Retail Investors Badly Trailing the S&P 500

[ERD50]

I haven't read every word here, but I wonder if some of the under-performance could simply be due to investors taking the dividends in cash (rather than reinvest) to pay ongoing expenses (like most retired people would do)?

-ERD50

[Markola]

Quote:

Originally Posted by OldShooter Probably not. I was making a more general point. My guess is that any portfolio that diversifies away individual stock risk and diversifies away sector risk will be a close enough approximation to the market portfolio to deliver similar results. No reason to buy a total market index except that it is an idiot simple way to achieve the goal.

That’s why I favor the broader Vanguard Total Stock Market Index with exposure to 3,900 equities vs the S&P 500 index fund. Intellectually, it seems to offer more of a diversification free lunch, though history shows expenses and returns are almost identical between the two.

[NW-Bound]

Quote:

Originally Posted by ERD50 I haven't read every word here, but I wonder if some of the under-performance could simply be due to investors taking the dividends in cash (rather than reinvest) to pay ongoing expenses (like most retired people would do)? -ERD50

Regarding the original article, showing that the retail investor losing -26.51% in a recent 15-month period of Nov 21 - April 23, when the S&P lost only -10.94%?

No, dividends are not that much in that short period.

It was more an indication of chasing hot stocks, which crashed a lot harder than the S&P. On the other hand, if these people bought the hot stocks way early, they might still have some gains, and even beat the S&P over the longer periods.

It's hard to tell.

PS. Some headlines on the Web say that retail investors start putting money into the stock market again. Is that a good or bad sign?

[NW-Bound]

Quote:

Originally Posted by Markola That’s why I favor the broader Vanguard Total Stock Market Index with exposure to 3,900 equities vs the S&P 500 index fund. Intellectually, it seems to offer more of a diversification free lunch, though history shows expenses and returns are almost identical between the two.

Or as the study by Ptak shows (not the original article in the OP) showing, taking a snapshot of the S&P then letting the failing companies drop out over a 30-year period and not replacing them with new companies, while holding a lot of cash, beat the S&P and the total market too.

The above means not bothering with chasing the latest technology stocks, no "disruptive" stocks, no genomics, no EV stocks, no biomed, no fancy technology, actually works quite well for 30 years. That's a long time, with huge changes in the economy and the way people live.

Weird stuff can happen in the market.

All I can conclude is that it's hard to make generalizations, and there's too much randomness to know anything for certain.

[Markola]

^^^ I guess it’s a “let the leaders run” kind of strategy. I can’t imagine owning 500 stocks nor paying the trading fees to buy them and then to sell some when they drop out, but maybe a closed end fund could do it.

[NW-Bound]

Quote:

Originally Posted by Markola ^^^ I guess it’s a “let the leaders run” kind of strategy. I can’t imagine owning 500 stocks nor paying the trading fees to buy them and then to sell some when they drop out, but maybe a closed end fund could do it.

Exactly. The Ptak study is more of a theoretical interest than a practical importance.

By the way, no you would not sell anything, you only bought. And you bought once, and never again, including the new stocks that the S&P 500 selection committee adopted.

You would not sell anything, including the stocks that get dropped by the S&P 500 selection committee. You let the rejected stocks stay in your portfolio.

About the cash, he was talking about stocks that went bankrupt, got bought out or taken over, and the purchasing companies paid for the takeover with cash. Ptak then lets the cash sit, and not reinvest it into anything. So, the portfolio was 100% invested in the beginning, and ends up with a lot of cash from the buyouts. Still beat the S&P. Is that not amazing?

Again, I have not found out that out of the original 500 companies in 1993, how many would be left standing, inside or outside the S&P, at the end in 2023. But in just 10 years, from 2013 to 2023, 100 out of the original 500 already got bought out or went bankrupt.

[OldShooter]

Quote:

Originally Posted by NW-Bound ... No, dividends are not that much in that short period. ...

Also, if the total return calculation is done correctly, cash flows in and out of the portfolio are accounted for.

Quote:

Originally Posted by NW-Bound ... if these people bought the hot stocks way early, they might still have some gains, and even beat the S&P over the longer periods.

True enough but the phenomenon of individual investors underperforming is pretty much old news, well suppressed by the investment industry.

Quote:

Originally Posted by Markola That’s why I favor the broader Vanguard Total Stock Market Index with exposure to 3,900 equities vs the S&P 500 index fund. Intellectually, it seems to offer more of a diversification free lunch, though history shows expenses and returns are almost identical between the two.

Yes, absolutely. We carry the "intellectual" look at diversification one step further and own the world via VTWAX. That has cost us some return as the US has outperformed, but the game is not over.

[M Paquette]

I had to look. Including market fluctuations, and my annual withdrawals of selected gains and dividends, I'm down 13.3% over this Nov 2021 to present interval.

Meh. M... E... H... Meh.

It's well inside my long term plans. I've seen worse. Heck, I retired in March 2008, and some of us may recall what happened over that next year. Why, I had to rebalance bonds and treasuries in Nov 2008, and stocks in Feb 2009. I haven't had to expend that massive effort since then. Just a little pruning when I do my annual withdrawals...

[tenant13]

I’m at pretty much the exact same level. 10k less on the 12th, 10k more today. Lol. And I do own a lot of tech stocks. Not JUST tech but substantial amount. No bonds though. I just never liked them. My absolute worst performing account is the “Intelligent Portfolio” by Schwab. It’s the last time I let anyone else make investment decisions for me. At least if I mess up I shrug it off and move on. These guys are a joke and I’m mad at myself AND them.

[HaveEnough]

Two words Real Estate.

Not REITs, not stock real estate, physical real estate.

We have < 1% in the "market" all in real estate, primarily notes, not rentals with toilets and tenants.

Up 24.5% since Dec 2021 to (march 23) that includes removing all living expenses but that is less than 20% of income. Highly recommend.

Have (more than) Enough

[Markola]

^^^^^ Just curious how real estate notes appreciate? Is there a way to mark them to market or do they have price discovery of some kind? Or maybe you’re saying your rental income is up 24.5%?

[luckydude]

Quote:

Originally Posted by HaveEnough Two words Real Estate. Not REITs, not stock real estate, physical real estate. We have < 1% in the "market" all in real estate, primarily notes, not rentals with toilets and tenants. Up 24.5% since Dec 2021 to (march 23) that includes removing all living expenses but that is less than 20% of income. Highly recommend. Have (more than) Enough

Quote:

Originally Posted by Markola ^^^^^ Just curious how real estate notes appreciate? Is there a way to mark them to market or do they have price discovery of some kind? Or maybe you’re saying your rental income is up 24.5%?

I have the same question as Markola. In today's rising interest rate environment, wouldn't existing real estate notes depreciate in value? Do you buy those notes individually from brokers and hold them to maturity, or do you buy shares in an investment fund that invests in notes bought in bulk?

[HaveEnough]

Thanks for the questions and curiosity!

The gain is from the interest at 12% and 2 points for the origination. After the 7 month term expires, the note can be renewed at my discretion for another point. I use some leverage (HELOC) to goose the returns a little. There are some other tricks.

These are fix and flip loans, they are short term. They do not act like bonds as far as valuation. These are not public market vehicles. These are generally not resold because the "time to maturity" is limited. The security is the property. I am similar to the bank with a mortgage. I am paid when the property sells or the note expires. The success rate on these, for me is 1 loss in 10 years and over 500 loans. I do have another that may go south for my second in 10 years.


Arguably, there is no appreciation. However, if a loan extends for a year, it generates 16%. If it goes past the term, the rate updates to compound daily.

[luckydude]

Quote:

Originally Posted by HaveEnough Thanks for the questions and curiosity! The gain is from the interest at 12% and 2 points for the origination. After the 7 month term expires, the note can be renewed at my discretion for another point. I use some leverage (HELOC) to goose the returns a little. There are some other tricks. These are fix and flip loans, they are short term. They do not act like bonds as far as valuation. These are not public market vehicles. These are generally not resold because the "time to maturity" is limited. The security is the property. I am similar to the bank with a mortgage. I am paid when the property sells or the note expires. The success rate on these, for me is 1 loss in 10 years and over 500 loans. I do have another that may go south for my second in 10 years. Arguably, there is no appreciation. However, if a loan extends for a year, it generates 16%. If it goes past the term, the rate updates to compound daily.

Thanks for the explanation. 1 default in 500 loans over 10 years is very impressive. It sounds like a good niche investment strategy for investors with ample liquidity.

If you don't mind sharing, do you use a lending platform to get matched and vet out loans, or do you own a business that markets and caters specifically to such loans?

[Montecfo]

Sounds like Have Enough is doing what we call hard money lending.

[luckydude]

Quote:

Originally Posted by Montecfo Sounds like Have Enough is doing what we call hard money lending.

Yes. 500 loans in 10 years so average 50 loans a year. That's substantial capital needed to fund 50 loans at large enough amounts in order to generate sufficient retirement income annually, and 12% interest certainly helps.

[Koolau]

Quote:

Originally Posted by Montecfo Yes. I have followed this for years. Stay Fully Invested.

Pretty much "set and forget" (oh, and rebalance occasionally.)

[HaveEnough]

Yes, I do hard money or private lending.

I do not use a platform for the deals. Most are private relationships developed over a few years by networking at local real estate investor meetings.

Sometimes I require an appraisal or inspection report, usually I inspect personally. My father was a commercial electrician, we rehabbed a couple of houses together so as the song goes .... "I know a little".

Some of the local competition, actually colleagues, raise money from others for their liquidity. They will give their investors 8-10% while keeping the points and a couple percent a month. They have advertising, assistants, offices, memberships to all kinds of associations to run their business. My lending is smaller, just me and almost no expenses. So, yes, it is capital intense with the number of loans I do. However, it depends on your needs and wants, $500K can generate $5000 - $6000 a month including points when keeping the funds fully working. Is that enough retirement income? (rhetorical) My portfolio is a little larger.

HaveEnough

[Markola]

It’s interesting that the fix and flip market is holding strong for you during a higher interest rate environment. I figured that was more of a low rates market phenomenon.

If you’re willing to share, how many deal opportunities come your way vs. how many do you accept? Or maybe you can just deal with people who know what they are doing at this point.

[HaveEnough]

Quote:

It’s interesting that the fix and flip market is holding strong for you during a higher interest rate environment. I figured that was more of a low rates market phenomenon. If you’re willing to share, how many deal opportunities come your way vs. how many do you accept? Or maybe you can just deal with people who know what they are doing at this point.

That is counter intuitive, I know. The delta between my (high) rates and the bank has become smaller. With investor rental loans pushing 8%, 12% does not sound as bad for a higher risk fix and flip loan. What is changing for me is the cost of the properties going up, While I have the same amount deployed, it is fewer properties now and when the properties get expensive, the holding costs increase making it more difficult for the flipper to find deals needing larger margin.

I have a mix of old and new business. Most of the old business I can accept, they are seasoned and will find as much or more of the issues that I find. AND, more importantly, if there are unforeseen problems, it is part of the biz. The newbs are more risk, but I do take them as clients if they have a good deal, I walk them through the process, have lawyers, realtors, and other contacts I can recommend for them. I turn down probably 20%. People come in and out of the business, sometimes it is a couple years between deals.

Hope that helps