Another Slap of Reality: A Reminder to Stay Disciplined

The first two weeks of November have once again reminded me of the reality of investing.  I have experienced market corrections before, but I suppose I had forgotten how they felt over the past year.  From January to mid-September, my portfolio grew by about 19%, including reinvested dividends.  It was a pretty good run, and naturally, seeing the portfolio value climb brought some satisfaction.  However, since mid-September, the market has corrected sharply, giving back a significant portion of those gains.  The feel-good factor has diminished.

I am not depressed, nor am I particularly worried.  But the euphoria is gone.  And perhaps that is not necessarily a bad thing.  Sometimes, a market correction is a useful reminder of what investing actually feels like.

As a dividend investor, I know I should be paying more attention to the income my portfolio generates rather than its market value.  After all, I am generally not selling shares to fund my expenses.  What matters more to me is whether my dividend income remains sustainable and continues to cover my living expenses.  Yet, this recent correction has brought up reminders of lessons I have written about previously.

Yield Compression: A Lesson I Did Not Fully Apply

Previously, I wrote about selling stocks when yield compression makes their valuations less attractive here.  I applied this thinking to Singapore Technologies Engineering (STE).  As its share price appreciated and its dividend yield compressed, I decided to sell part of my position and lock in some capital gains.  In total, I sold about 50% of my shares, batch by batch, as the yield of STE compressed below 2.5% and its share price continued to rise.  However, I did not exercise the same discipline with Oversea-Chinese Banking Corporation (OCBC).

As OCBC's share price continued climbing, its dividend yield fell below 3%.  I could have taken some profits off the table, just as I did with STE, as yield compression happened.  Instead, I held on, partly because the rising share price made my portfolio look increasingly good, and I believe I "fell in love" with the stock, which is another pitfall that I have warned myself against earlier.

In hindsight, I missed an opportunity.  When the share price subsequently corrected, some of those paper gains disappeared.  Had I trimmed my position when the yield compressed, I could have locked in some capital gains and redirected the proceeds into higher-yielding shares (I probably did not consider this because, with my limited knowledge and exposure, I could not see another stock as stable as OCBC) or simply kept the money as cash.  That cash would have given me more flexibility to take advantage of opportunities during the recent market correction.

Of course, nobody knows exactly when a stock has peaked or when a correction will happen.  I am not suggesting that I should have sold at the top and bought back at the bottom.  That would be unrealistic.  But I could at least follow the plan.

Never Be Married To Any Stock

This is another lesson I need to remind myself constantly, not to fall in love with a stock.  I have written about this before here, yet I think I fell into this trap with OCBC.  Perhaps because it has been a good dividend-paying stock in my portfolio for years, and perhaps I kept convincing myself that I did not own a large number of shares in the first place (like I did for STE), selling a portion will leave me with too few shares and impact the dividends I can collect from a relatively reliable dividend generator.  Hence, I became too comfortable holding it.  As its share price climbed and my portfolio value grew, I was happy to sit on my unrealised gains.  I became less objective about whether its valuation and dividend yield still justified holding the position at that size.

I need to remind myself that no stock deserves special treatment, regardless of how long I have held it or how well it has performed for me.  I should look at the numbers objectively: earnings, business fundamentals, valuations and dividend yields.

If the numbers no longer justify holding a position, I should be prepared to act.  It should not matter whether the stock is OCBC, DBS or any other company I have owned for years.  At the end of the day, I am investing to build a dividend portfolio, not collecting stocks that I have grown attached to.

Back To The Plan

When the market is doing well, it is easy to become complacent.  Portfolio values rise, unrealised gains accumulate, and there is a tendency to enjoy the ride without questioning whether the underlying valuations still make sense.  Then, when the market corrects, reality sets in.

These reminders sometimes feel like a slap in the face, but perhaps I need them.  They remind me that a rising portfolio value does not mean I have suddenly become a better investor.  Neither does a falling portfolio value mean my investment strategy has stopped working.

I started this dividend investing journey with a plan.  My objective has always been to build a portfolio that generates sufficient passive income to support my living expenses.  I should not lose sight of that objective.  But neither should I use dividend investing as an excuse to ignore valuations and capital efficiency.

Going forward, I want to be more disciplined about yield compression, especially when a stock's valuation becomes stretched.  I do not necessarily need to sell everything, but I should be willing to trim positions, lock in gains and maintain some cash for opportunities.  The past two weeks have been another reminder that markets move in cycles.  The good times will not last forever, and neither will the bad times.  I just need to stay disciplined, follow my plan, and not let a rising portfolio value distract me from what I set out to achieve in the first place.  Barista FIRE, here I come...!