Buying Individual Stocks Much Cheaper Than ETFs or Index Funds

[l2ridehd]

I have moved in the other direction. I am trying very hard to simplify my investments so I can spend more time doing fun stuff. lazytraders.com and I are becoming good friends. I to used to spend lots of time researching individual stocks and I had a strong focus on dividend stocks. As I started down the path of total market indexing, I looked at Vanguard dividend growth fund and I owned 9 of their top ten holdings. That was the final convincing piece of information. So over the past year have sold all dividend stocks and bought the fund. Also wanted more diversification so bought total stock market, total bond and emerging markets. Yes my investment expenses will be about 25 times what they were, (although still very low using Vanguard index funds) but also my risk is spread 1000 times more. And I get to play a lot more golf and other fun stuff.

[justplainbll]

Diversification and access to investments not readily available to retail investors can make mutual funds attractive. However Enron exemplifies the 'expertise' of some mutual funds-
http://crab.rutgers.edu/~mchugh/enron.txt

[lowflyer]

Investing on your own requires time and effort in order to stay on top of things. For me, it’s probably my most important “hobby”. Most people I associate with (including my family) clearly don’t understand my “obsession” with money and investing. On the other hand, I don’t understand how they can go day-by-day and not have any idea what is going on in the world of money and finance.

I am not an aggressive investor, but invest primarily in conservative income generating stocks and a couple ETF’s. I do research and often listen to conference calls for more info. I don’t know the exact numbers, but I suspect my brokerage commissions and minor ETF fees will be less than if I was using mutual funds.

Regardless of your use of individual stocks, ETF’s or mutual funds, I still think you gotta stay engaged to some extent in the markets, the Fed and the economy. Just seems smart to me.

Ha – Please tell more about using library access codes for online publications.

[Lsbcal]

I have a reasonable size portfolio that trades index ETF's, averaging about 3 trades/year, ER = 0.2%. So almost buy-hold. It's carefully backtested (datamined) and value tilted. Trades involve moving from the value bias to growth temporarily. Also moving some assets between US and international, currently no international. Based on trend analysis using unpublished methods.

Still it's tough to beat Wellington. Backtesing shows it has beat Wellington about 2% per year since 1993 but only 0.8%/year since 2002. Wellington is winning year to date.

Individual stocks are tempting but I don't think I have the knowledge or temperament to do a good job. I'd worry too much. Last stock I sold was Johnson and Johnson beginning of 2005 and had held since 1994.

[haha]

Quote:

Originally Posted by lowflyer Ha – Please tell more about using library access codes for online publications.

It depends on whether your library subscribes to these electronic services, and makes them available to library patrons.

Usually if you go to your library website you will find all the information you need. If not, the central library usually has a reference librarian for electronic services who can help you.

With recent budget cuts some of these things are perhaps threatened, but so far I have seen no changes.

Ha

[Lsbcal]

BTW, my favorite research tool was Value Line Investment Survey at the library. Great tables with 15 years of key data and 1 page per stock they cover. Buffet is said to like it too.

[Ed_The_Gypsy]

More elaboration...

As l2ridehd said, at some point I will pack it in...and buy Wellesley (sigh) and let Vanguard provide the minimum required annual distribution. (Uncle Mick, save me a seat.)

[FUEGO]

I'm such a cheapskate, I don't like paying expense ratios on mutual funds. But it is such a simple and convenient way to own hundreds or thousands of stocks from across the world and across different sectors and cap sizes in the market.

And the expense ratios seem to be trending downwards over the years. Now we can buy ETFs covering a wide segment of the world wide markets for around 0.06 to 0.12% expense ratio. Still, the costs add up. 0.06% on a million dollar portfolio is $600 in admin/management expenses, plus you are still paying the underlying trading commissions and bid/ask spreads on the individual stocks transacted within the ETF or mutual fund. The price of diversification I guess.

[GregLee]

I have read that mutual funds pay less for trading costs than individual investors do. I think that deserves mention when comparing pros and cons of owning stocks directly. (If it was mentioned earlier in this thread, I'm sorry that I didn't notice it.)

[Borbastic]

Thats hard to believe. Their trading costs are not reported as a line item and thus appear costless to the customer. Maybe 50 years ago their commissions were smaller but thats not true today. Their biggest trading disadvantage is their size. They pay up to move big blocks of stock. When I buy and sell $5,000 to $15,000 of shares, its just a flea on an elephant.

I found some academic research that shows an average of 0.8 % of assets per year.

http://finance.wharton.upenn.edu/~rl...apers/9927.pdf

I can't imagine moving the price of a stock by 1 % when I buy it.

That is in addition to line-item costs (the expense ratio) starting with the management fee.

[brewer12345]

Quote:

Originally Posted by Borbastic Thats hard to believe. Their trading costs are not reported as a line item and thus appear costless to the customer. Maybe 50 years ago their commissions were smaller but thats not true today. Their biggest trading disadvantage is their size. They pay up to move big blocks of stock. When I buy and sell $5,000 to $15,000 of shares, its just a flea on an elephant. I found some academic research that shows an average of 0.8 % of assets per year. http://finance.wharton.upenn.edu/~rl...apers/9927.pdf I can't imagine moving the price of a stock by 1 % when I buy it. That is in addition to line-item costs (the expense ratio) starting with the management fee.

I think that the .8% is likely due to the frenetic pace of trading that most actvely managed funds do. If you are an individual investor whose average holding time is measured in years or decades, of course your costs will be lower.

[GregLee]

Quote:

Originally Posted by Borbastic They pay up to move big blocks of stock.

I didn't express what I meant very clearly. I didn't mean that individuals can't do better than mutual funds on costs (by trading less), but rather I meant that mutual funds can trade a given share for less, because they trade in large blocks and, probably, they can negotiate lower per-share brokerage fees because of that.

[clifp]

Quote:

Originally Posted by GregLee I didn't express what I meant very clearly. I didn't mean that individuals can't do better than mutual funds on costs (by trading less), but rather I meant that mutual funds can trade a given share for less, because they trade in large blocks and, probably, they can negotiate lower per-share brokerage fees because of that.

While that is true, I don't think it is particularly relevant any more. Most everyone pays less than $10 commission to buy stock (Schwab is $8.95 for any number of shares). On a $10,000 transaction that is one basis point. My stock purchases are generally two or three times are larger than that.

So constructing a $1 million dollar portfolio of 50 stocks at $20K each is only $450 in trading cost. If you keep the stocks for an average of 5 years the total cost are $90/year to buy and bit higher than $90/year to sell. This is an expense ratio of less than .02%.

In the case of large cap stock the costs are probably very similar for institutions and individuals there 100,000 to 1 million share trades move the market by a penny or two, on the other hand they can narrow the bid ask price spread to less than $.01 at times. But for mid and small cap stocks institutions are at disadvantages to us small time guys trading a 500-1,000 share or so. If an institution buying 100,000 share moves the market by just one cent more than I pay, with my 1000 share order, that completely negates any commission advantage they have.

[Packman]

I always thought that when I ER'd, I would go back to buying and owning individual stocks versus funds and ETF's. But I haven't so far. At least I know with funds I won't lose all my money. Yes, I owned World Comm, WAMU and Citigroup. I rode World Comm and WAMU right down to nothing . Both were highly regarded and highly recommended stocks when I bought them. I could have gotten out sooner, but I still would have lost a bunch.

Although the extra fees and loss of dividends on funds and ETF's continue to bug me, I have to abide by Mr. Buffet's #1 rule - don't lose money!

[haha]

Quote:

Originally Posted by GregLee I have read that mutual funds pay less for trading costs than individual investors do. I think that deserves mention when comparing pros and cons of owning stocks directly. (If it was mentioned earlier in this thread, I'm sorry that I didn't notice it.)

The reality is likely to be opposite to this. Is it easier to sell 5000 shares, or 50,000 or 500,000, without moving the market?

[Borbastic]

Quote:

Originally Posted by GregLee I didn't express what I meant very clearly. I didn't mean that individuals can't do better than mutual funds on costs (by trading less), but rather I meant that mutual funds can trade a given share for less, because they trade in large blocks and, probably, they can negotiate lower per-share brokerage fees because of that.

I understood you correctly. The bid-ask spread kills the big guys, not the brokerage commission. Even the ones that trade as little as individual investors.

[jayc]

I do all types of asset classes. I do not track costs. Most places are within $5 of each other for a trade. I can reduce cost by increasing shares traded. I am constantly running annual compares versus MF, stocks, Bonds, options, CD. Since I hook up with different companies to do certain projects, I am usually opening a 401K or doing a rollover from the last gig. That is when I deal with MF. Once in the ira they are history. I do use the MF profile to view top 10 holdings. Just looking for high-div utility stocks.

Best all around (21 years) low cost, low maint, good return has been the CD ladder. Times are tough, my goal is 4%. I am moving 7-9% of CD ladder to high-div stocks to meet my goal.

[photoguy]

Quote:

Originally Posted by GregLee I didn't express what I meant very clearly. I didn't mean that individuals can't do better than mutual funds on costs (by trading less), but rather I meant that mutual funds can trade a given share for less, because they trade in large blocks and, probably, they can negotiate lower per-share brokerage fees because of that.

This article claims that DFA can save up to 70 - 80 bp with patient trading strategies (through providing liquidity to other market participants).

Similar Fund Companies, Yet Still Different - CBS News

Edit -- note that the article referenced in the news story is authored by vp of dfa, so not necessarily unbiased source.

[smjsl]

Uh oh... is this one of those threads that fosters financial risk as recently discussed? :-)

Quote:

Originally Posted by Finance Dave If you've been successful picking individual stocks, I admire you. I've had some good ones, and some bad ones...but anymore I stay away. IMO owning individual stocks makes you one fraud, one lawsuit, one recall, or one CEO death away from losing a large portion of your investment.

+1

To play with individual stocks, it's not enough to believe in "Inefficient Market Hypothesis"; you also have to ensure you price stocks better than the market and time your purchases / sales accordingly. If you can do this, great!

I would like to also warn about investing in individual relatively high-dividend paying stocks. A higher than normal dividend often implies company does not have great growth prospects on the upside. At the same time, its stock can effectively disappear just like FNM and GM did and BAC/C almost did. So downside risk can be great. You can do great with such companies for a very long time; until you lose it all one day or one month or one year... This is the kind of investment that pays higher yields for a while but a high-risk can suddenly raise its head at one point or another...

I had analyzed and invested in such a company at one point. It paid a nice dividend and had a lot of other great properties; and in fact had a very nice growth profile too. It was relatively large, stable, and secure. It was undervalued based on most if not all common stats. Unfortunately, an unforeseen accident moved its stock way down. I sold it at a large loss, when its chance of bankruptcy suddenly became non-trivial (and I risked 3 times the amount of my loss). It does not matter whether it eventually did go bankrupt or not (it could have gone either way); the point is, I learned my expensive lesson that time (I hope)...

[akck]

Quote:

Originally Posted by haha The reality is likely to be opposite to this. Is it easier to sell 5000 shares, or 50,000 or 500,000, without moving the market?

What a lot of managers do is called something like cross-block trading. What they do is match up large block buyers with large block sellers who agree to trade at the closing price on a certain day. They do this in order to avoid moving the market as you suggest.