individual stocks vs index funds,stocks poor choice

[mathjak107]

http://www.coffeehouseinvestor.com/PortPonder.htm

Interesting topic for discussion here i think.

 

[2B]

What's your point? I'd say 75% of this forum is solidly in the "mostly ETF/index" camp. I personally own all domestic index plus a very littly BAC (left over from years ago, large capital gain and I like the dividend). I have managed international funds because I don't trust the index. DODFX and VEIEX. Both have good performance and under 1% mgmt fees.

Maybe we can help convert the die-hards. We can read their stories of making a killing on that hot stock.

 

[mathjak107]

Believe me from what i see in disscussions here there are plenty of buyers of individual stocks.
My own feeling is i consider buying individual stocks my speculating money.
Im not smart enough to pick just the right company or companies at just the right time in the right sector  ,and to sell before the disapointing earnings report sends it reeling.Even if i got all of the above correct i still dont know what the competitors got on their drawing board.
I have lots of fun trading individual stocks and even tried a plan like the dogs of the dow method but in twenty years of investing its still my funds that grew my serious money.

 

[Tadpole]

There is nothing wrong with owning some individual stocks if you have the temperment. I own about $35K $37K $35K (I give up), of oil company stock. Boom and bust, but good stocks tend to increase slightly over time just like funds.

If one plays with speculative stock like nanotech, biotech, etc. startups, if you end up with one that is a winner, you win. If not, ..... Unproven high return areas are for play money.

If one buys Ford because it is a bargain, chuckle, I'll put you in my prayers.

 

[ladelfina]

I get the indexing argument.. but 3/4 of my egg is in a taxable account of mostly individual stocks with mostly wicked low cost bases... Need to look at my tax situation end of year to see whether I feel like selling anything.. even low cap gains of 5% seem expensive compared to just hanging on for the ride, but OTOH I should prob. take advantage of today's "LOW LOW RATES!!!!"   and start shifting.

Anyone been stimulated to swap a significant portion of stocks for indexes in a taxable acc't.? Any strategies or other thoughts?

 

[2B]

If one buys Ford because it is a bargain, chuckle, I'll put you in my prayers.

Then pray for us indexers. It's in our indexes with the current high flyers and the other dogs. Ford may fold (like I believe) or go private for a big premium (Ford family ego may drive that outcome). I gave up trying to outsmart the market years ago. It seems to be working better than I did and it takes much less time.

 

[2B]

I get the indexing argument.. but 3/4 of my egg is in a taxable account of mostly individual stocks with mostly wicked low cost bases... Need to look at my tax situation end of year to see whether I feel like selling anything.. even low cap gains of 5% seem expensive compared to just hanging on for the ride, but OTOH I should prob. take advantage of today's "LOW LOW RATES!!!!"   and start shifting.

Anyone been stimulated to swap a significant portion of stocks for indexes in a taxable acc't.? Any strategies or other thoughts?

You won't get any better capital gains rates than now. More Dems in Congress will raise the war cry to repeal the capital gains treatment in the last "tax cut."

I rolled over a significant amount of capital gains into index funds. I did it over a couple of years as my view of my holdings said it was time. That was a mistake because the reason I needed to switch to the index fund is because I don't always guess right.

Look at the tax situation. The nice thing about index funds is that you don't sell them until you need the money. They are very tax efficient.

 

[Cut-Throat]

I get the indexing argument.. but 3/4 of my egg is in a taxable account of mostly individual stocks with mostly wicked low cost bases... Need to look at my tax situation end of year to see whether I feel like selling anything.. even low cap gains of 5% seem expensive compared to just hanging on for the ride, but OTOH I should prob. take advantage of today's "LOW LOW RATES!!!!" and start shifting.

Anyone been stimulated to swap a significant portion of stocks for indexes in a taxable acc't.? Any strategies or other thoughts?

I owned waaaayyyy to much of a stock that I liked. It was in a taxable account and I did not want to pay that much taxes.

Problem Solved. The stock took a 40% hit and I lost $175K. When I finally sold it, I did not have to pay that much in taxes! After that 'lesson', I have always considered taxes on capital gains a good thing. It means you made some money.

I then proceeded to sell off all my individual stocks when the capital gains rate dropped. I only own the one stock that my DW works for, becuase we can buy it a 15% discount. - And I shed some of that every couple of years.

 

[d]

i'm just not smart enough to separate the sheep dip from the huckleberries ...

 

[maddythebeagle]

What's your point?  I'd say 75% of this forum is solidly in the "mostly ETF/index" camp.

The article is directed to the average investor......which I think there isnt a lot of here... Pretty simplistic argument against individual stocks.....I cant remember a recent discussion on individual stocks that wasnt about value.....The article would be good for folks that put all of their money on tech stocks in the late 90s.....or buying Pfizer, coke, etc. at high valuations at the same time....

 

[unclemick]

Buy both - the balanced index for retirement and:

individual stocks for the male hormones - a form of medical treatment for an incurable condition.

heh heh heh heh heh - BTW Monday night football is coming tomorrow.

 

[grumpy]

To me the strongest argument for investing in individual stocks is the education it provides as to the mechanisms of the markets and the drivers of profits in various industries. I hold about 20% of my total portfolio in stocks of 22 companies. They fall into 8 different industries. I DCA'd into them over a 10 year period. I found that I paid alot of attention to the dynamics of those industries which I would not have done if I was invested only in index funds (where the bulk of my remaining investments are). This has given me insight into market dynamics and has allowed me to ignore alot of fluctuations that might otherwise have caused me to panic and sell funds at just the wrong times. I have also done a bit of sector rotation among these stocks. Again that motivated me to educate myself on the likely impacts of such things as interest rates, competitive advantages, spin offs, etc. Unless you are going to buy and hold and hold and hold... index funds you will benefit from the education you receive by trading modestly in individual stocks even if your returns are equally modest.

Grumpy

 

[Spanky]

... I only own the one stock that my DW works for, becuase we can buy it a 15% discount. - And I shed some of that every couple of years.

I am pretty in the same boat, holding only a single stock through employee stock purchase plan (ESPP). The old plan (before the merger) was better since you can sell it almost immediately. Now, you have to hold it for 3 months before selling and another 21 months to avoid paying tax for the 15% discount.

 

[Nords]

Anyone been stimulated to swap a significant portion of stocks for indexes in a taxable acc't.? Any strategies or other thoughts?

Only as the stock hits a sell stop or we decide what to liquidate for living expenses. I'm also wondering if we'll ever sell Berkshire Hathaway or just hold it for gifting/charitable donations.

I'm holding one big loser-- Nortel-- as we wait for tax-loss harvesting or a deus ex machina. I'm pretty sure now that harvesting will happen first.

As far as other strategies, I think the 2008 reduction in cap gains taxes is worth planning for. The political parties will be pumping up the election-year economy and it may be a good time to harvest profits in favor of finding an unloved sector or two... perhaps REITs or oil!

Beating the indexes with individual stocks can be done, but it's a lot of work-- work that I'm losing interest in doing.

 

[preben]

I hold almost all index/ETFs with only "managed" funds being Vanguard Metals, and Pimco foreign and developing bond funds.

Now for my "fun-money" I hold only 1 single stock currently; WisdomTree Investments (WSDT.pk) which we have discussed here before. It is a wild ride, and my stop "loss"(gain actually) have stopped me out twice(at a profit), but I have faith in the biz; good board (Incl. Siegel), interesting (fashionable?) products being dividend indexes and in addition an international small cap value/dividend ETF (DLS).

Above said; for me ETFs/index is the main driver, I see little advantage in taking on specific company risk with my base portfolio.

Cheers!

 

[justin]

What's your point? I'd say 75% of this forum is solidly in the "mostly ETF/index" camp. I personally own all domestic index plus a very littly BAC (left over from years ago, large capital gain and I like the dividend). I have managed international funds because I don't trust the index. DODFX and VEIEX. Both have good performance and under 1% mgmt fees.

Your VEIEX is an index fund. It tracks the MSCI Emerging Markets Index. It used to track the MSCI Select Emerging Markets Index (a custom index created for Vanguard), but they switched in the last few weeks.

 

[d]

To me the strongest argument for investing in individual stocks is the education it provides

... what i learned from that education is that:

i'm just not smart enough to separate the sheep dip from the huckleberries

 

[Nords]

Above said; for me ETFs/index is the main driver, I see little advantage in taking on specific company risk with my base portfolio.

Bernstein & Swedroe have both observed that the single-stock risk premium is not sufficiently rewarded. 

They also opine that when the extra effort is taken into account, investors in individual stocks would probably enjoy greater rewards with their lives, families, & friends. If, by that point, they still have any.

But there will always be the exceptions to the rule who will profit handsomely by it.

 

[renferme]

I have both stocks (Ameritrade) and Mutual Funds (D&C).
My Ameritrade account consists of mostly dividend paying stocks.
I rarely spend my dividends - usually use them to buy more stocks or draw out
and buy CDs.
But, what I don't like about mutual funds is the accounting hassle regarding
dividends and capital gains, which would be nightmarish if I began drawing from the D&C funds. I guess I just don't understand how to use my funds.
They just seem to make income tax time too tough as I have to pay taxes on money that I haven't withdrawn.

 

[brewer12345]

If you are retired and living off your portfolio as thae main/only source of funds, I think that having more than maybe a third of your equity allocation in individual stocks is foolish (unless you have WAY more capital than you need).  OTOH, if you are in the accumulation stage, have a large risk appetite, and are willing to do the significant amount of analysis required, individual stocks and bonds can be a very good thing.  

I personally am way ahead of the indexes as a result, although a fair amount of that is simply that when I started investing in 1999 it was very clear even to newbie me that the overall market indexes were not even vaguely attractive.  Since that was the case, I had to start out with individual stocks.  Since lots of good, old stalwarts were out of favor, it was pretty easy to pick up good stuff on the cheap.

 

[haha]

This quote form MathJak's reference shows why this guy and everybody else who proves why you can't make money with individual stocks is wrong.

First, let’s talk individual stocks, even though it is hardly worth our time. What are you thinking when you browse through Value Line’s stock summary? That you are the next Warren Buffett[sic], and that you are going to hunt down the top performing companies and turn yourself into a millionaire next door?

There is one little problem with this method. It doesn’t work, and the reason why it doesn’t work is that everyone else is trying to do the same thing, and as a result, you and all your like-minded Wall Street millionaire-wannabe buddies bid up the price of these great companies to the point that, collectively, you are paying a lot more for a dollar earned than you would for a company that no one wants to own.

So "everybody" is looking for bargains? I don't think so. A huge slug of what is traded is in index ETFs . A huge slug of what is held is in ETF and mutual fund indexes. Buy side research has been gutted at many firms. Some hedge funds do it- others mostly make macro bets.

Likewise, the above comments from forum members show that individual stocks are an aberrant approach that people feel vulnerable about mentioning. "Oh sure, I own a few, but only a few and I realize it's just hormones." Like, "OK, I admit I toked, but I didn't inhale." Or, "Bless me father for I have sinned against the 6th Commandment, but only alone, never with others."

I feel that it is much safer retired or not, to have >=50% in TIPS or other CPI indexed bonds, and what is left in carefully chosen, well financed businesses with strong business franchises, low cost advantage, or et., etc. It wouldn't hurt if a good portion of these paid meaningful and growing dividends.

It is true that in a statistical sense one is not “rewarded for choosing individual stocks”; but he can be rewarded for choosing individual companies well.

Of course this is not for a coffee table guy. It's for a man or woman who enjoys the process as well as the outcome of investing, and realizes that it takes time and effort to achieve success.

Ironically, probably the most rational use of index funds and ETFs is in market timing, where one is making a forecast for the whole market, rather than trying to find a well financed company with good and secure cash flows.

Ha

 

[mathjak107]

I find it difficult and trying at times to make money in my vast diversified mix of funds and thats with pretty much only market risk and sector risk without worrying about individual company risk.I dont believe you can diversify enough owning 10 or 20 individual stocks .There is far to much individual company risk there for my taste.

 

[CyclingInvestor]

I feel much more comfortable with a collection of 6-20 carefully chosen,
well managed, consistent dividend paying/raising individual stocks which
provide a dividend stream sufficient to live on (as I will be doing after
Oct 20, finally). The sleep-at-night factor is large here (I do not feel
comfortable with investments other than stocks). I have never
trusted others to select my investments, expecially when they charge
1-1.5% to do so, and I do not like to own stock in poorly managed
companies (inevitable with index funds). I feel comfortable enough with
my results using this approach (used since 1993, although with dividends
reinvested) to retire on it.

 

[AltaRed]

I feel much more comfortable with a collection of 6-20 carefully chosen,
well managed, consistent dividend paying/raising individual stocks which
provide a dividend stream sufficient to live on (as I will be doing after
Oct 20, finally). The sleep-at-night factor is large here (I do not feel
comfortable with investments other than stocks). I have never
trusted others to select my investments, expecially when they charge
1-1.5% to do so, and I do not like to own stock in poorly managed
companies (inevitable with index funds). I feel comfortable enough with
my results using this approach (used since 1993, although with dividends
reinvested) to retire on it.

So you are certain you can do this without any Enrons, WorldComs, etc.? Even the auditors, fund managers and analysts didn't catch these. I hope you are right but I wouldn't bet a dime you won't have a flameout or two. And it is a whole lot more significant in a portfolio of 6-20 stocks than it is in an index.

 

[bpp]

I almost feel comfortable with 60 nearly randomly selected individual stocks, but will feel much more comfortable when I get to 2 or 3 times that number.