Concentrated Risk Dividends & Bonds

[Luck_Club]

Do you hold all your eggs in a few individual stocks and bonds as opposed to a broader based mutual fund or index type investing? Share with me your successes or failures on investing only with a few individual dividend paying stocks or individual bonds though a low cost broker like fido. Of particular interest would be buy and hold strategies

Background:
I'm managing an elders financial affairs, and noticed their portfolio has 100's maybe over a 1000 of individual stocks & individual bonds spread among the accounts. These are actively managed for about a 1.14% fee. Allegedly according to the broker their is tons of risk mitigation and given the age of the account owner etc it is a very conservative investment strategy overall designed to mitigate potential downside risk.

Here is the rub. The 1.14% fee is taking about 35% of the total return, and I find it incredibly confusing to watch or understand this many individual small bets. The wrap account names don't trade on an exchange so tracking the performance prior to my getting involved is impossible. Over the past 3 years or so I believe the return has been sub 5% though it is hard to tell from the statements.

[Dash man]

While I don't agree with having someone else manage my account, I realize as I age and my decision making skills deteriorate, that I will eventually turn my investments over to a manager. I think 1.14% is lower than some but higher than others. USAA starts at 1% and lowers it with higher levels of investments.
I have a mix of about 30 individual stocks, 6 ETFs and 2 mutual funds. DW has another 4 funds in her 401k.
We also have CDs and a large cash position which we are working on how best to invest much of it. Many of my stocks are in taxable accounts which pay good dividends and have substantial capital gains if I were to sell. My IRAs have REITs and BDCs, along with my mutual funds for tax advantages.
You might consider consolidating into a lower cost managed account or move everything into a self managed account to reduce expenses. Be cautious of tax consequences. Those wrapped accounts will likely not be transferred and will trigger a taxable event if not in an IRA or 401k.

[DrRoy]

On the equity side I index, so there is sort of automatic diversification there. For bonds I do prefer individual issues over funds, so diversification will come over time as I buy more of them.

[pb4uski]

I guess it depends on what the overall AA is.... but it sounds way too complicated to me. I would start by looking at returns over the last 3 years in relation to benchmarks with a similar AA to the subject portfolio. I suspect it will confirm either than the portfolio underperforms both before and after the management fee and the best course (absent tax any implications) is to sell and invest in index funds.... simpler, less expensive and likely better returns.

[Dash man]

One more thing to consider is the health of the elder. The sale and tax consequences may outweigh the 1.14% fee depending on your estimate of how much longer this person may live. Once they pass the investments will transfer to the heirs with a new cost basis being the value at the time of death. Then you can sell the wrapped accounts and all investments with no or little tax consequences related to the sale.

[bingybear]

The FA should be able to provide you with the previous performance for the accounts that you are looking at. It sounds like either that FA is running that account or a money manager is. If it is a money manager, they may have past performance data. However, there may be some variation client to client based on start/end dates and some variation client to client. I understand you can't look it up like a MF.

Just because you have a lot of holdings doesn't really mean you have good diversification. If you have a 1000 individual investments, it can be really hard to manage. Do these managers even have a clue why they own each of these holdings? Each holding on average is 0.1% of the portfolio. I would not do a great job tracking and deciding on 100 holdings of my own.

Does the owner of these investments have on opinion? Do they understand how the investments are being done?
I moved some $ a couple years back under DMIL's FA to see how he worked. He was expensive. His performance was not as good as my adhoc method. I pulled my money back out. But I have not suggested she should. Why? He doesn't seem to be cheating her or doing anything unethical. She is comfortable with this adviser. And if I suggested a move and $ went down, she would panic and crucify me. Making a bit more will not change her life. Taking her out of her comfort zone could cause havoc in all our lives.

A change may make sense. But understand the people issues that could arise.

[copyright1997reloaded]

Quote:

Originally Posted by Dash man One more thing to consider is the health of the elder. The sale and tax consequences may outweigh the 1.14% fee depending on your estimate of how much longer this person may live. Once they pass the investments will transfer to the heirs with a new cost basis being the value at the time of death. Then you can sell the wrapped accounts and all investments with no or little tax consequences related to the sale.

+1 on this. You (OP) need to determine basis on the holdings. Since on death the assets are stepped up, you might want a 'simplification' strategy of selling those assets with the least gain (or highest losses) to both reduce the number of holdings and achieve a better asset allocation.

[socca]

Quote:

Originally Posted by Lucky-Sperm-Club I'm managing an elders financial affairs, and noticed their portfolio has 100's maybe over a 1000 of individual stocks & individual bonds spread among the accounts. These are actively managed for about a 1.14% fee. Allegedly according to the broker their is tons of risk mitigation and given the age of the account owner etc it is a very conservative investment strategy overall designed to mitigate potential downside risk.

My mother is in the same boat. A portfolio with 100's of stocks she inherited from her 2nd husband is being managed by a Chicago money management firm for 0.67% per year. However, they have cleverly managed to increase their fees by investing 10% of the available capital in their own high-cost mutual funds (behavior that may become illegal when the new fiduciary rule comes online). If there is a back-end load on these mutual funds, I will really be pissed. I would like to see my mother 'fire' these money managers and prudently transition the portfolio to Vanguard index funds over time, however, she has other priorities than messing around with this portfolio.

[RobbieB]

I have individual equities, but not 100's, just 65. And I don't manage it, my advisor does.

[CyclingInvestor]

I am 58, retired 10 years. I have held almost all of my funds in a group of what I consider high quality, stable, dividend stocks since 1993. They (usually) roll over slowly when some become relatively overpriced compared to the others I track. I enjoy tracking these companies, and will add/subtract companies from my watchlist when they change policies. No trades in 2016. I usually hold about 12 or so at a time. I do not like mutual funds as that would result in owning stock in a bunch of poorly managed companies (imo).

[Luck_Club]

Quote:

Originally Posted by CyclingInvestor I am 58, retired 10 years. I have held almost all of my funds in a group of what I consider high quality, stable, dividend stocks since 1993. They (usually) roll over slowly when some become relatively overpriced compared to the others I track. I enjoy tracking these companies, and will add/subtract companies from my watchlist when they change policies. No trades in 2016. I usually hold about 12 or so at a time. I do not like mutual funds as that would result in owning stock in a bunch of poorly managed companies (imo).

Thanks for all the replies. I will probably do nothing until a step up in basis event occurs. It is good to know the IRA accounts can be rolled over in kind. Though it might make more sense to liquidate under the management fee as opposed to $7.95 per trade.

Many of the replies reflect my thoughts which is you hold 10-20 big name companies ie Wendy's, National Grid, Exxon, etc that pay dividend income. Then watch them for things going good, trimming positions as they get over priced.

Not sure why they aren't doing that in the wrap account.

Lots to learn about the roulette table (stock Market)

[pb4uski]

If you hold one broad based index fund then you own literally hundreds of companies that pay dividend income... if you prefer a dividend tilted fund there are many out there and your transaction costs will likely be lower than holding 10-20 individual stocks. Simple is good.

For example, Vanguard Equity Income fund has a 2.81% dividend yield with and ER of 0.26% and has 211 stocks.

[Lsbcal]

Quote:

Originally Posted by Lucky-Sperm-Club Thanks for all the replies. I will probably do nothing until a step up in basis event occurs. It is good to know the IRA accounts can be rolled over in kind. Though it might make more sense to liquidate under the management fee as opposed to $7.95 per trade. Many of the replies reflect my thoughts which is you hold 10-20 big name companies ie Wendy's, National Grid, Exxon, etc that pay dividend income. Then watch them for things going good, trimming positions as they get over priced. Not sure why they aren't doing that in the wrap account. Lots to learn about the roulette table (stock Market)

I'll be blunt. The OP looks like a very bad plan to me.

I would simplify into index funds ASAP.

FWIW, I did most of this kind of stuff decades ago. Then went to active funds. Now almost all indexed and at Vanguard.

What you need is a simple benchmark and look at the last 5 to 10 years. Did it beat you by a mile? Then get moving and change your strategy.

[Danmar]

I hold about 10-12 big name individual Canadian div payers. Self manage. Mostly banks, telcos and pipes. I have beat all appropriate benchmarks since inception by a significant margin. The caveat is that I am well qualified to do this (MBA, CPA, CFA) and have a high risk tolerance.

[MooreBonds]

Quote:

Originally Posted by Dash man One more thing to consider is the health of the elder. The sale and tax consequences may outweigh the 1.14% fee depending on your estimate of how much longer this person may live. Once they pass the investments will transfer to the heirs with a new cost basis being the value at the time of death. Then you can sell the wrapped accounts and all investments with no or little tax consequences related to the sale.

+2 - one way to ask without arousing suspicion from the FA is to simply point-blank ask what the current cost basis is for each position (they should be able to provide that info). If they ask why, say that you need to know which positions to sell first with the smallest taxable gain as they need money to pay for extended care, and you need to see what kind of potential capital gains exposure they might be hit with for taxes (which would require additional selling to accumulate funds for taxes).

Go ahead and sell enough marginally profitable/losers to net a small capital gain, transfer that money out, then promptly place it in an ultra low cost index fund.

[Totoro]

Just to build on Danmar's (implicit) advice.

Simplify & index first.

If you go individual limit it to 10 - 20 companies and only a part of the portfolio.

Don't do more since a) your 20th best idea is probably not that great and b) keeping really track of even 10 companies is quite a task.

I also have a standing 'race' going between index and individual. If individual doesn't outperform I'll stop doing it. I do 'cheat' a little bit, since I'm actually complementing my main index (VT - 20% of total NW) with an emerging index right now (7%).