Lessons Learned from the 2005 “Blue Chip” Stock Portfolio

By Ron DeLegge, Editor

October 3, 2008

SAN DIEGO (ETFguide.com) – How many millions of investors have seen their blue chip stock portfolios vaporize into thin air? And if history is our guide, it was bound to happen.

Bull markets make fools look like geniuses. Bear markets make fools look like fools.

Thanks to the financial gypsies that inhabit Wall Street, (See CNBC’s Jim Cramer or Goldman Sachs’Abby Joseph Cohen) unsuspecting investors have been victimized. Ill-timed stock picks, ill-advised financial advice and consistently inaccurate forecasts have proven to be a combustible combo. 40 percent gains have quickly turned into 97 percent losses. So much for investing in stocks deemed as “safe” and “solid” investments by Wall Street’s know nothing analysts.

Take a gander at the 2005 “Blue Chip” Stock Portfolio, which looks more like a laughingstock than a portfolio of stocks.

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For banking, there was exposure to twin giants Washington Mutual and Wachovia Corporation (NYSE: WB). Insurance exposure was covered by American International Group (NYSE: AIG). Investment banking coverage was given to two industry titans, Bear Stearns and Lehman Brothers. Hey, wasn’t it Tarzan the Ape Man (Jim Cramer) that told us Bear Stearns, when it was $65 per share, was fine? And then, there was the can’t miss quasi-government duo of Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM).

From what I can see, the 2005 “Blue Chip” Stock Portfolio had a nice cross section of corporate America’s best of breed flunkouts.

And what can be said of Wall Street’s deadbeat analysts? For the precise answer, look at how few of them issued immediate downgrade and sell recommendations on any of these stocks. Other analysts never got around to updating their outdated buy recommendations. I suppose traveling to the Hamptons got in the way.

At one time the 2005 “Blue Chip” Stock Portfolio performed handsomely. Shortly thereafter, the predictably lame duck strategy of trying to beat the market began to unravel.

According to my count, I loosely estimate the 2005 “Blue Chip” Stock Portfolio has delivered a negative 97 percent return. Not bad, if 100 was your original goal.

What is this saying?

For clarification, a negative 97 percent return is not telling you that you need to pick your stocks more carefully. Nor is it telling you to invest more time and money in better stock research. It’s also not telling you that you need to become a better trader.

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Your broken stock portfolio is asking you to stop. It’s telling you to end the insanity, salvage what you have, and stop trying to play a loser’s game. Are you listening?

Get the right asset allocation, diversify your money across multiple asset classes, and align your money with the market. Stop panicking and start doing.

You only need a handful of low cost index funds to build a diversified portfolio.

Here’s a short list of ETF ticker symbols in key asset classes to start with:

--Bonds (NYSEArca: BND)

--Commodities (AMEX: DBC or NYSEArca: GSG)

-- U.S. Real Estate (NYSEArca: VNQ or AMEX: RWR)

--International Real Estate (AMEX: RWX)

--Total U.S. Stock Market (NYSEArca: VTI or AMEX: TMW)

--International & Emerging Markets Stocks (AMEX: CWI or NYSEArca: VEU)

--TIPS (AMEX: IPE or NYSEArca: TIP)

I’m not going to tell you what percentage of your money should be invested in each of these funds. You need to figure that out for yourself and if you can’t, then hire a qualified investment advisor to help you. (IndexShow.com has a neat advisor referral service that’s free.)

The 2005 “Blue Chip” Stock Portfolio has taught you this: Only invest in individual stocks with money you can afford to lose.

All of the money you care about should be invested in a broad mix of low cost index funds or ETFs linked to their respective market.  

Class dismissed.