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Stocks or Mutual Funds
Old 02-26-2006, 01:14 PM   #1
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Stocks or Mutual Funds

I currently have both Stocks and Mutual Funds.... Funds in D&C and also, in my 401k.
I currently do not use the D&C or Stocks for income.
And I know that Bernstein favors mutual funds over stocks...less risk if diversified properly. Small investors have a difficult time diversifying with small stock accounts.
But, I still wonder if I should keep the stocks, or should I sell and move that money into the D&C accounts.
One thing I don't particularly like about mutual funds, is that every year I have to pay taxes on reinvested dividends and capital appreciation... money that I don't ever see or use. But with the stock account, I only have to pay taxes on the dividends received. Right now, those dividends are reinvested in more stock or CDs. On the other hand, the D&C funds are excellent rated funds with
low fees (Balanced and Stock funds to be specific).
Would anyone tell me their "philosophy" about this issue ?
Thanks,
Ray
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Re: Stocks or Mutual Funds
Old 02-26-2006, 01:30 PM   #2
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Re: Stocks or Mutual Funds

Quote:

But, I still wonder if I should keep the stocks, or should I sell and move that money into the D&C accounts.
One thing I don't particularly like about mutual funds, is that every year I have to pay taxes on reinvested dividends and capital appreciation... money that I don't ever see or use.
May be the question is: "Should I sell my stocks?"
If they provide the capital appreciation that you want, there is no reason to get rid of them - not to mention taxes from the capital gain.

I agree that mutual funds are not as good as stocks in terms of taxes. That's one of reason that I choose ETFs, tax managed or index funds.

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Re: Stocks or Mutual Funds
Old 02-26-2006, 01:48 PM   #3
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Re: Stocks or Mutual Funds

What little I know:

Some mutual funds are more tax-efficient than others. Big index funds such as VFINX are generally tax-efficient. Bernstein discussed the subject on his web site at least once, showing tax-efficient funds that can be held outside of a tax-deferred account and equivalent funds that would better be held inside one.
http://www.efficientfrontier.com
He probably goes over it in one of his books.

Capital gains distributions in a tax-deferred account turn into something taxable at income rates when you take them out. Outside of a 401k (or the like), capital gains are taxed at lower rates, so you have the same benefits as owning the stocks themselves, except that you pay for the capital gains a little bit every year instead of all at once, but you do not control the turnover. Then there are the annual management fees.

If your pot is big enough, individual stacks make better sense. Even though he advocates index funds for everybody else, John Greaney has individual stocks and has written recently on how the annual fees on a large pot of mutual funds can easily be more than your annual cost of ownership of your own stock portfolio. It used to be that 20 stocks were enough to give you the same portfolio volatility as the overall market, but Bernstein reported that 20 is not enough anymore. The big trick is being a good stock-picker and managing your own portfolio.

Eventually you will see and use the benefits of reinvested distributions, when you take $ out of your big pot.

If D&C is Dodge and Cox, I have read good things about them. You could do a lot worse.

My philosophy:

Personally, I have not done well with individual stocks, but have had good success with mutual funds and they are a lot easier for me to manage. I pay for the convenience.
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Re: Stocks or Mutual Funds
Old 02-26-2006, 03:29 PM   #4
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Re: Stocks or Mutual Funds

Quote:
Originally Posted by Ed_The_Gypsy

Eventually you will see and use the benefits of reinvested distributions, when you take $ out of your big pot.

If D&C is Dodge and Cox, I have read good things about them. You could do a lot worse.


Yes, D&C is Dodge and Cox.
What do you mean by "see and use the benefits of reinvested dist." ?
And, thanks for replying.
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Re: Stocks or Mutual Funds
Old 02-26-2006, 04:25 PM   #5
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Re: Stocks or Mutual Funds

problem with owning individual stocks these days is stocks are to prone to getting pummeled at a negative earnings report or the slightest bad news..as an investment im not smart enough to pick the right company at the right time in the righ sector and get it right when to sell..even if i got all the above correct i still dont know how the market will perceive whatever it is this company does and lets not forgot what the competitors are doing...i do all my serious investing with funds and ill speculate every now and then in individual stocks but i still consider them speculations,no matter who they are and how big.
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Re: Stocks or Mutual Funds
Old 02-26-2006, 06:22 PM   #6
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Re: Stocks or Mutual Funds

Quote:
Originally Posted by bennevis
One thing I don't particularly like about mutual funds, is that every year I have to pay taxes on reinvested dividends and capital appreciation... money that I don't ever see or use.* * But with the stock account, I only have to pay taxes on the dividends received.* * Right now, those dividends are reinvested in more stock or CDs.* * On the other hand, the D&C funds are excellent rated funds with low fees (Balanced and Stock funds to be specific).*
Would anyone tell me their "philosophy" about this issue ?
Ray,

* * *I hear you.* Here's some more thoughts on risk premiums from Larry Swedroe.

* * *Stocks may look like a better investment because you don't pay any taxes on your purchase until you cash it in, whereas mutual funds have to report their expenses and distribute their gains every year.* However even Berkshire Hathaway pays millions on their investments and it's just reported a different way.* Taxes are paid by someone every year and the taxes/expenses are certainly reflected in the share price.

* * *I think most mutual funds charge an ER for giving us the privilege of diversifying away the risk of a small number of stocks.* Active management presumably makes sure that we're diversifying among the "right" stocks, however that's accomplished.*

* * *I think the best answer is a tax-efficient mutual fund, CEF, or ETF.* The TSP has some of the lowest expense ratios in existence, many Vanguard funds are down in the single digits, and many ETFs are only 25 BP.* And of course the ultimate tax efficiency would be tax-deferred IRAs or even a Roth IRA.* We're minimizing our taxes by converting our IRAs to Roths.

* * *Warren Buffett has earned the faith of 30% of our retirement portfolio and individual stocks another 10%, but I'm slowly throttling back on the testosterone poisoning.* At this point I'm beginning to think that it's better to move into an international ETF like PID.

Quote:
Originally Posted by bennevis
What do you mean by "see and use the benefits of reinvested dist." ?
I can't speak for Ed, but I bet he's referring to the math shown by Jeremy Siegel in "The Future For Investors".* Reinvested dividends take on a DCA life all their own and tremendously multiply the return on your original investment.* We've realized that it's better to draw down our final mutual fund (in a taxable account) for living expenses while letting our ETF & stock dividends be reinvested.* Tweedy, Browne's had a great run anyway so it's time to rebalance/diversify away from it, and if we ever need to swing back to international in our AA we'll do it through an ETF.
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Re: Stocks or Mutual Funds
Old 02-26-2006, 11:55 PM   #7
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Re: Stocks or Mutual Funds

Spot on, Nords. Thanks.

Ed
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Re: Stocks or Mutual Funds
Old 03-01-2006, 07:14 PM   #8
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Re: Stocks or Mutual Funds

Quote:
Originally Posted by bennevis
reinvested in more stock or CDs. On the other hand, the D&C funds are excellent rated funds with
low fees (Balanced and Stock funds to be specific).
Another thing to consider is if the fund is closed to new investors. DODBX (D&C Balanced) is closed to new investors and so is their stock fund. Unless you are able to transfer the assets "in kind", you will have to liquidate the position and not be able to get back into it unless it reopens. I'm in a similar position with an old 401k. I can't move it to Vanguard since Ameriprise (formerly part of AMEX) won't move the assets in kind UNLESS I roll it over to an IRA at their institution!

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