Stocks or Funds

[popowich]

Hello,

I'm only 31 (already 31?) and have been bit too many times by individual stocks tanking. Many of these picks have come from investment services such as fool.com. Overall they do OK, but I'm so annoyed that I have started moving more toward funds instead of individual stock picks. For the person who does not like the risk of individual stocks, and is my age, but is still fine with some degree of risk, what percentage of your portfolio would you have in individual companies (GOOG for example), and what percentage in ETF's and Funds (SPY and VTSMX for example). Thanks!

-Raymond

 

[Marquette]

Unclemick's time-tested formula is, I think, 5% of your total portfolio for your testosterone trading fund.

 

[unclemick]

Hmmm - academic research wise - I would benchmark something like Target Retirement 2040 (age 31-35) and convince myself I understand why they own what they own and how it might apply to my situation.

As for me age almost 65

85% Target Retirement 2015 - young for my age cause I have a small pension/early SS. Now covers 100% of retirement.

15% Individual stocks heavily skewed toward widow and orphan dividend stocks - elect utes, big oil, telephone, food, drug - some REITs, shipping, etc.

On the flip side - current yield plus dividends plus pension plus early SS easily covers a hard times mode.

Note the individual stocks are relatively high cause I'm too cheap to sell - I need to spend more.

heh heh heh - Note that huge handgrenade wise - skipping all the fancy trim and do dads - I'm not too far from the ancient hoary old 60/40 traditional pension fund ('policy portfolio'). 66/34 not tossing in pension/SS adjustments which would make me less hot roddy.

 

[rogersteciak]

Unclemick's time-tested formula is, I think, 5% of your total portfolio for your testosterone trading fund.

I concur. This approach saved my wealth during the dot-com bubble (along with my eventual ability to FIRE). I kept 95% of my portfolio in a diversified group of "managed accounts" (which are "private mutual funds" as far as I'm concerned) and 5% in individual dot-com stocks I picked.

The 5% I picked went to zero, while the 95% my managers picked (which were mostly in "old economy" stocks) did lose 40% of its valuation for a couple of years before it recovered and reached new highs. (This 40% dip and subsequent recovery is the reason I'm directing fresh money into quality dividend-paying stocks today in case we have a repeat of this market hiccup, which we will eventually.)

Then at what turned out to be just before the peak of the real estate bubble, I was thinking of putting 5% of my portfolio into directly-owned real estate. But the real estate mentoring club I was with insisted I put in 100% (its reasoning being "real estate is a highly leveraged investment that always appreciates"). This risk-it-all insistance was all I needed to leave that mentoring club and stay invested in the stock market.

I'm a believer is staying within my circle of competence (which means selecting and paying other people to manage in those areas outside my circle of competence) and using only a small amount of "test money" when trying to expand my circle.

 

[clifp]

While you are in the accumulation phase any number between 0 and 20% is good for individual stocks. Since retirement my individual stock percentage is creeping toward 50%. I really not sure I want it that high but I keep finding stocks that I think are bargains.

I have found that services like the Motley Fool, Bob Brinker Value line, or my personal favorite Morningstar are good starting points. But the reality is there are no short cuts and you need to do your own homework. It is a lot of work to follow a diversified portfolio of 20-30 stocks much less the 50 I currently own. Possible to do while retired, extremely hard while working and raising a family.

My argument for owning individual stocks is more psychological than financial. To a large degree, I found it gave me almost as much pleasure to buy stock in a company as a new toy (e.g. sports car, new computer). Even if I underperformed the market by a few percent with individual stocks, it was a better investment than a shining new sports car. I never got the same satisfaction of seeing a mutual fund go up by 50% in a few years as stock double or triple. But that is just me.

 

[hotwired]

I am in a similar boat. I have about 30K in my ROTH and the rest of my 7 figures with a financial planner OR vanguard in VERY tight asset allocation, mostly index funds, index ETFs, etc. My instincts SCREAM at me to buy downtrodden stocks and they just seem to go lower. I bought WAMU, AXP, CFC, etc. not to mention doubling up on my MESA at 6, which I bought at 12, only to watch it at .50 now. So my decision to only trade a small portion has worked out VERY well, needless to say!! The main reason is that I'm still trying to decide what kind of investor I am. I think I've done best doing quality, low or no debt, borning type of stocks, but my instincts keep getting the best of me when FORD is at 9 and I think "hey, I neglected to buy chrysler at 10 back in the 80s and it went to 60 the next year!".

So now I'm considering slowly moving that 30k into some "forbes honor roll" type mutual funds. I find that I am not that excited by the research, and frankly, that's what kills me!

Does anyone have a strategy for mutual funds for out performing the index funds? My thought is investing in good managers with a small amount in the lousiest performing industries (in this case financials which are down 30-40% past year). Perhaps Dodge and Cox stock, CGM cap dev., CGM focus (kind of a high flyer recently ... maybe poised for downturn).

 

[Zathras]

Depends upon how narrow your focus on individual stocks is. If you only invest in dot.coms, or what is hot, I would agree around 5%.
If you have a good allocation in lots of areas and do research in the companies you invest in, I would say 70%-95% IF you can handle the short term swings.
A stock mutual fund is basically that, a bunch of individual stocks.

 

[rgarling]

...
For the person who does not like the risk of individual stocks, and is my age, but is still fine with some degree of risk, what percentage of your portfolio would you have in individual companies (GOOG for example), and what percentage in ETF's and Funds (SPY and VTSMX for example). Thanks!

-Raymond

Do yourself a huge favor and pretend individual stocks are properly priced by "the market". Then study those vanguard target retirement accounts and model your FUND purchases after those. Also, match your savings rate with your discounted retirement outflow $ you will need 30 years from now.

 

[Running_Man]

Hello,

I'm only 31 (already 31?) and have been bit too many times by individual stocks tanking. Many of these picks have come from investment services such as fool.com. Overall they do OK, but I'm so annoyed that I have started moving more toward funds instead of individual stock picks. For the person who does not like the risk of individual stocks, and is my age, but is still fine with some degree of risk, what percentage of your portfolio would you have in individual companies (GOOG for example), and what percentage in ETF's and Funds (SPY and VTSMX for example). Thanks!

-Raymond

I am near 100% in agreement with Clifp on investment philosophy, in your case since you do not show the same drive to research and follow individual stocks, the indexing model with no individual stocks is probably best for you.

 

[tomintucson]

I believe that thousands of the world's best and brightest are currently employed in the money management (read stock-picking) business. Why is that? Well, that's where the money is! When I ponder the collective experience and wisdom of a Goldman Sachs, for example, and then consider my odds of going up against these guys and gals in what is essentially a zero-sum game of stock selection, I can only conclude that I'm just not smart enough.

However, I do add to my self-taught knowledge base of economics and finance on a daily basis, and I think I stay relatively current on international affairs and social and historical trends. I use what I have to guide my investing, via managed funds, index funds and ETFs. There are a lot of people who are a lot smarter than I am, yet I seem to have developed an investment style that has affords me a little comfort when swimming with the sharks in the sea of equities. I'm fine with others who feel and invest differently, this is just what works for me.

 

[REWahoo]

I believe...

Tom and I attend the same church.

 

[FinanceDude]

You can make a LOT more money in individual stocks than in a mutual fund, but most can't stomach the roller-coaster ride to do it.

Today, with all the ETFs about, you can buy whole sectors cheaply and tax-efficiently, so individual stocks are not as glamarous as before..........

 

[rgarling]

You can make a LOT more money in individual stocks than in a mutual fund, but most can't stomach the roller-coaster ride to do it.

Purchasing stocks gives you a chance to get lucky.

You've got to ask yourself one question: 'Do I feel lucky?' (from Dirty Harry)

It is legal gambling in all 50 states; just put your life savings on the table, and enjoy the ride! (Unlike poker, individual stock selection is not a game of skill, but the allure is hard to resist. )

The above posters are wise to limit the damage to their investment portfolio by limiting their gambling to a small percentage.

 

[unclemick]

Google up Wm Bernstein's 15 Stock Dividsification Myth if you want to get a gut feel for individual stocks vs indexing.

There are other articles/studies but that is my favorite.

six to one AGAINST.

But sometimes I feel lucky. I've beaten indexing over maybe 5/10 yr stretches by a tad if I torture(cheat a little) the numbers but over forty yrs?

Let's just say indexing financed 80-90% of my ER.

heh heh heh - like the Saint's in the Superbowl someday - maybe by 50 yrs I will solidly trounce the index and retire to the Bahamas. .

 

[innova]

Many of these picks have come from investment services such as fool.com. Overall they do OK, but I'm so annoyed that I have started moving more toward funds instead of individual stock picks.

Why are you annoyed? You'll avoid diversifiable risk by buying funds rather than stocks.

People poo-poo indexing, but numerous studies repeatedly show that when adjusted for risk it is very, very difficult to beat the index net of expenses. You'd do well to not ignore that massive body of evidence unless you consider your retirement funds gambling money.

I believe that thousands of the world's best and brightest are currently employed in the money management (read stock-picking) business. Why is that? Well, that's where the money is! When I ponder the collective experience and wisdom of a Goldman Sachs, for example, and then consider my odds of going up against these guys and gals in what is essentially a zero-sum game of stock selection, I can only conclude that I'm just not smart enough.

Brilliantly stated. Please pay careful attention to these words.

in your case since you do not show the same drive to research and follow individual stocks, the indexing model with no individual stocks is probably best for you.

Read the previous quote. No matter how much research you do and how smart you think you are, there are people that have much better information than you do and access to resources you never will. In short, if you are getting your research from major financial websites / magazines, that is not knowledge it is information, and information is not useful since everyone has it.

So now I'm considering slowly moving that 30k into some "forbes honor roll" type mutual funds.

One last thing. Typically the funds identified by such publications are managed, high-expense funds that have temporarily been thrust into the limelight from short-term outperformance. When the article is published, lots of folks mistaking information for knowledge will plow their money into these funds, swelling the size of the fund (ala Magellan) and making underperformance all but inevitable in the years to come.

For some entertaining reading on this subject check out some of Larry Swedroe's books from your library, or Malkiel's "Random walk".

 

[Running_Man]

People poo-poo indexing, but numerous studies repeatedly show that when adjusted for risk it is very, very difficult to beat the index net of expenses. You'd do well to not ignore that massive body of evidence unless you consider your retirement funds gambling money.



Read the previous quote. No matter how much research you do and how smart you think you are, there are people that have much better information than you do and access to resources you never will. In short, if you are getting your research from major financial websites / magazines, that is not knowledge it is information, and information is not useful since everyone has it.

Innova has a polar opposite approach to investing than I do so there is little chance we could agree on individual stock investing. I believe index investing is best when one does not have the inclination to manage their investments to succeed in the long run.

In studies that have advocated index investing, I have found several instances where the authors were frustrated that they knew they were investing in overvalued assets but did so anyway. Read Bernstein's website when he challenged his international indexing against Tweed and Browne and other international funds and was lamenting the fact that managed funds were able to avoid Japan while he was forced into ever larger positions due to the cap nature of investing. Or Jeremy Siegel in the Future for investors as he complains about the overvaluation of tech stocks in the S&P500 and even wrote a WSJ piece advocating selling all tech stocks as he still held a significant portion of his investments in the S&P500. This is the weakness of index investing, the more popular it becomes the more the largest caps can become overvalued.

One of the best comments I have read lately was on the Morningstar Boards under the dividend stocks and I believe but am not sure it was our Clifp, stating: "I prefer to invest in a stock if I know I would invest more if it fell 25 percent so long as there was no change to the underlying business." I realized that was how I was viewing my recent purchases of Coke and Johnson and Johnson and how I would be thrilled if those stocks fell to a 3.5 to 4 percent dividend yield.

I do not think it took specific genius to recognize in 1998 that CocaCola with a PE of 51 and a dividend yield of 0.8 percent was overvalued as a result of the mania of investing in the S&P500 at the time. As a long term business with a PE of 17 and a dividend yield of 2.8 percent I think it offers a fair and steady income with above inflation growth prospects.

The advantage that someone at a Goldman Sachs hedge fund has over a longterm perspective in my portfolio on Coca-Cola is negligible. Remember Jim Cramer was a very successful Goldman Sachs broker and a hedge fund manager. His attention span is barely a quarter for investments, the time horizon is so different that we literally are on totally different wavelengths.

Were Coke to fall to 38 to yield 4 percent over the next year I would be thrilled and would double my investment in the stock. If the stock were to rise faster than earnings so that the PE were to jump back into the mid thirties and the dividend drop below 1.5 percent I would probably sell even if the business did not appreciably change.

 

[haha]

The advantage that someone at a Goldman Sachs hedge fund has over a longterm perspective in my portfolio on Coca-Cola is negligible. Remember Jim Cramer was a very successful Goldman Sachs broker and a hedge fund manager. His attention span is barely a quarter for investments, the time horizon is so different that we literally are on totally different wavelengths.

Well said. These guys are not in the same game as you and I. So saying, "What chance do I have against Goldman Sachs" is a non sequiter. Sounds daunting, but is actually meaningless.

I remember reading a book about warant hedging back in the early 70s, by Ed Thorpe and a guy named Kassouf, who I think was teaching at Irvine. They had a method that was actually putting up 20-25% returns exploiting what were glaring inefficiencies in warrant pricing. But they couldn't attract big investors (at that time anyway, Thorpe eventually came to run a large and successful hedge fund) because these guys were saying, "Why I should go with you for 20% when I can get 50% drilling for oil?"

And as for research, how much research do you need to understand Coke or JNJ? Countless laboratory studies have proven that paying attention to the few key factors in the difference, not knowing how many gallons of syrup KO sells in Uzbekistan.

 

[CuppaJoe]

Hello,

I'm only 31 (already 31?) and have been bit too many times by individual stocks tanking....

Hello, Raymond, from Clueless Cuppa. 31 and you've already had time to watch stocks tank! How long do you want to hold them, say, if they don't tank? How long did you hold the tankers?

I'm currently re-allocating my portfolio which has always been in various mutual funds. At the moment I have a large cap fund and an S&P fund. It is really interesting to look at their top holdings as there are always several that I would like to own individually. That's the way I would go if I wanted to buy individual stocks. If you feel you've been bitten too many times, maybe 100% funds? I've found plenty of risk there over 35 years.

[I don't care for fool.com, too many sales pitches.]

 

[innova]

The advantage that someone at a Goldman Sachs hedge fund has over a longterm perspective in my portfolio on Coca-Cola is negligible. Remember Jim Cramer was a very successful Goldman Sachs broker and a hedge fund manager. His attention span is barely a quarter for investments, the time horizon is so different that we literally are on totally different wavelengths.

This is actually a really good point and you made me stop and think. I should restate my post with the clarification that I am referring to investors looking for growth, the next 'ten-bagger', making a killing, killing the market. My remarks aren't targeted towards the long-term buy and hold stock pickers who do not buy on news or chart fluctuations but rather fundamentals.

If you're in the latter group, I'd say your goal is not to beat the market but to grow and protect your wealth. I'm still undecided as to whether a dividend vs. total growth strategy is the best one, but the indexers like me and the value-stock buy and holders actually have a lot in common.

 

[tomintucson]

I'm also with innova in terms of respecting individual stock selection as part of a long-term ("Buy great companies and hold them forever.") strategy. Even so, I'm big on a deep-value, extremely low-turnover, super-smart kind of manager such as David Winters and his Wintergreen Fund for some of my managed holdings. Yeah, he's having a tough year relative to his fabulous risk-adjusted history with Mutual Series. Yeah, he's expensive. But he sells me what is basically an international hedge fund for 1.9%. He carries on the Michael Price legacy,but at mutual fund expense ratios. You have to pay Mr. Price hedge fund fees to manage your money these days. Mr. Winters will take very good care of my money, and will earn his keep.

Tom

 

[unclemick]

Generally I recommend index funds(more so Target Retirement Series) or balanced Value ala pssst Wellesley types(Wellington, Dodge and Cox also) for most of my friends.

However - there is this thing called hormones - which cannot be ignored.

One can go to the library and read the 'Postscript' chapter of Ben Graham's Intelligent Investor or take note of the founder of 'The Retire Early Homepage' - the original sponser of this forum who got here(ER) with individual stocks.

Happens every generation and I have no clue as to your 'true?' odds of success.

A little sin is sometimes fun! And remember - fall is football!

heh heh heh -

 

[rogersteciak]

When you buy a [-]fractional share of a great business [/-]stock, it's important to know why you are buying it: income, appreciation, or a combination of the two (i.e., total return).

If you buy a stock for its income (and increases in income in the future due to its level of business growing), you should not be concerned about what its quoted price is every day (assuming its business fundamentals remain solid).

If you buy $10K worth of shares yielding 4%, for example, you will receive $400 a year of dividends as long as the company is doing well (meaning its Board of Directors continues to approve the payment of a dividend).

If the valuation of the shares drop 50% to $5K or increase 50% to $15K, you will still get your $400 a year of dividends regardless of the quoted price on the public exchange.

But if you are buying the shares for appreciation, then you are in a completely different ball game. There, the quoted price means everything (as long as the fundamentals of the business remain solid), expecially when you are at the point where you want to sell your shares for a gain.

But the decision of why you buy or sell a stock is your own decision to make. Other people can buy or sell the same stock for completely different reasons than yourself and still make money doing it.

Short-term flippers (i.e., day traders), for example, can make money in the next hour or two from momentary appreciation and long-term buy-and-holders can make money from long-term capital appreciation.

Long-term income investors, on the other hand, can make money over the years from the growing stream of dividends received (with their heirs having to worry about the quoted price should they want to sell the shares they inherit).

 

[haha]

It's a fact of investing that as a dividend rises, so do share prices, unless treasury rates are climbing or the company is perceived to have lost investment value, such as market strength, margins, ROA, etc.

So if you do a good job of finding stocks with growing dividends and strong businesses that can stay strong, you will get your income and your net worth too, over the cycle.

Even better if you buy them at a low point in their cycle, or the stock market in general.

Ha

 

[Marquette]

Buffet says that a know-nothing investor should stick to index funds. I feel that I'm a know-nothing investor and I'm sticking to index funds.

My wife's grandma has managed their investments very well by concentrating on 12 stocks and owning them long-term. I know she's a know-something investor and doesn't let hype or exuberance get to her.

I don't think it takes that much work to become a know-something investor. Heck, you could probably do ok just by tracking what you and your neighbors consume and invest accordingly in the companies that provide those products. That plus some financial statements and a few cups of coffee would get you further than most. The discipline part would be in forcing yourself to react opposite to the market. (Yes, I realize that, as a market investor, I'm at odds with this part of my statement).

For example, it probably wouldn't take a seer to figure out 5 years ago that oil would be a strong play. However, you'd now be sitting on a huge pile just when everyone else is rushing to get into the game. You'll have to fight your own greed switch to start selling off, if you think that oil is ready to pop... and realizing that might mean leaving even bigger returns on the table. When you've just made the right call, it can be hard to remember to stay fearful when others get greedy.

Otherwise, I think comparing oneself to the giants on the street is a bit of a disservice. Sure, they're smart. Sure, they trained for this. But, really, it's not like surgery or theoretical physics. And, you have an inherent advantage over them. If they're successful, they get a lot of money into their funds. So, they might have been successful picking their 10 favorite stocks. However, now they need to go down the list... it's a lot harder picking your 30th favorite stock. You, you can concentrate on the companies you like the most. You don't need to worry about style drift or mot being able to continue to pour money into your 10 favorite stocks.

Me, I'll keep investing in indexes because, otherwise, I wouldn't have time to post here.

 

[rgarling]

Buffet says that a know-nothing investor should stick to index funds.
...

Me, I'll keep investing in indexes because, otherwise, I wouldn't have time to post here.

A wise choice.

The "know something" investors are taking on risk for which they will not be compensated for (on average). Some will win, and win big. Some will lose, and lose big. In the end, it will boil down not to what they knew, but to how lucky they were.