I sold our final stock. The holding I had was in HCP, and I’ve been a big fan of this position for many years, but I realized it was time to reallocate for several reasons.
HCP is a Real Estate Investment Trust (REIT) focused on the healthcare industry. I really like this conceptually as looking forward I see a strong demand for the type of properties that they work with: senior housing, skilled nursing facilities, hospitals, medical offices etc.
Additionally, REITs in general are good income investments. In order to be granted special taxation status with the IRS they must promise to pay out at least 90% of taxable income as dividends annually. I personally like to shove these into retirement accounts and use a Dividend Reinvestment Program (DRIP) to automatically buy new shares (without a fee) with my dividend payment.
Within REITs, HCP is a S&P 500 Dividend Aristocrat, a title bestowed on it for a 30 year performance of dividend increases. It currently yields 5.3% annually.
So…it sounds like a pretty good company and you may be wondering why I got out now? The truth is, it is still an attractive proposition in many ways. Frankly, I don’t have too many concerns about it for the future.
My view on investing
You need to consider an investment in a single company as incredibly high risk, and as you should know by now, risk must have reward priced into it in order to be a savvy investment decision. The reward of HCP is the yield of 5.3%… which is quite attractive. But the risk can be seen on the chart below:
As you can see, HCP is outperforming the S&P 500 until, well… it doesn’t anymore. At the beginning of February over a couple of days, it declines from a high of $47.97 to a low of $42.88. If you look at the macro-economic events for this period, nothing notably changed. This means that the decline that occurred was through unsystematic risk.
Essentially something happened to the company itself, a micro economic event. I looked around for ’news’ and I couldn’t find much to explain this drop. There was some muttering about the price being expensive compared to alternative companies, but nothing really solid.
The final push?
Typically, the events surrounding HCP would not be enough for me to bail on them. Note that this event happened a month ago, so it isn’t a knee jerk reaction to losing money.
Overexposure to real estate
As home owners we are already invested in the real estate market. While HCP may seem very different, there is correlation on a rate level. IE if rates rise borrowing will cost more which will impact marketability of our home, and the cost of borrowing for HCP increases, reducing profitability, also impacting its marketability.
While I do not predict immediate rate hikes, there is just not enough incentive for me to ‘hope’ it doesn’t happen. Remember risk must be offset with reward.
Conclusion
I do not believe in a one size fits all approach to investing. Holding individual stocks, including HCP can be a wise move for many investors. My own needs change based upon analysis of my overall asset allocation, including personal residence, and plans for business growth.
I do believe the core of any investment strategy should be a broad, well diversified asset allocation using low cost ETFs or Index Funds, sectors should account for economic cycle and personal exposure. Single stocks should be speculative in nature and considered very high risk. High risk is OK, providing that it is priced accordingly.
Now THAT is a nasty looking chart! Broke through 2 support levels, took a dead cat, and then kept on falling…..
What will you be buying with your proceeds? Sounds like you will be putting it into some kind of index fund.
I’ll be going for a fund. I am still deciding how exactly to allocate it, there are a few things on my mind that I want to explore further.
Matt. Dude. C’mon. I am not a troller and don’t want to come off as one but this is a bad move. When you posted about a year or so ago about how you can make a lot more money in the market by “timing it” and pulling out before you think it would crash, I was shaking my head just as much. Everyone (at least the smart ones in the personal finance world) knows that only a fool tries to time the market! But here you were trying to tell people to do just that. And guess what, the market has skyrocketed since you said you were pulling out because a crash was coming. I didn’t say anything back then and hoped that you would wise up from your CFP classes, but now this move is just about as bad. REITs aren’t held for value appreciation. This fluctuates with the real estate market especially decreasing when the housing market is on the up, since rentals become less attractive. I know this fund is actually a little different since it’s not based on residential rentals, but REITs are roller coasters. You hold on to them for the dividends. And now you’re basically saying it’s time to get out because the price is down! A month passing by doesn’t mean it’s not a knee jerk, it just means it’s delayed. Stop telling your readers to freak out when everyone else does, sell low, and to try to time the market.
Hey Brad,
I don’t think you understand my reason for selling. If it was timing as you say then I agree with you. Also, a year ago I had other reasons to change.
The reality is that each investor is different based upon their personal situation. I am moving out of this stock because of correlation with real estate, as I mention in the post. If I was uncorrelated (renting) then I’d certainly keep a REIT. The reality is that now I probably have at least 50% of my assets in Real Estate, so I want to find an investment that softens that.
The risks that come from lack of diversification are not worth it to me.
And it really isn’t knee jerk – I have no idea how much I lost (I can figure it out but I haven’t) it is not relevant to me.
I’m not ‘out’ of the market. I am all in.
I already feel sorry for your future clients. Volatility = Risk, hahahahaha
I’m not sure I really understand where you are going with that. But always good to have a nice laugh 🙂