may I ask for advice too?

[P.S.]

Okay, I've been reading on this board for a few months, read many past threads, and have read many of the kind of finance books for the masses.  But I'm still not sure of a plan...

Husband and I are just into our 30's, we max out on allowable contributions for all non-taxable savings (IRA, TSP, etc).  Also, no debt.  So each month a good amount comes in, but I am not sure of a good strategy for how to allocate it.  So we have now accumulated a (kind of) ridiculous amount of CD's. Husband doesn't really have an opinion; would rather spend his free time fixing up houses or building furniture.

Have a list of about 15 companies that I would like to buy and have looked at the Valueline and my brokerage firm's analyses (the two pretty much agree), but I really think they are overvalued.  I say this just based on gut feeling, completely unscientific, just based on following the market for decades.

Have read the comments on Vanguard, Wellington, etc. etc.  So if stocks are overvalued (presumption), wouldn't that mean Wellington, Wellesley, etc. is overvalued?  And if I'm waiting for the stck prices of these 15-so co's to fall, shouldn't the same approach be used with the managed funds?  

Or should I just forget the market timing, and just start buying?   I hope this makes sense.

 

[unclemick]

Look at the stock holdings of Wellesley, Wellington, Dodge and Cox, and perhaps even Sequioa and Buffett (shareholder letters) on the web. All value holdings. See if you can get a feel for what they are holding and why.

 

[azanon]

You probably have no business buying (individual) stocks. I mean that as gently as I can say it.

I would recommend using mutual funds to grow your portfolio. A great start is to use the recommend asset allocation tools you'll find at places like T. Rowe, Fidelity, Vanguard, or just about any other direct buy mutual fund company.

Per intercst's recommendation, look for ones with really low expense ratios and no loads. The ones with the lowest fees will be the index funds.

If you buy individual stocks, you have to take on company risk in addition to market risk. IMHO, its better to pay a nominal fee (the fund expense ratio) to, in effect, completely eliminate "company" risk and only take on market risk. If a respective fund owned a worldcom or Enron, you'd hardly even notice cause such company would not likely make up more than 3% of an entire fund's holdings. Also, those companies that go bankrupt like that are often counterbalanced in the fund by one or two companies that skyrocketed.

 

[P.S.]

Hmm.. well I appreciate your perspective, but so far I've had pretty good experience with stocks, granted only over the past 15 y, and none of them were tech stocks. Pretty much stick with companies I am very familiar with, i.e. products I am very very familiar with, and closely study their reports.

Actually I feel more uncomfortable with buying funds, because I'm putting my faith in a manager's acumen or the sentiment of the general market (indexed).

 

[brewer12345]

PS, I think you are doing it backwards. First you should decide on a target asset allocation. Second, you should pick specific investments to get there. My understanding is that you are doing the tactical part first.

There is nothing wrong with buying individual stocks if that is your bag. Particularly if you feel the market is generously/overvalued, it is a good way to go. However, realize that you A) wll have to commit the time to do it properly and B) want to make sure that you don't take risks that could blow you up (like having too much in a single stock).

Having said that, it would be a lot easier if you started out with a target mix and then chose ways to get there. For example, I have a target in mind for international stocks and a target for domestic small caps. I am very good at analyzing small caps and I believe the US market to be generously valued. As a result, I pick individual stocks. OTOH, I feel out of my league in dealing with international equities (IASB or Dutch GAAP, anyone?). So I get to my target allocation with low cost index funds/ETFs.

 

[yakers]

Just my 2 cents. I support the index fund approach. Look at your TSP and see what would beat it over time. Not much, although yes, Buffett did. I did some pretty decent stock picking for a while at least beat the S&P500 but I closed my Q&R account because of trading fees. And it was taking too much of my time for my limited resources.
I still have stocks, six DRIP funds. Keeps the fees low and DCA monthly over time. 5 out of the 6 have beat the S&P500 over my several year holding period. This gives me some diversity and some flexibility. My DRIP funds are less than 10% of my holdings. Except for some ibonds and credit union account these stocks are my only funds not in a tax free account. So if I needed money somewhat quickly I could sell them. I also can sell them at a time when it may be tax benifical. So I think there is a place for stocks but picking them, the fees and the attention they require make them a challenge to do "profitably". IMHO.

 

[azanon]

Well, at least you're in stocks, which is my favorite investment. Regardless of your talent, you'll still have company risk, I dont. I pay 0.2-0.5% expense ratio to eliminate it.

I'm a biologist by profession. Although I think I know a thing or two about the market and good companies, I also have to be humble enough to admit that the average M.B.A'ed fund manager that spends time on it 8 hrs a day can probably make better choices than I can.

The other problem is that there are studies that show that even a 15 stock portfolio is not fully diversified enough to provide adequate protection. I think Bernstein supports that position?

Then there's the time issue. Buying (and monitoring) individual stocks just resembles work too much. And work is bad.

 

[charlie]

P.S., I support brewer's comments about approaching
things ass backward.

Check out Bernstein's "4 Pillars ...." or one of Swedroe's
excellent books to see where most of the posters
on this forum are coming from.

Cheers,

Charlie

 

[Sheryl]

Well, at least you're in stocks, which is my favorite investment.  Regardless of your talent, you'll still have company risk, I dont.  I pay 0.2-0.5% expense ratio to eliminate it.  

Could you clarify, AZ, by this do you mean that you buy index funds?

I also favor stocks, mostly in funds, but a few individual stocks as well.

 

[Nords]

There are many ways to achieve ER.  

Have a list of about 15 companies that I would like to buy and have looked at the Valueline and my brokerage firm's analyses (the two pretty much agree), but I really think they are overvalued. I say this just based on gut feeling, completely unscientific, just based on following the market for decades.

Have read the comments on Vanguard, Wellington, etc. etc. So if stocks are overvalued (presumption), wouldn't that mean Wellington, Wellesley, etc. is overvalued? And if I'm waiting for the stck prices of these 15-so co's to fall, shouldn't the same approach be used with the managed funds?

Or should I just forget the market timing, and just start buying? I hope this makes sense.

No one can apply logic or reason to your "gut feeling". If you think the stocks are overvalued then don't buy them. Wait for 9 Oct 2002 or Oct 1987 or 1973-4, but in the meantime don't complain about being so heavily in cash. Buffett's been waiting ever since the 2003 market recovery.

I don't know if Wellington & Wellesley are in cash for the same valuation reason, but that's what active fund managers are supposed to do-- go to cash when the market's rich and be fully invested when it's a bargain. Some of them-- no more than 20%-- even do it right. But they all charge money for their labor.

Vanguard claims to eschew market timing just because so many are so lousy at it. Instead of making the big gains (with their attendant volatility risks, expenses, & labor) the index crowd touts the discipline of DCA and the fact that short-term performance is irrelevant to the long-term fact that the market has gone up more than it's gone down. I'm not trying to tell you that indexing is better than active, just that most INVESTORS are better suited for indexing. If you don't agree with the indexing concept then go find undervalued stocks-- but accept the fact that you're gonna work a lot harder to find the right purchases.

Actually I feel more uncomfortable with buying funds, because I'm putting my faith in a manager's acumen or the sentiment of the general market (indexed).

I've been happy with Tweedy, Browne Global Value (TBGVX) and Berkshire Hathaway because their managers have been handling those investments (or their predecessors) for decades-- and they have the long-term record to back it up.

I understand it's pretty much the same for Dodge & Cox and some Vanguard funds.

But again no one can apply reason or logic to "uncomfortable". If you can't sleep at night with active management, then buy index funds or buy individual stocks. Or take John Galt's approach and buy bonds & real estate. Or invest in commodities... you get the idea.

 

[P.S.]

Everyone:

Thanks for your responses.  I've requested info from Dodge and Cox and will look at TBGVX and Berkshire.  The other funds info should also be arriving soon in the mail.

Hmm...I thought I had for the most part figured out the allocation part.

Our non-taxable accounts are already diversified.  But the the rest of equity is divided between real estate (about 75%) and the formentioned CD's.  We do have a few stocks and one token mutual fund, but didn't mention that b/c the amount is not that much, and pre-getting serious about FI days.  Also the prior stocks/fund are good so no plan to touch.

The real estate assets are such that it is no burden, brings in rent money, and has been appreciating such that we have no desire to sell.  Also, in case we ever move back to those areas, we won't be "priced out" of the market.

So :  the assets that have been allocated thus far are in good stead (except maybe not so much CD's).  And I already know which stocks I want (which happen to be heavily represented in a few of Vanguard's fund),  but am waiting for the prices to come down.  And I am currently reading through Bernstein's book and do think that index funds should also be a part of the allocation.
    I guess my question is, since funds are comprised mostly of stocks, if US stocks are overvalued (again, presumption), then is the value of a fund, the price at which I would pay if bought today, also overvalued?  Or is this a moot question.  Or would one then begin with the funds representing the indexes which one thought were least overvalued?

And yes, I do value what this mensa of strangers-by-face advise!  Except maybe commodities, which I figured long ago not to dabble in.  Personally don't know any ER'ed financial advisors or managers, probably would be getting their opinion too if I did.

Maybe I should finish reading "Four Pillars"....

 

[brewer12345]

If the equity market is overvalued, then the fund is overvalued. Can't create matter out of nothing (unless maybe it is a closed end fund).

 

[cute fuzzy bunny]

Wellesley/Wellingtons value approach means their stocks (while possibly being overvalued within the historic universe of value funds) probably have less far to fall if valuations do return to normal.

The fund by the way is holding <2% in cash right now, normally they're about 1% to handle the occasional defector.

Just a jab about valuations. There is a camp of folks that have noted that over long periods of time, there is a 'mean' value to broad buckets of stocks. Theres another camp that suggests that this is simply coincidental. I'm not firmly in either camp, but I sort of lean towards the "theres something in the mean" category. Right now the mean for the s&p 500 against historic values would be about 850-ish, give or take 50 points depending on who's doing the calcs. Given todays ~1180-something level, thats quite a drop to bring us back to the mean.

Heres the really 'thumps you in the head' part. Because we've been so far above the mean for the last ~10 years or so, in order to actually bring a long term graph back to the actual 'mean line', we'd have to see something like 350-500 on the s&p 500 for about 10 years. Just to get back to normal.

So if you believe that long term there is a 'rhythm' and 'progression' (for lack of better terms) in the market a la the Gordon Equation (get in here charlie!!) then you have to believe there will be some sort of compensatory action to bring us back to the mean. Which means a 75% drop followed by a return to normal annual gains, or we go sideways for about 20 years.

Given that prospect, I'd like to own the cheapest asset classes that produce the highest current dividends and income.

 

[brewer12345]

Random tidbit: I have met (and had diner with) one of the partners at Wellington. VERY sharp. One of the few active managers I would be happy about giving my money to run. I have also met some of the Fido Selects managers. Wouldn't give them my lunch money.

 

[Mr._johngalt]

"Had diner with"? Does this mean you guys ate your dinner
companion? Remind me to decline any future dinner
invitations

JG

 

[Spanky]

Try Scott Burn's cough potato profolio:
http://www.dallasnews.com/sharedcon...2005/stories/032005dnbussburns.153f93882.html

Scott Burns Couch Potato (0.66/0.33)   
Vanguard Vipers Total Market Index (VTI)   0.166666667
iShares Lehman TIPS (TIP)   0.166666667
iShares Morgan Stanley EAFE (EFA)   0.166666667
American Century International Bond (BEGBX)   0.166666667
Vanguard REIT Vipers (VNQ)   0.166666667
Vanguard Energy Vipers (VDE)   0.166666667

 

[P.S.]

Thank you everyone for your responses. I am reading them over slowly.