Why when it comes to equities, I'm sticking to funds...

[trixs]

Consider picking stocks a hobby. One that makes money. Unlike any of my other hobbies.

Agreed!

My other Hobby: RC helicopters.. Now that is fun but $$$$$

Heres a link to someone flying a trex on google videos!
http://video.google.com/videoplay?docid=2297310916926246825&hl=en

 

[maddythebeagle]

I couldnt imagine individual stocks in multi million dollar portfolio...when I get there, I will let you know but sounds like a hassle..

 

[audreyh1]

I've never been comfortable buying individual stocks. On the few occasions I've stuck my toe in the water I've made some money and lost some money, and thankfully had only had one really big loser. But I've rarely been able to sleep well while owning them and usually felt a sense of relief once I sold.

I'm with you. I had a couple of educational years in the late 90s where I did very well with individual tech stocks. It was mostly an experiment "for fun", but I very quickly figured out that it was WAY more work than I was willing to put in to stay on top of things, and I wasn't willing to put a large portion of my investments that way. It seemed that I would end up having a full time job as a fund manager when I retired if I tried to do that.

And I definitely agree with Brewer's comment that it may be more about having a sufficiently strong stomach than brains.

So in the interest of "getting a life" during retirement, I went with funds and a simple investment approach that didn't require much monitoring at all.

Audrey

 

[chinaco]

I learned my lesson. My biggest problem investing in individual stocks is me. On average, I wound up ok... but I got burned... or I should say, I burned myself on a few stocks.

I will stick with funds (of some sort) from here on out. I am using funds for other holdings as well (i.e., bonds, etc...).

 

[samclem]

I did some soul searching re: my personal rick tolerance and decided a pleasant night's sleep is worth getting a % or 2 less return. If I get braver as I learn more about stock picking, I might designate 5% of my stock portfolio as play money and see what happens...

The good news is that, if you are typical, you won't even be giving up that 1 or 2% by sticking with ETFs or low expense funds. But, if like many of us, you have to fiddle with someting, then the 5% "playing around" account is probably a smart way to avoid major damage.

 

[kcowan]

Consider picking stocks a hobby. One that makes money. Unlike any of my other hobbies.

For us it is mandatory for us to actively manage the portfolio until it reaches our target for 3.5% SWR. It is also a hobby and a habit. I wonder if we are going to be able to kick the habit after we reach the goal. It is also fun to hear news about our specific holdings. There is a much stronger connection with our companies than with the funds that our in our sheltered portfolio.

We had out loses in the 2000 swoon but so did everyone else in equities... 8)

 

[jIMOh]

Back to LOL's comments re: dividend spin off and tax implications. This year I started freaking out about paying taxes on dividend proceeds during my accumulation phase. It seems that our desired outcome in ER is at loggerheads with what we are doing in the accumulation phase. The problem is that one (presumably) would like to switch to higher-yielding funds during ER, but doing so would incur cap gains taxes on the sale of the lower-yielding funds we prefer prior to ER for the lower tax load. I've shied away from DVY in favor of SPY because of the yield. Does anyone have any input? Should we not worry about the tax implications now in favor of higher yield in ER? On a related note, given that cap gains and dividend tax is currently 15%, is there a difference in ER between higher yield vs. higher cap gain? Anyone's crystal ball say that one tax rate will outpace the other in, say, 2015?

WEBBY

I am 20 years from ER and 30 years from normal retirement. I am starting this "dividend accumulation" strategy right now. In a taxable acount. Single biggest reason is I have read that dividends by blue chip companies tend to increase higher than inflation, and the favorable tax treatment of dividends is my plan for at least 25% of my retirement income.

I have no issue paying "some taxes" over next 20 years to accumulate enough dividends to live off of in retirement.

Plan 1 is to buy the highest yielding stocks in the DOW, around $1200 total each year. MSFT, PG etc. The goal is 100k-200k of dividend paying stocks yielding me ~$4500/year. The tap out RMDs to top of tax bracket each year to supplement this.

Plan 1 suggests that 100k of assets are in blue chips. Plan 2 suggests to supplement this with around 50k-100k in addition in much smaller dividend paying companies (somebody mentioned ALD earlier, HPT and many other smaller dividend payers in much smaller positions for the Plan 2 part of portfolio.

Plan 3 is to find a way to increase portfolio from 200k to 500k. 500k yielding 3% is $15k. This is enough to be around 25% of the income needed during retirement. This 15k should increase higher than inflation each year. More than likely this phase comes with selling of a house, or something similar (cash windfall).

I do not mind paying some taxes along the way to have a reasonable taxable account size. I'd rather have a tax problem than an income problem.

 

[chinaco]

Plan 1 is to buy the highest yielding stocks in the DOW, around $1200 total each year. MSFT, PG etc. The goal is 100k-200k of dividend paying stocks yielding me ~$4500/year. The tap out RMDs to top of tax bracket each year to supplement this.

Dow Diamonds (ETF) yields a little over 2%. It is a nice easy way to own the Dow. That is a little shy of your 3% goal.

Perhaps a better option is the Vanguard High Dividend Yield ETF (VYM). It is yielding about 2.78%.

 

[Nords]

I am starting this "dividend accumulation" strategy right now. In a taxable acount. Single biggest reason is I have read that dividends by blue chip companies tend to increase higher than inflation, and the favorable tax treatment of dividends is my plan for at least 25% of my retirement income.

Many of us on this board can remember when dividend income was double-taxed and discouraged, so stock buybacks & swashbuckling corporate raiders were the way to unlock the true value of your investments. Every earnings-estimate concensus was beaten by a penny/share, too. Don't miss those days a bit.

But I've read Siegel's "The Future For Investors" and it sure is hard for the CFO to lie when the dividends are paid out. We have about eight percent of our portfolio in a DOW dividend ETF (DVY) and another 21% in PowerShares' International Dividend ETF (PID). We're reinvesting dividends in both and I'd buy more DVY if the share price took a major hit.

 

[NinjaPigeon]

Was it Bernstein who said he'd rather live his life than take on a bunch of single-stock risks? While I may have obsessive-compulsive tendencies, I'm pretty sure that I'm not in the same class as Buffett. The smart move is index ETFs, and that's where we're heading in a leisurely manner.

I'm curious if the reason you are moving to ETFs is because you are out of the accumulation phase or if you see some inherent benefit to ETFs over indexed funds that I'm overlooking? I looked at it briefly, but it just didn't seem to make sense for me since I have very early on in my accumulation.

 

[LOL!]

... The goal is 100k-200k of dividend paying stocks yielding me ~$4500/year. The tap out RMDs to top of tax bracket each year to supplement this.

I think you are selling yourself short. You don't need stocks or even dividend funds to get dividends. Your funds will pay out the dividends. Your ETFs will pay out dividends. Even the venerable 'tax-efficient' S&P500 (SPY, VFINX, etc) is paying out 1.5%, VTI/VTMSX 1.7% and EEM 1.3%. Any kind of cash at 5% or more in an emergency fund or 1-2 years of living expenses account will generate thousands of dollars in income.

You have to think about where you will end up when you are around 50 years old like us. We had $19,000 of taxable dividends in 2005 and $26,000 in 2006, so this has become quite a problem for us.

Maybe we should move to a high-income-tax state so we can use tax-free munis?

 

[Nords]

You have to think about where you will end up when you are around 50 years old like us. We had $19,000 of taxable dividends in 2005 and $26,000 in 2006, so this has become quite a problem for us.

$17K last year here. I hope our "problem" grows faster than inflation!

I'd much rather pay cap gains taxes at 0-5%, but harvesting dividends is a lot easier (and in the long run cheaper) than frequent trading. Considering those pitfalls, paying 15% on dividends is a bunch better than ramping up to 25% income-tax brackets or paying RMDs.

What do the long-term studies say about large-cap value, large-cap dividends, and small-cap value funds?

 

[jIMOh]

What do the long-term studies say about large-cap value, large-cap dividends, and small-cap value funds?

Good discussion.

I understand that 66-75% of the long term S&P 500 performance is from reinvested dividends. The compounding factor of dividends, IMO, is significant.

I don't plan to rely on small cap value to sustain dividends, but at same time diversification does help.

I'd rather rely on 30 companies to pay me $500 each than 15 to pay me $1000 or 5 to pay me $3000.

 

[FIRE'd@51]

Many of us on this board can remember when dividend income was double-taxed and discouraged, so stock buybacks & swashbuckling corporate raiders were the way to unlock the true value of your investments.

Actually, dividends are still subject to double taxation. It's just that they are currently taxed at the favorable LT capital gains rate, so those in the 10% and 15% brackets won't pay any Federal tax on dividends from 2008-2010. After 2010, when the Bush tax cuts sunset, tax rates on dividends will be right back to where they were before (taxed as ordinary income), unless Congress extends the favorable rates. The Dems aren't making any noises that would lead me to believe these rates will be extended.

 

[wabmester]

We had $19,000 of taxable dividends in 2005 and $26,000 in 2006, so this has become quite a problem for us.

Maybe we should move to a high-income-tax state so we can use tax-free munis?

I take it that you're still working? That's the problem -- quit!

My dividends and interest income are in the 6-figures, and I paid about $5000 in taxes last year. Having very little earned income and lots of deductions helps a bunch.

I wonder what will happen to high-yield stocks if the tax rates on dividends become less favorable. Hmm, that should drop their price and increase their yield. Excellent!

 

[FIRE'd@51]

I wonder what will happen to high-yield stocks if the tax rates on dividends become less favorable. Hmm, that should drop their price and increase their yield. Excellent!

Only if you don't own them already!

 

[clifp]

A bit late to this thread. My portfolio is roughly equally divided among bonds, funds, and individual stocks. Among the funds all but one is an index or ETF. (Any suggestions for international ETF that includes developing countries, and smaller stocks, to replace my managed international fund?)

I own individual stocks for historical reasons and because I believe a portfolio of dividend paying stocks coupled with a strategy of writing covered calls will provide superior risk adjusted returns to index funds individual stocks are more fun. I own 30 individual issues (although 8 are my newly created microcap portfolio and the total of all of them is one normal position ~30K). For me picking individual stocks provides some intellectually stimulation. I also like the individual stocks keep my expense ratios really low 3 basis points including the cost of newsletters. BTW, I'll put a plug in for the Morningstar dividend investor newsletter, not only has its admitedly short track record been good, but the editor Josh Peters does a great job explain the rational for his picks, and unlike the Fool's newsletter he uses a real money portfolio.

My overall portfolio beta is pretty low and so I'll lag the averages by a few points like last year, but since double digit increase are way more than I can spend, I am more concerned with following Buffett's first rule of investing "don't lose money" than in beating the market.

 

[LOL!]

(Any suggestions for international ETF that includes developing countries, and smaller stocks, to

VEU is the new all-world ex-US etf from Vanguard.

 

[clifp]

VEU appears to be perfect. Although I am a bit confused about the differences between the Vanguard Total International stock market, and the FTSE all world Ex-US index fund.

 

[mathjak107]

im not smart enough either to own just the right stock at just the right time in just the right industry and even if i got all of the above correct i still dont know how the market will perceive it and what the competitors are doing.

oh yeah one bad earnings report and it plunges 20%.

did i tell you i looooove my funds

 

[saluki9]

I will always prefer individual stocks.

I am not concerned about diversification risk, I prefer the risk of owning more stocks when I feel the marktet is cheap and less when I feel it is overpriced. Owning funds inevitably leads to one agreeing they can never know anything about the market other than it will always go up. I do not, can not, will not believe that. If I am going to live the rest of my life on my investments I will assume that responsibility myself.

The risk of stocks held is offset by my fixed portion of the portfolio. Market return is a nice number by what is it? The S&P 500, Russell 1000, 20000, 5000? The US total stock market? The world stock market? A global portfolio? The target date portfolio?

If one truly understands investments well enough to insure their life savings and future with them, picking individual stocks should be a continual part of the portfolio review.

My main goal is to earn a return in excess of inflation by 4% minimum.

Owning index funds means agreeing that you aren't smart enough to outguess the tens of thousands of highly paid and well educated analysts who are trying to do the same thing as you are. I make my living analyzing the market and investing other people's life savings. Individual stocks will never be part of our portfolio review process. (nor mine)

If you really believe you have the ability to outsmart them, then please have at it. The data suggests otherwise.

 

[al_bundy]

is it still true that most money managers fail to beat their respective indexes and the SP500 over the long term? how many money managers outside of hedge funds and other only open to the wealthy funds have beat the SP500 over a 10, 20 or 30 year period?

 

[lswswein]

VEU appears to be perfect. Although I am a bit confused about the differences between the Vanguard Total International stock market, and the FTSE all world Ex-US index fund.

Canada is the difference; Vanguard Total International stock market owns Vang Europe, Van Pacific and Vang EM. None of them had Canada - the FTSE ex-us solves that problem; Also with the Total Intl because you won funds instead of stocks directly, you could not take the foreign credit which you can with FTSE ex-us bbecause it owns the stocks not the funds;
Basically FTSE ex-US is better for a couple of reasons, but not too different because Canada is only about 5% of the total portfolio anyway

-h

 

[Running_Man]

Owning index funds means agreeing that you aren't smart enough to outguess the tens of thousands of highly paid and well educated analysts who are trying to do the same thing as you are. I make my living analyzing the market and investing other people's life savings. Individual stocks will never be part of our portfolio review process. (nor mine)

If you really believe you have the ability to outsmart them, then please have at it. The data suggests otherwise.

What are these classes for individual stock selection at our hallowed institutions of which you speak? Most acedemia believe that individual stocks cannot be picked so by process most well-educated analysts will believe the same, just as you do. Most seasoned analysts are concerned about risk management in their careers and their portfolios not stock selection. If you do not believe you can not pick good stock selections that beat the market then you surely will not.

I believe I have many advantages over an analyst. I do not have to worry about being replaced or outsourced for my job and as such do not need to overreach on my research. I can hold a stock for any period I feel fit, I am not depending on any cash flow outside my control. I do not even need to hold any stocks whatsoever if I feel it is a poor time to do so.

I do not have to worry about being called by a client second guessing my every move. I can look at a stock and review the company and parameters with a view towards the next 10 years and see what I think will happen over the next 10 years. Most of those "well -educated" analysts think long term is an excess of 6 months.

Yes I do believe I can outperform most indexes and I will have at it thank you. This ability is there for anyone who wants to put in the effort to do so, and it does take effort. Rewards in life are usually in preportion to effort taken and goals set that you are working towards.

 

[saluki9]

Yes I do believe I can outperform most indexes and I will have at it thank you. This ability is there for anyone who wants to put in the effort to do so, and it does take effort. Rewards in life are usually in preportion to effort taken and goals set that you are working towards.

Except in investing where most professionals don't beat their index.

I know many fund managers and sadly, most are arrogant just like you and feel that they are "the one" who is smarter, better looking, quicker, more patient, you name it. They actually believe that this will be the year when they clobber the index. The sad part is that by the simple rules of math they can't all be right.

Nobody is stopping you from stockpicking. As a matter of fact, as an indexer I appreciate people like you because you keep markets mostly efficient. So from me to you, thank you!

BTW: If you actually believe what you're saying (I can't believe you really do) you should go raise some money and start a fund.