Indexing - Buy the basket yourself?

[jim584672]

With the rise of brokers who can do trades for extremely low commissions why not buy the actual stocks in an index? The advantages include granular control of tax loss/gain harvesting, no worry about capital gain distributions. Also no fund risk - the managers take everyone's funds and disappear. A substantial portfolio would be needed and it requires some work without a program to place the orders but it might be worthwhile.

Any thoughts on this approach?

 

[frayne]

Too much work for an old retired fart like myself.

 

[aja8888]

With the rise of brokers who can do trades for extremely low commissions why not buy the actual stocks in an index? The advantages include granular control of tax loss/gain harvesting, no worry about capital gain distributions. Also no fund risk - the managers take everyone's funds and disappear. A substantial portfolio would be needed and it requires some work without a program to place the orders but it might be worthwhile.

Any thoughts on this approach?

A lot of folks do just this with a hand picked basket of stocks. Mulligan here has a portfolio of preferreds that pay high dividends. Some of your most successful mutual funds have less than 30 stocks in them (Oakmark is one). You just have to be diligent and spend time monitoring your stocks if you want to do this successfully.

 

[audreyh1]

Too much work for an old retired fart like myself.

+300!

 

[Animorph]

An index fund can probably do it much more cheaply, and stay up with any changes. I'd hate to replicate the S&P 500. Just imagine trying to reinvest $1000 in dividends evenly into 500 individual stocks.

 

[jim584672]

Interactive Brokers has a minimum commission of $1.00 a trade. A few shares each, of say 100 stocks would only be $100 for a whole portfolio. Nothing can beat this from a cost view. Especially since expenses of ETFs are ongoing every year.

 

[REWahoo]

... why not buy the actual stocks in an index? The advantages include granular control of tax loss/gain harvesting, no worry about capital gain distributions.

Why not go for it? Let us know how it works out, both in terms of time and costs.

 

[target2019]

I think you could get by with less than 50 companies. But you would have to monitor and manage the basket. I am building and watching a 35-company portfolio, and it takes time. The monthly statement is 20 pages. I bought a hi-capacity shredder so I can dispose of it in 10 seconds or less.

 

[pb4uski]

Why in the world would I go through all that work to save 0.05%? Not to mention how complicated my tax return would get. No thanks, I have much better things to do with my time.

 

[gauss]

Might be feasible if you plan to take the dividends and not reinvest them.

-gauss

 

[photoguy]

An index fund can probably do it much more cheaply, and stay up with any changes. I'd hate to replicate the S&P 500. Just imagine trying to reinvest $1000 in dividends evenly into 500 individual stocks.

I was doing a search on Vanguard and securities lending and discovered that for some funds, the extra earnings covers the expense ratio. E.g. the following article claims that "The Vanguard Small Cap ETF (VB) has historically eliminated its costs with securities lending"

How Securities Lending Makes Some ETFs Free - Forbes

As of today VB (vanguard's small cap ETF) expense ratio is 0.09%.

Granted there is some additional risk (to securities lending) but it doesn't seem worth the effort to self index. There are probably multiple other ways Vanguard (and large fund companies) can implement it way cheaper than one could do it themselves.

 

[samclem]

Some of your most successful mutual funds have less than 30 stocks in them (Oakmark is one).

Having a small number of stocks is among the best ways to produce outstanding returns. And, it's a great way to get returns that are well below average.

In some past market environments, a disproportionately large amount of the S&P 500 gains were due to just a few stocks. Picking a small number of stocks improves the chance of missing a "fair share" of the standouts, or of maybe getting an extra serving.

Most of us don't need to swing for the fences--getting consistent singles is enough.

 

[jim584672]

For the S&P 100 (OEX) with $100,000...

TICKER | SHARES | DOLLARS
AAPL | 48 | $6,020.64
MSFT | 67 | $2,958.05
XOM | 35 | $2,912.00
BRK.B | 20 | $2,722.20
WFC | 43 | $2,418.32
JNJ | 23 | $2,241.58
GE | 83 | $2,205.31
JPM | 31 | $2,100.56
FB | 23 | $1,972.71
WMT | 27 | $1,915.11
AMZN | 4 | $1,736.36
PG | 22 | $1,721.28
PFE | 51 | $1,710.03
GOOGL | 3 | $1,620.12
DIS | 14 | $1,597.96
VZ | 34 | $1,584.74
GOOG | 3 | $1,561.53
CVX | 16 | $1,543.52
T | 43 | $1,527.36
BAC | 87 | $1,480.74
ORCL | 36 | $1,450.80
KO | 36 | $1,412.28
GILD | 12 | $1,404.96
C | 25 | $1,381.00
V | 20 | $1,343.00
MRK | 23 | $1,309.39
IBM | 8 | $1,301.28
CMCSA | 21 | $1,262.94
HD | 11 | $1,222.43
INTC | 39 | $1,186.38
CSCO | 42 | $1,153.32
PEP | 12 | $1,120.08
PM | 13 | $1,042.21
UNH | 8 | $976.00
SLB | 11 | $948.09
CVS | 9 | $943.92
ABBV | 14 | $940.66
BMY | 14 | $931.56
AMGN | 6 | $921.12
AGN | 3 | $910.38
MDT | 12 | $889.20
MA | 9 | $841.32
GS | 4 | $835.16
BA | 6 | $832.32
QCOM | 13 | $814.19
CELG | 7 | $810.18
BIIB | 2 | $807.88
MO | 16 | $782.56
UTX | 7 | $776.51
MMM | 5 | $771.50
MCD | 8 | $760.56
WBA | 9 | $759.96
NKE | 7 | $756.14
LLY | 9 | $751.41
KMI | 18 | $691.02
AIG | 11 | $680.02
UPS | 7 | $678.37
UNP | 7 | $667.59
USB | 15 | $651.00
SBUX | 12 | $643.44
AXP | 8 | $621.76
MS | 16 | $620.64
COP | 10 | $614.10
TWX | 7 | $611.87
HON | 6 | $611.82
EBAY | 10 | $602.40
ABT | 12 | $588.96
LMT | 3 | $557.70
FOXA | 17 | $553.35
COST | 4 | $540.24
LOW | 8 | $535.76
MDLZ | 13 | $534.82
SPG | 3 | $519.06
DOW | 10 | $511.70
MET | 9 | $503.91
F | 33 | $495.33
ACN | 5 | $483.90
OXY | 6 | $466.62
TXN | 9 | $463.59
CL | 7 | $457.87
HPQ | 15 | $450.15
DD | 7 | $447.65
COF | 5 | $439.85
GM | 13 | $433.29
MON | 4 | $426.36
GD | 3 | $425.07
CAT | 5 | $424.10
EMC | 16 | $422.24
TGT | 5 | $408.15
BK | 9 | $377.73
BAX | 5 | $349.65
FDX | 2 | $340.80
SO | 8 | $335.20
EMR | 6 | $332.58
APC | 4 | $312.24
HAL | 7 | $301.49
RTN | 3 | $287.04
NSC | 3 | $262.08
EXC | 7 | $219.94
ALL | 3 | $194.61
DVN | 3 | $178.47
$100,176.34

 

[pb4uski]

To me , simple is better.

While I'm not aware of a S&P 100 index fund, the S&P 500 index fund would cost you $50/year on that $100k. For discussion purposes, let's say the return is the same. Is it worth the hassle of having the above portfolio, accounting for it and dividends and rebalancing, etc for $50 a year? Besides, the $50/year is partially offset by securities lending and the like that is not really feasible for an individual to do.

 

[Mulligan]

A lot of folks do just this with a hand picked basket of stocks. Mulligan here has a portfolio of preferreds that pay high dividends. Some of your most successful mutual funds have less than 30 stocks in them (Oakmark is one). You just have to be diligent and spend time monitoring your stocks if you want to do this successfully.

I feel very comfortable doing this with preferred stocks, over a preferred stock index because they have to buy the dogs with fleas and cannot focus on the safe higher yielding small issue illiquids. As you know buying them yourself Aja, we are just looking for higher yielding safe ones.
But in the common stock arena, I don't feel I would do any better trying to pick "the best common stocks" in an index fund and then counting on beating the average. In fact I am more willing to bet I would pick the wrong ones and underperform. That is probably why the only common stock I own is in the Total Stock Index.


Sent from my iPad using Tapatalk

 

[target2019]

Take 100K and divide it into two portions.
- 75% Wellesley
- 25% Stock brokerage

Examine the companies held by Wellesley. Find companies not held by Wellesley that you feel will pay a growing dividend and buy those at good value.

Each quarter remove one half the dividends and purchase more shares of Wellesley.

Enjoy the other half of your dividends by eating and drinking as much as you can afford.

 

[ERD50]

For the S&P 100 (OEX) with $100,000...

TICKER | SHARES | DOLLARS
AAPL | 48 | $6,020.64

.
.
.

DVN | 3 | $178.47
$100,176.34

So after buying 50-100 of the S&P500, I think you have some risk of not tracking within the 0.09% expenses they charge for SPY.

And you would likely need to re-balance from time to time - that would be a nightmare, I'd think. And it would cost something. The funds can do that as people move in/out.

Yes, I've thought about it from time to time, then I go back to whatever I was doing.

-ERD50

 

[Sunset]

Years ago I had the same idea, and I recall reading that to come close to the performance of some index. You only needed a relatively small number of stocks about 15-20.

The idea was you buy the 15-20 stocks that make up the majority of the index and that accounts for most of the index action.

I don't know if its true, but I did go on to purchase various stocks and learned the value of harvesting gains and losses on the individual stocks, while my index etf could not do any of that since it is a mix of many.

I have come to the conclusion for myself, that I will over time convert my individual stocks to index etf's as the broader mix means no black swans.

One of my individual stocks was JOY, as it was individual I'd sell covered calls on it to pump up the dividend and eventually let it go as coal weakened, now it is 1/2 of what I sold it for. But my broad etf's are not hurt by coal's demise.

Wish I had done that for my CAT

 

[photoguy]

Here's what Bernstein says about how many stocks you need to diversify properly:

To be blunt, if you think that you can do an adequate job of minimizing portfolio risk with 15 or 30 stocks, then you are imperiling your financial future and the future of those who depend on you. The reason is simple: There are critically important dimensions of portfolio risk beyond standard deviation. The most important is so-called Terminal Wealth Dispersion (TWD). In other words, it is quite possible (in fact, as we shall soon see, quite easy) to put together a 15-stock or 30-stock portfolio with a very low SD, but whose lousy returns will put you in the poorhouse.

The reason is simple: a grossly disproportionate fraction of the total return came from a very few "superstocks" like Dell Computer, which increased in value over 550 times. If you didn’t have one of the half-dozen or so of these in your portfolio, then you badly lagged the market. (The odds of owing one of the 10 superstocks are approximately one in six.) Of course, by owning only 15 stocks you also increase your chances of becoming fabulously rich. But unfortunately, in investing, it is all too often true that the same things that maximize your chances of getting rich also maximize your chances of getting poor.

The 15-Stock Diversification Myth

He has a nice histogram in the article showing how it's very easy to lag the index with small baskets.

 

[Sunset]

Well, after reading the Bernstein link, I'm really glad I came to the conclusion to phase into etf's.

Perhaps I will phase in faster now...

 

[gcgang]

https://www.folioinvesting.com/folioinvesting/about-us/

Above is a link to a service, Folio, that kind of does what you're trying to do.

I agree Advantages of owning the individual securities includes potential tax efficiency, and possibly lower cost than an ETF.

I've never used Folio, so can't speak to details. I'd be interested in your or anyone else's experience with them.


Sent from my iPhone using Early Retirement Forum