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Cutting Investment Costs
Old 07-13-2004, 05:03 AM   #1
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Cutting Investment Costs

Can you guys think of any other strategies to cut stock market investment costs besides index funds? Right now, i'm not that concerned about it since i'm young and i dont have a sizable portion in my actively managed funds. However, once i pass, say, the 100K mark, i'll probably start looking a little closer at what i'm paying for their services.

Naturallly, i had in mind just buying individual stocks when I had enough capital to buy 8-10 stocks. As for what to pick, what do you guys think about just checking a popular mutual fund's current holdings and buying their top 10? (then switching when he/she does). Granted you wont switch the moment he/she does, but would that exact timing really make that much of a difference. What are some other ideas for selecting a portfolio of individuals stocks for someone who doesnt want to put too much time into it? Again, the main objective here would be to cut out the 1% management fee, but avoid the "trained monkey" of index funds.
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Re: Cutting Investment Costs
Old 07-13-2004, 05:26 AM   #2
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Re: Cutting Investment Costs

Type in Moneypaper or Net stock direct on your internet search engine. I haven't used a stock broker in 15-20 yrs (so long ago I don't remember). I use DRIPs to buy individual stocks(37 as of today). Pain in the butt paperwork wise to many people - but for me it's a hobby. I have hundreds of shares in a few stocks down to a few shares in several - waiting for a better price to add more $ - meanwhile the dividends are compounding. It's creeped up to over 25-30% of my taxable income stream the last 10 yrs (variable) and last year with sales/spin offs/mergers - 40% of my taxes. So - definitely not for everyone - the paperwork/taxes put off many.
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Re: Cutting Investment Costs
Old 07-13-2004, 05:28 AM   #3
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Re: Cutting Investment Costs

OK i'll check it out. Not worried about the tax part because this would be for a Roth retirement account.
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Re: Cutting Investment Costs
Old 07-13-2004, 08:00 AM   #4
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Re: Cutting Investment Costs

Not sure what you have against index funds, but whatever floats your boat. If you think that you have some ability to outperform the indexes based on stock-picking, I would say go right ahead and buy individual stocks that you will be happy holding for many years. Most of the costs that arise from investing stem from trading and taxes, so the less you trade, the lower your costs.

If you aren't comfy picking stocks, I would either go for index funds or a portfolio of ETFs. Anything else gets way too expensive quickly.
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Re: Cutting Investment Costs
Old 07-13-2004, 08:36 AM   #5
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Re: Cutting Investment Costs

Quote:
Not sure what you have against index funds, but whatever floats your boat.
Even with low fee funds that 0.2% adds up over 40-60 years, not to mention the hidden trading costs. I took that as his meaning.

It's occured to me that going long term buy & hold on stocks could be cheaper long run; the trick is getting the risk down to mutual fund levels while keeping trading costs below mutual fund fees.
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Re: Cutting Investment Costs
Old 07-13-2004, 08:43 AM   #6
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Re: Cutting Investment Costs

Quote:
Not sure what you have against index funds, but whatever floats your boat.
The short answer: I dont like "trained monkeys" managing my retirement account. The long answer:

http://early-retirement.org/cgi-bin/...num=1089675118
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Re: Cutting Investment Costs
Old 07-13-2004, 08:51 AM   #7
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Re: Cutting Investment Costs

azanon,

The number of companies that allow you to purchase
DRIPs into an IRA may be pretty limited. Exxon Mobil
comes to mind. I think you may have a problem
buying DRIP stocks into an IRA sponsored by a
financial institution since they hold your stocks in
"street name". It has been several years since I
checked on this so the rules may have changed.

Cheers,

Charlie
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Re: Cutting Investment Costs
Old 07-13-2004, 09:21 AM   #8
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Re: Cutting Investment Costs

azanon,

If you plan to buy individual stocks, please keep in
mind that you need to stay well diversified.

Buying the top 10 stocks of a fund might work OK
as long as you use a diversified mix of "slice and dice"
funds for your model. I have not seen any studies
on this approach, but it sounds reasonable.

That said, the odds that you will substantially beat
a mix of index funds is not good. I would rather
have a "guaranteed" average market return than
run the risk of not being as smart as I think I am.

Cheers,

Charlie

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Re: Cutting Investment Costs
Old 07-13-2004, 09:53 AM   #9
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Re: Cutting Investment Costs

Quote:

The short answer: *I dont like "trained monkeys" managing my retirement account. *The long answer:

http://early-retirement.org/cgi-bin/...num=1089675118
Whatever helps you get your freak on. Just remember that a manager may do great or poorly in any given year, but management fees (150 BPs seems to be typical) are a certainty. Over the long haul, they really add up. That also totally ignores the costs of trading (which you bear), the potential for skullduggery at your expense, and the possibility of style drift over time.

Personally, I am a stock picker. However, as I get busier and have less time to go scratch through 10Ks, index funds are becoming more attractive. I am now hedging my bets by having part of the portfolio in indexes, and part under my active control. I don't do a lot of trading, though.
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Re: Cutting Investment Costs
Old 07-13-2004, 10:24 AM   #10
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Re: Cutting Investment Costs

Well, i do look at turnover and try to pick one with a low turnover rate. *Also, i think this is more of an issue for those with a lot of capital than someone like me with a relatively small portfolio for now. *To make the obvious evident, if one of you here have 1 mil you put into the same diversified mutual fund i own with 10K in it, we're both getting the same quality of management, but you're paying 100 times as much for him to do it.

Because i'm federal, the "base" of my retirement fund is index in effect (TSP). *I think my strategy for the rest of it will be to keep my active managed funds till i hit, say 80-100K in them, then i'll look to move the money to buy common stocks myself or * gasp * index funds.
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Can't beat the TSP but...
Old 07-13-2004, 11:09 AM   #11
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Can't beat the TSP but...

... after you max out your TSP contributions, you may be able to diversify with sector ETFs.

Of course there are complications. The brokerage fees would be too high if you're DCAing so you'd probably accumulate $25K for a large purchase. (One way to stay fully invested during the accumulation would be to DCA into a low-cost Vanguard index fund.) Depending on your ETF asset allocation, you could get your annual expense ratio down into the 0.2% range or even less with a big index. Or, with individual stocks and a one-time brokerage fee, down to just a couple basis points.

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Re: Cutting Investment Costs
Old 07-13-2004, 12:53 PM   #12
 
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Re: Cutting Investment Costs

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As for what to pick, what do you guys think about just checking a popular mutual fund's current holdings and buying their top 10? (then switching when he/she does). Granted you wont switch the moment he/she does, but would that exact timing really make that much of a difference.
Most mutual funds are a quarter behind in publishing their top holdings. I believe that they do this for the reason that you just proposed. While most of these funds adhere to a buy and hold methodology, there is a possibility that there would be a top ten holding or more that has reached its full valuation and is sold before the next quarter's holdings are published. It does make a difference, may be not in a quarter or even a year but eventually. This is where the gambler's luck comes in if you're willing to bet your saving on it.

In addition, top mutual funds switched in and out in the short term; in other words, top five this quarter may not remain the top five in the next quarter. So if you're following one fund's top tens you may as well put your money in that fund.

If you're set on the individual stocks, my opinion is that you're better off with due diligence on specific stocks and use mutual funds holdings or accumulations as one of the confirmations of your thesis. IMHO.

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Re: Cutting Investment Costs
Old 07-13-2004, 01:21 PM   #13
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Re: Cutting Investment Costs

I am always checking top ten holdings of Wellington, Wellesley, Dodge and Cox, Sequioa, Third Avenue Real Estate, etc. for possoble DRIP buys - have for years. Same with Warren Buffett top ten.

In fact - I'm adding AT&T (Dodge and Cox) this month - to my wild growth stock portion of my portfolio since it's below Ben Graham's 1.5 price to book.
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Re: Cutting Investment Costs
Old 07-13-2004, 01:26 PM   #14
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Re: Cutting Investment Costs

And theres another possibility for those who dont like indexes.

I do have a fondness for monkeys though.

Wellington, Wellesley, and Dodge and Cox are all actively managed balanced indexes with terrific records. I believe dodge and cox is about .54% annual, wellesley around .25 and wellington around .37. Shave some of those latter two off for 'admiral' shares. I pay .20 for my wellesley admiral shares.

I do not know if they have a monkey though...
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Re: Cutting Investment Costs
Old 07-13-2004, 01:44 PM   #15
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Re: Cutting Investment Costs

Th

Not monkeys but orangutans - Wellington took the best of bunch from Warren Buffett's 1984 speech on value investing at Columbia and made them managers - may even be using their decendants to this day.

Of course I think it's just a wild myth - probably a flight of fancy. But I hear universities are still studing primates and training them to do all sorts of things. ??
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Re: Cutting Investment Costs
Old 07-13-2004, 07:51 PM   #16
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Re: Cutting Investment Costs

Monkeys or not, you have to like the returns and low volatility, along with the low costs. On the other hand, they've been a little iffy lately against their concocted benchmarks by missing the boat on a few things.
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