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Just a quick reminder that I'm sure most on this forum already know. I was using https://www.portfoliovisualizer.com/ to backtest the asset allocation that I've chosen for my portfolio going forward and almost made a huge mistake...
I have a fellow physician friend that recommends investing in the dividend aristocrats rather than ascribing to modern portfolio theory. He says that the only reason to buy stocks is to receive the dividends, and companies that have consistently increased their divided for over 25 years represent a great investment. I decided to test this and chose a somewhat random selection of 20 dividend aristocrats with high current dividend yield: HCP, T, CVX, EMR, ED, NUE, ADM, PG, XOM, TGT, KO, PEP, MCD, TROW, KMB, MMM, GPC, CL, LEG, and MKC. When I backtested these across several different 5 and 10 year periods in the last 20 years, they almost always came out with a higher yield over time as well as less volatility when compared to my portfolio and the S&P 500. This made me really question my asset allocation, but, then I remembered survivorship bias.
While these may still be great investments going forward, the stocks that I was backtesting are the stocks that survived the test of time. I looked at http://www.suredividend.com/list-of-dividend-aristocrats-from-1989-to-2014/ to find companies considered dividend aristocrats in 2000. Several of these companies are no longer in business. Others that I had chosen for my backtest only became aristocrats in the last couple of years. If I had performed the same exercise in 2000 and actually bought the stocks, I'm sure a fair percentage would be out of business, split or consolidated into other stocks. So, long story short, I'm sticking to my plan and remembering that even companies that have been in business for a long time still fail and it's safer to own the whole market.
I have a fellow physician friend that recommends investing in the dividend aristocrats rather than ascribing to modern portfolio theory. He says that the only reason to buy stocks is to receive the dividends, and companies that have consistently increased their divided for over 25 years represent a great investment. I decided to test this and chose a somewhat random selection of 20 dividend aristocrats with high current dividend yield: HCP, T, CVX, EMR, ED, NUE, ADM, PG, XOM, TGT, KO, PEP, MCD, TROW, KMB, MMM, GPC, CL, LEG, and MKC. When I backtested these across several different 5 and 10 year periods in the last 20 years, they almost always came out with a higher yield over time as well as less volatility when compared to my portfolio and the S&P 500. This made me really question my asset allocation, but, then I remembered survivorship bias.
While these may still be great investments going forward, the stocks that I was backtesting are the stocks that survived the test of time. I looked at http://www.suredividend.com/list-of-dividend-aristocrats-from-1989-to-2014/ to find companies considered dividend aristocrats in 2000. Several of these companies are no longer in business. Others that I had chosen for my backtest only became aristocrats in the last couple of years. If I had performed the same exercise in 2000 and actually bought the stocks, I'm sure a fair percentage would be out of business, split or consolidated into other stocks. So, long story short, I'm sticking to my plan and remembering that even companies that have been in business for a long time still fail and it's safer to own the whole market.
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