.

Recession-ready

My U.S. stock portfolio and the Canadian component was recession ready by design. I am in the semi-retirement stage and I can't have the portfolio "fail me now." The portfolio was created to perform during times of market stress that includes bear markets and recessions. That the U.S. portfolio outperforms from 2015 and especially from 2020 is simply a bonus.

As expected, it underperformed when growth stocks ruled, and outperformed when the world changed in 2020.

The quality is reflected in our perfect dividend growth record through the pandemic. That record includes our Canadian stocks.

Superior retirement income

Here's a look at the portfolio income of the 8 U.S. stocks vs the S&P 500. The dividends are not reinvested to reflect the retirement scenario when we might be harvesting the dividends to create retirement income.

Dale's 8 portfolio has delivered generous dividend growth. The market offered a slight cut in 2021 and has delivered virtually no dividend growth from 2020, and includes a dividend reduction.

Dale's dividends have grown 38.5% from 2019. Quality rules in retirement.

All said, versus the market in a retirement funding scenario (at a 4.5% to 5% spend rate) Dale's 8 would have delivered 12% more total income over the last several years. That advantage is likely to increase over the decades if the quality factor holds up, and we continue to experience bear markets.

The portfolio could also have "safely" delivered at a much greater spend rate if desired.

Dale's 8 is part of the all-weather portfolio

The U.S. stocks work in concert with other assets to build an all-weather portfolio model. I penned that post in early April of 2022. Inflation was taking hold. It was almost an obvious call to batten down the hatches and shore up the defensive front. From that post I offered:

Due to the surge in our energy and commodity holdings I am looking to rebalance and shore up my defensive stance, by way of stocks. I continue to add to CVS Health ( CVS ), Walmart ( WMT ), Johnson & Johnson ( JNJ ), Walgreens ( WBA ), Colgate Palmolive ( CL ) and Pepsi ( PEP ).

Walgreens and Colgate Palmolive are held in my wife's accounts.

I also suggested:

There are serious risks of energy shocks and food shortages. It's possible that inflation and stagflation risks are at a peak. Of course, no one knows what will happen with respect to what economic regime will dominate in 2022, 2023 and beyond, but we should acknowledge the clear and present dangers.

Investors have the option to protect, or not. Of course the portfolio risks are great for a retiree or near-retiree. A young investor with decades to go in the accumulation stage might not be in need of the an all-weather portfolio. That young and brave investor might simply keep dollar cost averaging into equities and REITs.

For added inflation protection, we hold oil and gas stocks, some gold ( GLD ) and commodities ( DBC ).

Here's the ridiculous dividend growth of our oil and gas stocks. Thanks to the all-weather portfolio model, we are not feeling the effects of inflation. Our gas and energy costs are more than paid for by the portfolios - in fact, we profit handsomely from the inflationary cycle.

Superior stocks plus dedicated inflation fighters - that makes retirement easy. Bear markets and periods of inflation or stagflation do not have to impact your retirement plans.

We can strategically arrange stocks to prepare for the various economic conditions or possibilities. Stock selection can enhance the all-weather portfolio approach.

Please have a read of Stocks For The Retirement Portfolio .

Keep in mind that as part of an all-weather model, some cash and bonds will be in the mix.

What's up for 2023?

I have no idea, but I have some "pretty good" guesses, I think and hope. In the end, it doesn't matter if my intuitions are right or wrong. I hold a ready-for-most-anything portfolio.

In March of 2022, I had suggested that the Russcession is Coming! The invasion of Ukraine had poured gas on the flames of food and energy inflation. High inflation usually causes a recession after central bankers are forced to hike rates to bring inflation under control.

The (extreme) inverted yield curve that we have today suggests a recession of some sort is on the way. If we do not get a recession, it would be an outlier. The inverted yield curve has predicted 7 of the last 7 recessions. But once again, there is no guarantee.

Many market prognosticators suggests there is the possibility of a soft landing. Inflation is coming down, and the consumer is holding up better than expected. On my blog, I looked at some posts and podcasts featuring Bob Eliott, a former Bridgewater portfolio manager. Bob calls the current environment Transitory Goldilocks .

Check out that posts and links to the blog and podcasts. Bob recognizes the current favorable conditions, but sees economic events as more delayed that "fixed."

On Twitter, I tried to sum up his podcast on 42 Macro.

We'll get chocolates

One of the main takeaways (and I'd agree) is that we simply don't know what we will get. If life is like a box of chocolates - let's just say we'll get chocolates. That is certain. Will it be chocolates with caramel, walnuts or hazelnut? Don't know.

All said, I think there will be some very good rebalancing opportunities in 2023, between bonds and stocks and commodities. We might eat a few chocolates in 2023. I can't imagine NOT holding an all-weather portfolio.

Or, things continue to play out in slow motion, with inflation continuing to moderate and the consumer refusing to give up.

But if something breaks, bonds will rule the day.

From 2020, black swans have ruled. Let's hope we break the black swan streak in 2023.

Thanks for reading. Please hit the Like button if you liked this post. We'll see you in the comment section. How did your portfolio perform in 2022? I try to answer or address all comments.

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