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Get Out of Stocks and Into Index MF's?
Old 08-10-2007, 01:16 PM   #1
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Get Out of Stocks and Into Index MF's?

After watching our brokerage account take a beating, DH and I are contemplating gradually liquidating some of our stocks in our brokerage account and investing in index mutual funds.

We already invest in index MF's by dollar cost averaging every month but the amount invested is still quite small (approximately 4% of our total brokerage portfolio) and weighted as 25% Bond, 75% Stock (the stock portion is split three ways between Canada, U.S. and International).

Our individual stocks are scattered among REITS, some trust units (oil and gas) and a few technology stocks. Is anyone else thinking of getting out of individual stocks? I'd like to keep the REITS to give us some exposure to real estate and a few of the oil and gas trusts; everything else I'd like to liquidate. (Our total brokerage account is approximately $140K and this is outside of our retirement accounts).

Thanks!
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Old 08-10-2007, 01:33 PM   #2
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My spouse was in 2 investment clubs over the last 10 years. They were all into growth stocks. Over those years we kept track of what our gains in individual stocks were as well as the gains in our mutual funds and the indexes. We usually did as well as the indexes, sometimes a little bit better, sometimes a little bit worse. So we said, why work so hard and follow all this stuff and slowly switched to index funds and ETFs.

Since you are Canadian, may I suggest you use ETFs instead of mutual funds? The expense ratios should be lower and the transactions costs minimal if you use a discount broker like tdwaterhouse.ca There is plenty of info about ETFs on the web such as The Seeking Alpha ETF Investing Guide - Seeking Alpha
and ETFs vs. Index Mutual Funds

Good luck!
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Old 08-10-2007, 01:54 PM   #3
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Originally Posted by Calgary_Girl View Post
After watching our brokerage account take a beating, DH and I are contemplating gradually liquidating some of our stocks in our brokerage account and investing in index mutual funds.
While that might or might not be a good plan, I don't think that equity mutual funds would protect from the sort of market action of the last weeks. It isn't that some stock or sector got clobbered and everything else was unaffected. Pretty much everything is getting hit-of course ground xero is mortgage securities and anything that might have anything to do with mortgage securities.

Off the top of my head it appears that tech has been as strong as anything. Have you compared your drawdown to what you would have experienced in an equity fund, or several equity funds that represent the indicies that you might switch to?

Mutual funds can't do much about so called systemic risk.

Ha
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Old 08-10-2007, 02:22 PM   #4
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Originally Posted by Calgary_Girl View Post
Is anyone else thinking of getting out of individual stocks? I'd like to keep the REITS to give us some exposure to real estate and a few of the oil and gas trusts; everything else I'd like to liquidate.
We've been leaving individual stocks for ETFs. We've also just sold our last mutual fund and will be putting the cash in an ETF.

As Ha says, you won't necessarily reduce your volatility or your systemic risk. However you'll possibly reduce your expense ratios and you won't have to worry as much about single-stock risk.

Our reason for getting out of individual stocks is that the reward does not compensate for the risks or the work required to do it right. Without a profit motive there's no reason to stay in the business and there's plenty of other things to do with our time. We still hold Berkshire Hathaway, Intel, Superior Industrial, and Tate & Lyle PLC but we'll eventually leave the latter three.

I try to imagine myself selling even one "B" share of Berkshire but I just can't do it.
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Old 08-10-2007, 02:49 PM   #5
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I think one of the great inhibitors to successful stock picking over long periods of time has to do with the mentality of individuals.

When the stock drops, most individuals say:
"The stock is down, it's my fault"

When the stock market drops and the index fund drops, most individuals say:
"The market is down, it's not my fault"

Go with what you are most comfortable doing but don't allow the past few weeks make up your mind for you.
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Old 08-10-2007, 02:55 PM   #6
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Originally Posted by wildcat View Post
I think one of the great inhibitors to successful stock picking over long periods of time has to do with the mentality of individuals.

When the stock drops, most individuals say:
"The stock is down, it's my fault"

When the stock market drops and the index fund drops, most individuals say:
"The market is down, it's not my fault"
Very interesting point. I have never thought of this before.

Ha
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Old 08-10-2007, 03:11 PM   #7
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I usually say "when the stock is down, it is the fault of that mofo on the retire early board that recommended it"...
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Old 08-10-2007, 03:25 PM   #8
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I usually say "when the stock is down, it is the fault of that mofo on the retire early board that recommended it"...


That's what I am thinking too- Who is this index mofo that is causing all the trouble?
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Old 08-10-2007, 04:15 PM   #9
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Moved entirely out of individual stocks (except for a tiny speculation account) several years ago, and couldn't be happier.

There is a *lot* to be said for choosing an asset allocation, implementing it, and sticking to it through thick and thin. I'm very happy to be off the 'should I sell', 'should I buy', 'why did I buy that dog', etc. emotional roller-coaster.

- John
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Old 08-10-2007, 04:24 PM   #10
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mofo?
MF? or Mofu?
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Old 08-10-2007, 07:29 PM   #11
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Moved out of individual stocks over the last 5 years into index's. Although it was no protection from the last few weeks market actions, IMO it could have been worse (or better) with individual stocks. ... but the volitility is a lot less. Hence the buy/hold and get as good a night sleep as one can under these conditions.
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Old 08-10-2007, 10:21 PM   #12
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Bit by bit we are moving out of individual stocks. Surprisingly it was difficult at the start to let each one go, as they were like members of my family. However, once I pushed that sell button a few times it got easier.

We are actually moving more into cash as we can get 7% in the bank in Oz, so for my husband's peace of mind as we sell we are transferring the funds back home.
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Old 08-10-2007, 11:50 PM   #13
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I like individual stocks but I have a fairly large portfolio so it seems to functions as a mutual fund in terms of diversification. I also follow an investment newsletter which has been very profitable. Finally, I don't pay any brokerage fees so my expenses are the price of the newsletter.

I also realize that not everyone is like me and I would put my friends in Vanguard or some other low expense fund. (My family invests in stocks which is probably why I am comfortable with them).
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Old 08-11-2007, 12:51 AM   #14
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Bssc, we are getting out not 100% due to volatility, but part of it has to do with wanting to simplify our financial life. I am an accountant and it's not that I don't understand the paperwork, but the volume associated with holding too many investments gets overwhelming. We figure that as we will not want to be checking in on our investments every day once we are retired, if we lessen the risk by moving to cash it will give a bit of extra peace of mind.
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Old 08-11-2007, 03:54 AM   #15
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We got out of all individual stock holding except for PST holdings at DW's work... because of rules.

I prefer indexes because of the low cost. Plus few managers beat the indexes.

I currently use the traditional open-end mutual funds. I have not been using ETFs. But I do not make many trades. If one feels they are going to move in and out of the market, ETFs have the advantage... plus you can enter or close out a position immediately (rather than at market close).
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Old 08-11-2007, 11:41 AM   #16
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Bssc, we are getting out not 100% due to volatility, but part of it has to do with wanting to simplify our financial life. I am an accountant and it's not that I don't understand the paperwork, but the volume associated with holding too many investments gets overwhelming. We figure that as we will not want to be checking in on our investments every day once we are retired, if we lessen the risk by moving to cash it will give a bit of extra peace of mind.
I understand what you are saying and this is why I recommend one or two mutual funds for some people. However, I am a buy and hold investor, I think that I hold a stock for five years or so. I also mentioned the newsletter who does market monitoring for me. I don't check my stocks everyday and can go on vacation without worrying about the portfolio. I also understand the need for cash, when I retired, I will be doing the same thing to avoid market instabilities.
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Old 08-11-2007, 10:12 PM   #17
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(Our total brokerage account is approximately $140K and this is outside of our retirement accounts).

Thanks!
As your stocks are in taxable accounts what will the tax implications be if you sell and reinvest?
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Old 08-12-2007, 03:18 AM   #18
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One thing to consider when moving assets. It is a bit of a timing thing. I will try to describe it.

Back in 1999-2000 time frame... We had one particularly large holding in a solid large cap company. The stock value cut in half. This was about 6 months before th bubble burst. Since the company we held the stock figuring it would come back. But I decided then and there that it was time to sell the shares and diversify the holdings (but it was a little late). Six months later everything else broke down. Had I sole the stock at that time (Low) and bought S&P 500 Index funds (high), I would have lost twice because the S&P 500 lost much of its value 6 months later.

I eventually started to cash out of the stock about 1.5 years later. The stock had recovered a little and the S&P was beginning to recover. This was a timing thing... but at least I traded the securities when they are somewhat equivalent in terms of where they should be in the biz cycle.

This form of timing needs to be considered so you do not get a double whammy when moving assets. I would only cut and run immediately if the underlying asset (i.e., company) had serious problems that would jeopardize the entire investment (e.g possible bankruptcy or the like).
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Old 08-12-2007, 05:56 AM   #19
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I've been busy the last week, "buying" Canadian stocks. The last time I was this happy about buying, was in the spring of 2006. The way I look at it, the more the market goes down, the more dividend yield I get. Dividend growth and yield, are my first priority. Long term capital gains are nice, but for me, secondary.
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Old 08-12-2007, 07:54 AM   #20
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Over the years I moved:
- From individusl stocks to mutual funds, then
- From actively managed mutual funds to index funds
- From index to ETFs

I don't know if the return has increased - but I beleive the diversification has increased and volatility reduced (a little).

Most importantly, index/EFTs have allowed me to focus on overall asset alocation.

Individual stocks were a "time sink" - I spent too much time analyzing/deciding small incremental stock positions - and not enough time on the "bigger picture" of getting my "macro asset allocation" in place and tuned.
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