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Stocks To 'Enhance' An Index Fund Portfolio?
Old 08-20-2007, 04:00 PM   #1
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Stocks To 'Enhance' An Index Fund Portfolio?

Is there anyone who is primarily an index investor who uses individual stocks to ‘enhance’ your portfolio? I am mostly and index/target retirement fund type investor. My wife’s IRA is in VG Wellesley & STAR funds. I am not sure I have enough cash available to make individual stocks worthwhile, how much is necessary to have a significant impact on a mostly index portfolio? About 9% of our portfolio is in 6 DRIP stocks so that is our current comfort level, these were long term buy & hold and reinvest dividends and I didn’t spend a lot of time managing them once the DRIP was set up. So are there any stocks that are a natural balance to a target retirement type portfolio? Maybe it is time to just get ETFs like DVY and not look at individual stocks?


And what would be the approach to liquidation, I assume I would sell the stock or fund that is doing the best? If I sell stocks now that would allow my tax deferred accounts to grow until I hit RMD time and capital gains taxes are lower now so this may be the cash equities in.
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Old 08-20-2007, 04:33 PM   #2
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Not enhance but 'damp down' - is the way I look at it.

Handgrenade wise here be my left handed thinking, being my not getting any younger, the first 13 years of ER were fun but the money piled up a tad.

85% Target Retirement and 15% individual dividend - mostly widows and orphans types, former/current DRIP plans etc.

So at age 64(aka under RMD age) - pension, early SS, and the individual stock dividend $ easily cover a years budget - all in - taxes included. That's when I feel the need to be el cheapo.

In the good times mode - 5% varible from Target and stocks and party on.

Defense and offense ala that legendary investment guru Bear Bryant.

Note that my chickenheartedness theory has dividend stocks in taxible pot during retirement - not something other folks might want to do for their situation.

Please do not ask where a potential series of varying IRA to Roth mini conversions factors in - I'm still cal-cu-lating as it were.

heh heh heh heh - of course there is an emotional hormone factor for putzing - which I will also ignore .
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Old 08-20-2007, 04:43 PM   #3
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Quick ballpark = 20% of cash flow in my el cheapo mode. Note that in the past(really cheap 1990's) it was as high as 40% in some years.

Middle of the road stuff - Con Ed, Verizon, Exxon, Washington REIT, Eli, Lilly, Bank of America - that kind of stuff. A few zingers like Eagle(shipping) and STON picked up on this forum at the edges. Not a lot of the real high div yield stuff.

heh heh heh - tryed to balance div plus div growth - the bulk bought in the early 90's. Note that liquidation has a tendency to 'sort of happen' in fits and spurts via mergers, spin offs, me selling because of div not growing. So selling taxible first. I also use ORP to simulate cash out sequence.
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Old 08-20-2007, 04:54 PM   #4
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What's your motivation to trade individual stocks?

Indexing takes away individual company risk, which is a risk you don't get compensated for.

If you have an urge to speculate, you can still speculate with indexing. Pick a style you think might outperform (like ScV, that perhaps too many choose). Or a country. Or a sector.

You can still get an adrenaline rush without taking on uncompensated risk.
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Old 08-20-2007, 06:20 PM   #5
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I don't think it hurts for a retiree with no pension to "tilt" the taxable portion of an equity portfolio to dividend payers (in a reasonably diversified way), especially with the tax laws the way they are now. I plan to use the next three years to sell off some of the no-yield or low-yield stocks I have held for years which have a very low basis, and re-invest into other blue chip stocks which have dividend yields greater than the S&P 500, and a solid record of increasing the dividend (e.g. stocks like GE, JNJ, BAC to name a few). As you know, for a joint return with all income coming from dividends and LT gains, you can take approximately 81K (more if you itemize) in 2007 dollars and pay no Federal tax in 2008, 2009, 2010 under current law.
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Old 08-20-2007, 07:58 PM   #6
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I am getting to mostly index funds and have sold off all stocks except MO (+KFT) and ING which have huge unrealized cap gains that I don't want to pay taxes on. We give away shares of these to charity each year.

But I have a wild side. On volatile days I will buy the emerging markets ETFs such as EEM or VWO and try to make some lunch money. Usually I take a position of a few hundred shares. And I do it on margin sometimes because I don't want to transfer money from one account to another to pay for it. Then I sell either the same day or the next day.

Maybe I should go back to options trading?
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Old 08-21-2007, 04:00 AM   #7
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By enhance, I assume you mean increase returns.

IMHO - I would not buy individual stocks. I would stay diversified and look into shifting the allocations a bit to increase returns. For example, maybe you need to allocate a little more in a small cap index or emerging market index fund. Or some other asset class.

The primary questions you need to be able to answer is: Do you think you are a good stock picker? And will you manage it in a disciplined way?

If not, why take the risk?
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Old 08-21-2007, 08:54 AM   #8
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Quote:
Originally Posted by chinaco View Post
The primary questions you need to be able to answer is: Do you think you are a good stock picker? And will you manage it in a disciplined way?

If not, why take the risk?
The answer is NO. But - look at it this way - how many of those millions? around the world trying to hit that stupid little ball are named Tiger Woods?

eh?

Fear and greed and regular season NFL football - and forty years(1966-2006) of incredibly brilliant, legend in my own mind investing has led me to two things:

1. Real money - that you are using for retirement should be invested seriously - for me that's hands off lifecycle index funds auto rebalanced and auto deduct. Then go spend the money.

2. The putz is incurable. If I go totally broke on individual stocks - I can squeeze in a kayak, golf club or football ticket into my retirement budget on credit card.

Academic research and 'the mighty putz' - doesn't get better than that.

heh heh heh - If I hit the big one! - like fishing tales - I will be posting from my villa in the Bahamas, instead of greater Kansas City.
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Old 08-21-2007, 09:32 AM   #9
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Those that follow Bernicke believe that there is a better portfolio than the indices. They believe that uncorrelated or poorly correlated market sectors occasionnally rebalanced will produce higher returns over the long haul.

Those that follow Bogle believe that the market capitalization portfolio is best over the long haul and that changing from that portfolio increases your risk and perhaps not your returns. An index fund suits this model well.

Personally, I have a lucky astrology mood watch that tells me what sectors to invest during each of the lunar and solar periods for maximum effect.
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Old 08-21-2007, 10:03 AM   #10
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I'm primarily an individual stock investor who uses index funds to "enhance" my portfolio

There are a lot of companies in the indexes that I don't want to put money into, for various reasons. I hate the idea of owning any airline stocks (with the possible exception of LUV). I don't want to own the American auto companies. I don't want to own IBM or GE. I prefer Target and Lowe's to Walmart and Home Depot.

There are great companies that will always be under-represented by an index fund. I have owned Fastenal for 17 years. They'll have to pry those original 3 shares (now 48 shares) from my cold, dead hands.
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Old 08-22-2007, 07:26 AM   #11
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you could own a smaller position in a leveraged fund... such as one which tries to get 2X the return of the same index.
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