Why when it comes to equities, I'm sticking to funds...

[CyclingInvestor]

I sleep much better at night holding only individual stocks instead of funds.

I only invest in stocks which have a history of making good capital allocation
decisions (IMO), increasing earnings and dividends at a reasonable rate for
a substantial period of time, and whose managers have a history of orienting
with shareholders (IMO).

I do not feel comfortable investing in companies which do not meet my criteria,
which is inevitiable with fund investing.

 

[CyclingInvestor]

The difference between recent stupidity and the S&L debacle was that back then regulation was a lot looser and there was very significant fraud on the part of a number of regulated S&Ls.

While there certainly was alot of fraud and stupidity in that disaster, I think one
of the primary contributors were the regulatory changes that allowed S&Ls to
invest FDIC-protected funds into high risk, potentially high return investments
legally. If it worked, the S&Ls would be heroes, if it failed, the FDIC would bail
out the investors. Another example of the Law of Unintended Consequences.

 

[jIMOh]

Now if I could just get those pesky etf dividends to be tax-deferred. Are there tax-managed index funds that don't pay any dividends?

I have been pondering this. Here's a few ideas:

1) total market index fund (yield is much lower than S&P 500)
2) QQQ
3) T Rowe has two tax efficient funds I am looking at (one balanced with muni bonds, the other more growth oriented).
4) There is a managed mutual fund available with a high minimum (>$1 M) which has not paid a gain in 3 years (Managers first quadrant). If I can find a lower expense version, or lower mutual fund with similar record, then that replaces the first quadrant fund.
5) I might reverse logic and maximize dividends. There is a fund called Alpine Dynamic Dividend which caught my attention, to point where I can live off a significant amount of the dividend stream.

 

[brewer12345]

While there certainly was alot of fraud and stupidity in that disaster, I think one
of the primary contributors were the regulatory changes that allowed S&Ls to
invest FDIC-protected funds into high risk, potentially high return investments
legally. If it worked, the S&Ls would be heroes, if it failed, the FDIC would bail
out the investors. Another example of the Law of Unintended Consequences.

Yeah, like I said: regulation was a lot looser back then.

 

[Nords]

We used to own lots of stocks.
But it was alot of work.

I've done enough experiential research over the last five-plus years to determine that making a lot of money from individual stocks requires (1) a lot of research, (2) a lot of work. But losing a lot of money with individual stocks is even easier.

Was it Bernstein who said he'd rather live his life than take on a bunch of single-stock risks? While I may have obsessive-compulsive tendencies, I'm pretty sure that I'm not in the same class as Buffett. The smart move is index ETFs, and that's where we're heading in a leisurely manner.

And yet... sloshing around in Unclemick's testosterone-poisoned swimming pool... I still see stocks desperately begging to be bought or shorted. It sure doesn't help to start a 12-step process when the objects of your desire go on sale and then start jumping up 5-10% in a week.

We've managed to prune it down to just five six hobby stocks-- Berkshire Hathaway (BRK.B), Tate & Lyle (TATYY), Superior (SUP), Intel (INTC), Eagle Shipping (EGLE), and Diana Shipping (DSX). Great cash flow and/or great dividends.

I'm short FirstFed Financial (FED) and Abercrombie & Fitch (ANF). But that's just short-term longboard consumer lust. Or maybe I'm not really as detoxified as I think.

 

[wabmester]

Yeah, like I said: regulation was a lot looser back then.

NDE and WM are large heavily-regulated banks, but that didn't stop them from participating in the latest lending fads. Even the GSE's wanted some of the action. Basically, the guys estimating the risk weren't the same guys taking the risk. Classic moral hazard I tell ya....

 

[brewer12345]

Look at what the subprime mortgage REITs (unregulated lender) did versus what any depository institution you care to name did. World of difference.

 

[wabmester]

Look at what the subprime mortgage REITs (unregulated lender) did versus what any depository institution you care to name did. World of difference.

Oh yeah, that was an all-out carnival. Many of those guys have already gone bust, including some big names:

implode-o-meter

WM is pretty diversified, so I think they'll do OK. NDE will be interesting to watch as Alt-A implodes at a slightly slower rate than subprime....

 

[al_bundy]

I've never been comfortable buying individual stocks. On the few occasions I've stuck my toe in the water I've made some money and lost some money, and thankfully had only had one really big loser. But I've rarely been able to sleep well while owning them and usually felt a sense of relief once I sold.

Here's an example: I bought MFW in Dec of 05 at $16, watched it drop to $13, then sold it in May of 06 when it hit $16 again. Today it's trading at $56.

I'm definitely a fund guy.

i just checked the chart, and you just described a cup and handle chart pattern. I've read it in the technical analysis literature, but never really heard a first person account.

 

[Running_Man]

I will always prefer individual stocks.

I am not concerned about diversification risk, I prefer the risk of owning more stocks when I feel the marktet is cheap and less when I feel it is overpriced. Owning funds inevitably leads to one agreeing they can never know anything about the market other than it will always go up. I do not, can not, will not believe that. If I am going to live the rest of my life on my investments I will assume that responsibility myself.

The risk of stocks held is offset by my fixed portion of the portfolio. Market return is a nice number by what is it? The S&P 500, Russell 1000, 20000, 5000? The US total stock market? The world stock market? A global portfolio? The target date portfolio?

If one truly understands investments well enough to insure their life savings and future with them, picking individual stocks should be a continual part of the portfolio review.

My main goal is to earn a return in excess of inflation by 4% minimum.

 

[wabmester]

My main goal is to earn a return in excess of inflation by 4% minimum.

When you buy "the market," you're basically investing in the economy, whether it's the US economy, world economy, whatever. The US economy has grown historically by about 4% over inflation, so it's not a bad way to go.

But I basically agree with you that it's not that hard to figure out which stocks or sectors are likely to grow faster than the overall economy.

 

[uncledrz]

I'll throw my two cents into this discussion. We have both, funds and individual stocks.
Certain stocks we plan to hold for the very long term and have accumulated over a long (>20 year) period. These include stocks both large (MO, PFE, BAC, for example) and small (NSEC, UMH and ALD are some examples). They fit a particular formula and need. We hold them as individual stocks because of the cost involved. If we held as funds, the expenses, albiet smaller than even 10 years ago, would still be a drag on return.
OTOH, there are certain areas of investment where we feel that funds do very well. For example, most of our international allocation is in funds simply because the added variable of non US rules, regulations and customs make it too difficult to understand and we are willing to pay the manager's fee on that one. In the US bonds don't seem to properly trade in retail amounts, so we go with funds there as well.
Add to this some broad index allocation, and we're willing to own both individual issues and funds.
Tio z

 

[webbach]

Back to LOL's comments re: dividend spin off and tax implications. This year I started freaking out about paying taxes on dividend proceeds during my accumulation phase. It seems that our desired outcome in ER is at loggerheads with what we are doing in the accumulation phase. The problem is that one (presumably) would like to switch to higher-yielding funds during ER, but doing so would incur cap gains taxes on the sale of the lower-yielding funds we prefer prior to ER for the lower tax load. I've shied away from DVY in favor of SPY because of the yield. Does anyone have any input? Should we not worry about the tax implications now in favor of higher yield in ER? On a related note, given that cap gains and dividend tax is currently 15%, is there a difference in ER between higher yield vs. higher cap gain? Anyone's crystal ball say that one tax rate will outpace the other in, say, 2015?

WEBBY

 

[Bikerdude]

If one truly understands investments well enough to insure their life savings and future with them, picking individual stocks should be a continual part of the portfolio review.

I agree but only if one is willing to devote the time to selecting and trading individual stocks. I for one have too many other things to do that I don't wish to spend the time it takes on research. And even with the research I would wake up and find a stock pick down 50% on some news no one saw coming and all the computer programs issuing sell orders.

I'm moving to a one or two fund portfolio (along with some TIPS) that will re-balance itself and send me a dividend check each month.

 

[trixs]

I've shied away from DVY in favor of SPY because of the yield. Does anyone have any input? Should we not worry about the tax implications now in favor of higher yield in ER? On a related note, given that cap gains and dividend tax is currently 15%, is there a difference in ER between higher yield vs. higher cap gain? Anyone's crystal ball say that one tax rate will outpace the other in, say, 2015?
WEBBY

Hey,

I’m curious if you where talking about SDY instead of SPY. I would pay close attention to SDY as it has a very curious section about 12b-1 fees in its prospectus. Currently it’s not charging them but they "may" in the future.

My crystal ball says with the Dem’s coming to power we will all get to pay more in taxes! Yay!

I find it really ironic how the Democrat’s always come on TV and say the tax cuts only help the rich and not the middle class. Well I make 45K a year which puts my lower middle class. I haven’t calculated it but I am pretty sure lower dividend and capital gains tax rates save me money!

 

[unclemick]

Balanced index on one side, Unclemick's Norwegian widow stocks on the other - in spite of ups/downs, ying and yang - neither side has blown the barn doors off my porfolio(since 1977) to be the hands down winner. I too reread Bernstein's 15 Stock Diversification Myth quite often.

85% balanced index (Target Retirement) , 15% individual stocks.

If I get bored or lazy or whatever - well then I may just go out and buy -

A Kayak!

heh heh heh heh , , .

P.S. Hopefully I'm past the rental RE phase - in my 14th year of ER. The remodelling bug may bite again - or not!

 

[REWahoo]

i just checked the chart, and you just described a cup and handle chart pattern. I've read it in the technical analysis literature, but never really heard a first person account.

Funny, I thought it described a raised middle finger chart pattern. Anyway, it's nice to know I'm setting an example...even if it is a bad one.

 

[terminator]

I do not feel comfortable investing in companies which do not meet my criteria,
which is inevitiable with fund investing.

Yes, that's really what keeps me from doing much fund/ETF investing too. Almost every time you post I nod in agreement. I'll bet there's a lot of overlap in our portfolios as my criteria are similar to yours.

 

[Anansi]

I mainly buy individual stocks (and use ETFs rather than mutual funds where that isn't a reasonable option). It hasn't been hard to do at least as well, better mostly, than the overall markets, and individual stocks are extremely tax efficient, have no hidden fees and all activity completely controlable.

Another big reason though, is that buying individual stocks is just much more interesting than buying mutual funds.

 

[Moemg]

I have the bulk of my money in funds but I have been known to buy a stock or two and I'm with wahoo in that I don't really enjoy it .I do have a small amount set aside for penney stocks.It's amazing they are highly speculative but they let me sleep well.XKEM,BKMP

 

[yakers]

Another big reason though, is that buying individual stocks is just much more interesting than buying mutual funds.

unclemick is going to have to take you behind the shed & give you a lesson on keeping those hormones under control

 

[OKLibrarian]

I guess I'm a little odd in that I'm happy keeping it simple. The plan for the stock portion is 3 index funds covering S&P, small cap, and emerging/int'l respectively. Will some of you guys beat my returns? sure. I tried to play with the big boys in the dot-com days and got creamed even though I picked "sensible" stuff. Basically I did a dogs of the dow type portfolio and some telecom stocks from worthy competitiors who turned out to have been telling even wilder lies about their financial state than we were, and I did the deer in the headlights thing and couldn't quite bring myself to sell. Between that portfolio experience and my lay-off from corporate America, I did some soul searching re: my personal rick tolerance and decided a pleasant night's sleep is worth getting a % or 2 less return. If I get braver as I learn more about stock picking, I might designate 5% of my stock portfolio as play money and see what happens...

 

[Mwsinron]

"I guess I'm a little odd in that I'm happy keeping it simple"

If you can sleep well at night and live your life how you want who cares eh? Be happy!

 

[gandalf42]

If you can sleep well at night and live your life how you want who cares eh? Be happy!

That's the key. It's interesting reading all of the variations that people are using that meet that criteria.

Someone needs to write a book "Zen and the art of portfolio selection"

 

[Anansi]

unclemick is going to have to take you behind the shed & give you a lesson on keeping those hormones under control

Consider picking stocks a hobby. One that makes money. Unlike any of my other hobbies.