Help with approach

[savory]

Hi,

So, I made the move and decided to move from my adviser. I am in the learning phase of managing this myself.and want to bounce some ideas. I am fortunate that my adviser had actually done a good job but I felt I could save the commission. Since the portfolio move with minimal change, I am OK for now and do not plan to make too many changes quickly. But, I do want to make some and need to build by education.

Here are my thoughts now:

- Start with a total market index fund
- Purchase sector stocks (not funds) in those sectors that are viewed to be growing based on the economic situation. It appears that while there is some timing involved, there appears to be history on the performance of the 11 segments based on economic conditions. In other words, historically certain segments perform better during defined market situations. I would like to try to take some advantage of that with part of my funds.

1. Your thoughts about this basic concept
2. For those who follow something similar, how do you decide which stocks to purchase in a sector? Do you use some online sites? etc
3. I looked at funds that purchase a part of a sector, which is consistent with my suggested strategy but they appear to be expensive. Am I missing something?

All of your comments are appreciated. Thanks

 

[pb4uski]

If it was a predictable as you think, you would think that some smart asset manager would create a mutual fund and charge a nice fee to do this for people and would outperform Total Stock with this magic and make a killing and have happy investors.

There are not any out there to my knowledge... so you are on a wild goose chase.

A few years ago I did experiment with the idea of buy sector funds in the same weight as Total Stock and rebalancing annually to try to squeeze out a little juice.... my backtesting suggested that you might be able to squeeze out an additional 15bps at best.... I ultimately decided that it wasn't worth the effort and additional complication.

Just stick with Total Stock.

 

[travelover]

Hi,

So, I made the move and decided to move from my adviser. I am in the learning phase of managing this myself.and want to bounce some ideas. I am fortunate that my adviser had actually done a good job but I felt I could save the commission. Since the portfolio move with minimal change, I am OK for now and do not plan to make too many changes quickly. But, I do want to make some and need to build by education.

Here are my thoughts now:

- Start with a total market index fund Good idea
- Purchase sector stocks (not funds) in those sectors that are viewed to be growing based on the economic situation. It appears that while there is some timing involved, there appears to be history on the performance of the 11 segments based on economic conditions. In other words, historically certain segments perform better during defined market situations. I would like to try to take some advantage of that with part of my funds. Bad idea

1. Your thoughts about this basic concept Stick to a 3 fund portfolio
2. For those who follow something similar, how do you decide which stocks to purchase in a sector? Do you use some online sites? etc Crystal ball
3. I looked at funds that purchase a part of a sector, which is consistent with my suggested strategy but they appear to be expensive. Am I missing something? Yes

All of your comments are appreciated. Thanks De nada

Comments in red

 

[big-papa]

If it was a predictable as you think, you would think that some smart asset manager would create a mutual fund and charge a nice fee to do this for people and would outperform Total Stock with this magic and make a killing and have happy investors.

There are not any out there to my knowledge... so you are on a wild goose chase.

A few years ago I did experiment with the idea of buy sector funds in the same weight as Total Stock and rebalancing annually to try to squeeze out a little juice.... my backtesting suggested that you might be able to squeeze out an additional 15bps at best.... I ultimately decided that it wasn't worth the effort and additional complication.

Just stick with Total Stock.

Funny - I also did the same exercise years ago and ended up with the same results, so didn't pursue it any further.

That said, a total stock approach/3-fund portfolio is a fine one and works for many people. If you want to try and possibly do a little better than that, you can consider tilting to small cap value, for example, as a fixed percentage of your equity component. Not to start the next war on tilting or factors, which seems to go on endlessly over on bogleheads, but the main thing to consider is that in the past, such an idea has improved returns with the caveat that it may underperform a total stock approach for many years. Of course nobody knows what the future will bring.

Finally, I'm a firm believer that nobody can know what's "good enough" for you, except you. I wouldn't look for a one-size-fits all answer in a universe of possibilities from strangers on the internet. Read, learn, understand your own need and ability to take risk and then fully convince yourself of your action and then (and this is the important part) stick to it.

 

[Spock]

The claims on the % of passive funds that just buy an index are all over the map.
But taking the trend toward passive and the high end of claims, sector investing is dying if not dead. The market is becoming correlated due to blind "buy it all" index investing. The WSJ had an article last week suggesting "its all the same trade" and pointing out that it makes for fewer places to hide in a down turn... the underlying question becomes "are you really as diversified as you think you are?" given the cross-correlation amongst assets.

I still see differences between value and growth sectors. But value investing is now considered evil stock picking/active management.

 

[target2019]

Here are my thoughts now:

- Start with a total market index fund
- Purchase sector stocks (not funds) in those sectors that are viewed to be growing based on the economic situation. It appears that while there is some timing involved, there appears to be history on the performance of the 11 segments based on economic conditions. In other words, historically certain segments perform better during defined market situations. I would like to try to take some advantage of that with part of my funds.

1. Your thoughts about this basic concept
2. For those who follow something similar, how do you decide which stocks to purchase in a sector? Do you use some online sites? etc
3. I looked at funds that purchase a part of a sector, which is consistent with my suggested strategy but they appear to be expensive. Am I missing something?

All of your comments are appreciated. Thanks

1. Put 90% of investment into simple total market index approach
2. Question has been answered in other threads.
3. You nailed it.

Lots of background information from Fidelity:
https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml

 

[Lsbcal]

My pretty careful research has resulted in the best sector trades being between international and US broad based funds. I overweight to small/mid cap in this kind of trade versus large cap funds. I use a monthly trend following approach and have done this with some modifications since 2009.

I think one might improve returns by 1% to 2% over the long term depending on the algorithm used. I think it has worked because we have had some sustained periods of outperformance since the 1970s i.e. not too many trades. But this requires patience and discipline. I use spreadsheets to track this stuff. Not recommended for most investors as it is not sexy enough and did I mention patience and discipline?

 

[LOL!]

If you want the best outcome, then I would do only index funds (3-fund is OK) and no individual stocks.

However, if you want a hobby that costs you money as most hobbies do, then go ahead and add some stocks.

Of course, you should track your hobby and make sure it isn't costing you too much money, so that means you need to understand how to measure and track performance of your hobby stocks and an index fund benchmark that you can see your hobby's true cost to you. I'll assume that your time is free because it is your hobby, but taxes on your hobby are a cost and not free.

OTOH, stock shares are pretty liquid unlike a stamp collection or a Beanie Baby collection.

 

[RetireBy90]

I had or have the same inclination to put some of the funds into individual stocks. It is not a good idea, and I am able to scratch that itch by limiting my gambling to a small portion of funds and leave retirement finds in my asset allocation of 60/40.

Hey it keeps me happy and not risking my retirement

 

[OldShooter]

@davef, I first heard this fairly common quotation during pilot training: "Learning by the mistakes of others is a far simpler and less expensive process than making them all yourself." Many of us who are now passive investors learned only by making the mistakes ourselves. Worse, it took me almost 30 years to figure it out. Slow learner.

 

[triangle]

I somewhat agree with your thinking. In that purchasing sector specific funds can be expensive, so if you are going to dabble outside the indexes consider buying a small basket of individual stocks. Exceptions might be when buying foreign securities or wanting to dabble with leverage and/or CEFs (closed end funds), but that is a different topic.

As you gain experience and comfort level you might then increase the amount you invest outside of the major indexes. As long as you don't get aggressive or have a short term mindset or majorly overweight one sector I think you will be okay from an overall return perspective.

Tilting for income vs growth (future capital gains) is one thing that someone might do to meet near term vs long term spending needs. But tilting based on a belief that some specific sector such as commodities, technology, energy, financials, etc ...will be the economic winner over the next 5-10 years is much more of a gamble IMO. Tilting based on country/region is harder even if there appears to be some obvious advantages as there are additional political and currency risks.

 

[UnrealizedPotential]

As far as purchasing individual stocks go, be very careful. Tread with extreme caution. The road is littered with investors who have been badly burned by one single stock. If you still have the urge, only put enough in it that it can't hurt you really bad if things go wrong, even if you think it's the best opportunity in the World.

I mainly stick to funds for this reason.