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Asset (re) allocation
Old 09-16-2018, 08:51 AM   #1
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Asset (re) allocation

I have a large portfolio, and retired one year ago at 61. I would say that I have most of my money (in Fidelity) at about a 60% stocks and 40% bonds and/or cash/money-market accounts.


I was previously doing a dividend champions (Dogs) strategy, and have been very happy with those results. Over the last year or so, however, I have wanted to move more towards a Bogleheads strategy of using more index funds and less individual stocks.


The problem I have is that it is hard to pull the trigger on some stocks that I have held for many years, and which still pay very good dividends. Some examples are T, XOM, CVX, MO, PFE, FBIOX, and ED. These are up ranging from 40% up to 500%. So despite recognizing the psychology at play here, I don't really want to sell these to buy more of a S&P index fund (I already have a substantial amount in these).


I assume that others in this forum may have wrestled with similar challenges. While I am pretty confident that XOM and MO (!) will be around for at least 30 more years, stranger things have happened. Remember all of the large cap stocks that are no longer around. I used to work for a couple of them!


What have people done, or what would you do, in this situation? Go ahead and hang on to these multi-baggers, or just continue to move to index funds with their historical rate of return?


Thanks,


Bood
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Old 09-16-2018, 02:16 PM   #2
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Since you referred to the Bogleheads, one of Jack Bogle's guiding principals is Reversion to the Mean (RTF). Based on the S&P 500 PE ratio, stocks are about 50% overpriced if you take into account the entire history of the S&P. If you limit the data to just the past 50 years, the S&P PE ratio shows stock are 30% overpriced. You can either sell some of your stocks now, or wait a year or two or three and 30% to 50% of your stock value may be wiped out for you.
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Old 09-16-2018, 02:28 PM   #3
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This is not a recommendation pro or con, but I have found that re-reading about the "endowment effect" helps me think this kind of thing through: https://en.wikipedia.org/wiki/Endowment_effect

For a more in-depth discussion of this and other human departures from pure logic, you might read Daniel Kahneman's "Thinking Fast and Slow" and/or Richard Thaler's "Misbehaving." Both are quite educational and iMO helpful when considering investment decisions. Both authors are Nobel prize winners but, despite that, the books are very readable and enjoyable.
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(Re) allocation
Old 09-16-2018, 02:52 PM   #4
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(Re) allocation

Quote:
Originally Posted by Al18 View Post
Since you referred to the Bogleheads, one of Jack Bogle's guiding principals is Reversion to the Mean (RTF). Based on the S&P 500 PE ratio, stocks are about 50% overpriced if you take into account the entire history of the S&P. If you limit the data to just the past 50 years, the S&P PE ratio shows stock are 30% overpriced. You can either sell some of your stocks now, or wait a year or two or three and 30% to 50% of your stock value may be wiped out for you.

The reason some of my stocks are up so much is that I have held them for over 10 years, buying them before the last crash. Since they will presumably still pay dividends (I know, it's not guaranteed), if I do not need to sell them, there is no harm letting them ride, is there, despite the overvaluations that I do not disagree with.
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Old 09-16-2018, 03:45 PM   #5
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You should sell your individual stocks because



There is huge potential harm in "letting them ride."

Index funds are boring. Be boring.
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Old 09-16-2018, 03:49 PM   #6
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.. Index funds are boring. Be boring.
+1 The punch line (after 6 hours) in the Adult Ed class I teach is this: "Investing is boring. If you're not bored, you're not doing it right."
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Old 09-16-2018, 04:40 PM   #7
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Dividend stocks force you to realize income, even if you might not want to do so

E.g. you want the flexibility to manage your income as an early retiree in order to qualify for ACA subsidies.
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Old 09-16-2018, 07:25 PM   #8
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+1 The punch line (after 6 hours) in the Adult Ed class I teach is this: "Investing is boring. If you're not bored, you're not doing it right."
+2 Diversification risk is real. It doesn't even need to be an Enron or a total failure like Eastman-Kodak or GM... it can be laggards.
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Old 09-16-2018, 07:28 PM   #9
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pb4uski - I agree with your point... Even big companies (remember Kodak?) can just go away. And GE is another good example... Thanks.
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Old 09-16-2018, 07:52 PM   #10
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I assume these individual company stocks are in after tax account? Hence the reluctance to sell and absorb the capital gain? The good thing is you are long term so the potential tax bite will be lower.


I look at it as widely held diversified funds may not hit the home run, but they also don't strike out. Basically accept the market results, not being better or worse. Over the long term I know it will be a return that is acceptable to me. Sure the market is going to go up and down, but with less volatility than individual stocks would have.


In OP's case I do not see a big problem to hold on to the stocks and then be ready to sell if they or the market as a whole go down. Assuming the market also goes down, you will trade down individual stocks for down diversified funds, but *may* minimize some of the capital gains. A lot depends on how your individual stock does vs the market index.
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Old 09-16-2018, 10:29 PM   #11
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Originally Posted by Onward View Post
You should sell your individual stocks because



There is huge potential harm in "letting them ride."

Index funds are boring. Be boring.
How interesting that their stock took a leap in early 2000, and stayed up there in 2000, while NASDAQ and S&P500 took such a big hit. I guess folks were piling in, running away from tech stocks.
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Old 09-17-2018, 04:43 AM   #12
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I'm in pretty much the same situation - have most of my money in index funds, and a portion in dividend-paying, individual stocks. I came to realize, although I had some impressive gains in some of those stocks, that I wasn't gaining anything special with the dividend-paying stocks that other, non-dividend investors or index fund investors were missing out on. I also came to realize that, while I amassed a relatively high number of individual stocks (~60), the risks were greater than if I held the money in an index fund, which invest in a much greater number of stocks, thereby lowering risk.

Thing is - you don't have to sell all of your individual stocks all at once. I talked with DW about re-allocating the individual stocks to index funds, and we agreed upon how much of a tax hit we want to absorb this year. Sold a bunch and moved the proceeds to index funds. Next year, we'll do the same. We'll keep doing so until we have no individual stocks. Don't think of it as selling - think of it as reallocating and lowering risk. Yes, you'll take a tax hit, but your (paper) losses in a bear market could cause you to take a much bigger hit that you may not experience being in index funds.
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Old 09-17-2018, 05:40 AM   #13
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My F-I-L owned a nice chunk of telecom stocks. He focused on the dividends, and to him it meant "pocket money." He wanted to keep the stocks as he aged, so I worked with him to diversify more. This brokerage became 1/2 of their assets. With 33 positions, it stands very much like OP's.
I prefer our Bogle-Vanguard approach, as it requires little watering. However, I understand the use of individual stocks in a taxable portfolio. There are times when you inherit stock, and want to keep it going. Just know that it requires more time, you probably won't outperform, and your heirs will probably sell it all.
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Old 09-17-2018, 06:40 AM   #14
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OP, can you manage your income to take advantage of the 0% LTCG rate if you reposition?
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Old 09-17-2018, 07:35 AM   #15
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Since you referred to the Bogleheads, one of Jack Bogle's guiding principals is Reversion to the Mean (RTF). Based on the S&P 500 PE ratio, stocks are about 50% overpriced if you take into account the entire history of the S&P. If you limit the data to just the past 50 years, the S&P PE ratio shows stock are 30% overpriced. You can either sell some of your stocks now, or wait a year or two or three and 30% to 50% of your stock value may be wiped out for you.
The OP is talking about moving from individual stock to equity funds/etfs. If I understand your comment does not address this, but that he should lighten upon equities.

OP, I very little stock. But I do shift my allocation while having large embedded gains at times. I stop reinvesting distributions and use them to shift my allocation. It is slow, but has small tax issues.
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Old 09-17-2018, 10:04 AM   #16
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There was a thread a bit ago that may help. Several readers, including myself, set aside a small portion of funds to purchase individual stocks. I consider it my gamble account. You might want to look at leaving say 5 or 10% in individual stocks and moving the rest to funds. This allows me to keep the good feelings from winners and suppress or ignore the sadness and frustration from losers. Know you want to play a bit and allow yourself to with a restricted amount of $$. That is my plan.
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Old 09-24-2018, 11:49 PM   #17
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You don't HAVE to sell the stocks. Make an Investment Plan and an AA that suitts you. Make sure all your new money goes in the right place. Then look at tax impact of selling/converting stocks to mutual funds. Look at how much you can convert and stay in a desired tax bracket and do that each year. Also if you have some losers then sell an offsetting amount of winners. In any case make sure the stocks fit into your AA. Once most of your assets are in mutual/index funds then the impact of individual stocks is much lessened. When it comes time to do withdrawals you can use this opportunity to reduce desired holdings.
For me, my purpose in heading towards VG mutual funds (some index) is to simplify so the portfolio can be managed by DW on her own if she needs to.
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Old 09-25-2018, 02:21 AM   #18
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I also had a large 100% stock portfolio, all in a taxable account, and wanted to shift it all to a boglehead style investment plan. All I can tell you is that you have to be very dispassionate about your holdings. I put together a plan of how to get from the starting point to the end point and mapped out the intermediate steps. Basically a spread sheet that identified which stocks to sell in year-1, which to sell in year-2, etc. Of course the big concern is hitting AMT, at least it was for me at that time. Once you have the plan, just start marching through, executing sell orders. If you're having trouble pulling the trigger, I recommend a good single malt scotch to help lubricate the process.

It took me 3 years to liquidate the bulk of 40-45 stocks. I started in 2011, so cap gains were a lot less than I would have if I had started today. I tried to pick stocks to sell each year across a variety of industries in order to keep some diversity but ironically the only 3 left are: AMZ, APPL, MSFT, so old habits die hard (I was in high tech industry for many years). I have been selling off those last 3 when I rebalance.

Good luck!
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Old 09-25-2018, 05:37 AM   #19
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You can spread out your sale of the remaining dogs. 20% per month, or 20% per year until you are done.
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