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  • Writer's pictureHigh Dividend Opportunities

Investing Pitfalls: 4 Reasons Why You're Not As Good as You Think

Updated: 4 days ago

Good Morning, Income Investors!


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According to a JP Morgan study of 20 years of market data, the average investor terribly underperformed the markets with a measly 3.6% annual return, while the S&P 500 boasted 9.5%.


average investor returns

Investing is highly accessible today with a multitude of brokerage firms and no-commission trading. In this information age, we also have plenty of investment ideas all around us, either free of charge or at a modest price. So this JPM study raises a serious question: Why do average investors achieve such pathetic returns?


Here are four reasons why your investing strategy is delivering sub-par results:


  1. You are an emotional investor - Investors often act first and think later. When stock prices go down, people tend to panic and sell, thinking that they are reducing their losses. However, in reality, the fall may be temporary and the market could bounce back quicker than you think. This is not a soap opera, it is your financial future. So let’s leave the emotions, focus on the fundamentals and think long-term.

  2. You trade too much—Humans are impatient by default. They look for quick ways to make a profit and often become impatient when a stock doesn’t rise in price as expected. Buying and selling frequently and attempting to time the market are futile activities with limited repeatable success. Such strategies, especially by amateurs, lead to poor long-term returns.

  3. You do not know what you own - If you don’t understand the business or how it makes money, you are unlikely to unemotionally hold it if the stock drops.


“Behind every stock is a company. Find out what it's doing”  - Peter Lynch

These wise words of legendary investor Peter Lynch form the basis of long-term investing. Understand how the company makes money, whether its profitability and business model are sustainable, and how you as a shareholder can benefit by being an investor (or part owner of the company)


4. You do not have well-defined goals for your investments - Why are you investing? How much are you investing? Do you need this money in the next 1,3,5, 10 years? These are some questions you need to have answers to before you begin. 


If you are investing for retirement income and buying and selling shares with a buy-low-sell-high strategy, ask yourself if this will help you put food on the table and pay the bills every month. You need to pick the correct type of investment strategy to meet your goals.


Here are a few things to consider in order to improve your investment game.


  • Diversify - Spreading investments across different sectors, asset classes, and regions reduces overall risk. As an individual investor, you are never going to know everything about the company you have invested in. There are several unknowns, and diversification provides immunity against the unknown.


  • Use Diversified Funds—There is no harm in seeking the help of experts to augment your investments. For an average investor, several diversified options, like Exchange Traded Funds (ETF) and Closed-End Funds (CEF), offer broad market exposure with specific goals that could match your requirements. They allow investors to benefit from the markets without active trading.


  • Have a plan, and be consistent - Write down your investment goals, and regularly make investments regardless of market conditions. This can help reduce the impact of market volatility and build a substantial portfolio over time through the power of dollar-cost averaging. This disciplined approach ensures that you buy more shares when prices are low and fewer when prices are high, potentially enhancing your overall returns. 


At High Dividend Opportunities, we are income investors who seek to generate a lifestyle-supporting income stream from our portfolio. Our plan is to maintain a rate-agnostic portfolio that benefits regardless of what the Federal Reserve decides. This way, I win if rates are cut, and I win if rates stay elevated for longer. Let us now review two picks that help me execute that plan


Pick 1: ARCC - Yield 9.1%


Ares Capital Corporation (ARCC), the largest and time-tested public BDC with a $21.9 billion asset portfolio. ARCC lends using floating rates and borrows at fixed rates. As a result, rising interest rates have been beneficial to earnings, and the trend will continue if the Fed keeps rates elevated for longer.


The BDC just reported another strong quarter. Although Net Investment Income ticked down slightly to $0.55/share, it still comfortably covers the $0.48/share dividend. ARCC’s Net asset value ticked up to $19.53/share, up 1.5% sequentially and 5.8% YoY.


ARCC’s credit quality continues to be strong, with only 4% of its fair value rated with grades 1 or 2 (the worst on ARCC's scale). That works out to be 11% of its portfolio companies, and both numbers are lower vs. 2023.


Today, ARCC presents a defensive investment option. It pays a very well-covered dividend, has a solid portfolio, and is managed by among the best in the business. As such, it is reasonable to expect that the current dividend can be maintained in most economic scenarios—including a potential recession. Over the long term, we expect that ARCC will continue to be one of the best-performing BDCs in the market.


Pick 2: RNP - Yield 7.9%


Cohen & Steers REIT and Preferred Income Fund (RNP) is a CEF with a unique blend of REIT common equity, and non-REIT preferred securities. Interestingly both are dividend-oriented asset classes that are depressed amidst higher interest rates and are set to be the biggest beneficiaries of declining interest rates.


One portion of RNP’s portfolio is made up of equity REITs that are leaders in their respective domains, and this segment makes up 52% of the total assets. This includes prominent and high-quality data center, cell tower, and industrial and healthcare REITs like American Tower Corporation, Prologis Inc., Welltower Inc., Digital Realty Trust, and Equinix.

The second part of the CEF’s preferred portfolio has almost no overlap in the industry, with over 90% of the allocated assets invested in preferred securities of banking, insurance, utility, and midstream pipeline companies. RNP pays monthly distributions with a steadily growing payout since its inception in 2003.


RNP operates with a 31% leverage to boost returns from these undervalued sectors. This leverage has a highly lucrative structure with 81% carrying fixed-rate financing at 1.6% for a weighted average term of 2.3 years. The total cost of the CEF’s leverage is 2.4%, positioning the CEF well to ride out this interest rate cycle and refinance on better terms or deleverage naturally as its holdings appreciate with rate cuts.


Conclusion


Technology is here to assist us and make us better at what we do. Yet, despite the vast sources of information at our fingertips and the advent of trading with no commissions, the average investor performs rather poorly in the market.


No matter what style of investing you choose to pursue, it is critical to have a plan and ensure your steps are in line with it. An emotional investor is always bound to make the poorest of decisions and regret them down the road.


At High Dividend Opportunities, we maintain a comprehensive portfolio of equities, preferred stocks, and baby bonds and target an overall yield of +9%. We look to get paid by the market with every investment we make, and we aren’t shy about diversifying adequately to protect our income against the unknown and the uncertain.


Remember, with the right mindset and approach, anyone can improve their investment game. Happy investing!

 

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