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

[Mysto]

My only problem with individual stocks is the arguments for it usually sounds more like religion and less like science. I don't mind if someone wants to try it but don't try to convert me - I'm playing with the "house" the odds are better. The data says that the index funds will provide a pretty constant result in the long haul and I'm very happy with that.

 

[renferme]

I can buy the argument about Funds over Stocks, but,
who likes paying taxes on dividends and capital gains for fund shares that they are just holding ?
Every year, I have to pay taxes on my D&C funds that I'm just holding on to.
With stocks, you don't pay capital gains until you sell and you have the dividend money in hand (unless reinvested), so you have the money to pay the tax.

 

[samclem]

You can invest in tax efficent funds that will minimize the cap gains they produce. Distributions--have them deposited in a MM fund and use them to pay your taxes at the end of the year, and also to rebalance. That's what I do.

 

[renferme]

You can invest in tax efficent funds that will minimize the cap gains they produce. Distributions--have them deposited in a MM fund and use them to pay your taxes at the end of the year, and also to rebalance. That's what I do.

No I won't move my D&C funds to another family. And no, I reinvest the distributions. Withdrawals are done using the MM fund in my Vanguard IRA.
I just don't understand why the Feds require that you pay cap. gains when you've actually not been given the money - it resides in the MF acct. Why not just pay taxes upon withdrawal ? In any case, it's a tax preparation nightmare every year, even if invested in tax efficient funds.

 

[FIRE'd@51]

In any case, it's a tax preparation nightmare every year, even if invested in tax efficient funds.

This is why I hold mutual funds (other than MMF's) only in IRA's. I hold individual stocks in taxable accounts. This way I have maximum flexibility with respect to realizing capital gains and losses, and don't have to fool with mutual fund basis problems.

 

[Running_Man]

Except in investing where most professionals don't beat their index.

I know many fund managers and sadly, most are arrogant just like you and feel that they are "the one" who is smarter, better looking, quicker, more patient, you name it. They actually believe that this will be the year when they clobber the index. The sad part is that by the simple rules of math they can't all be right.


BTW: If you actually believe what you're saying (I can't believe you really do) you should go raise some money and start a fund.

Not interested in running a fund as it offsets too many of my advantages, however if I were to pick 5 stocks for a portfolio and I'll just pull 5 I have owned in the past: STR Questar Natural Gas company, PG Procter Gamble food company, SNV Synouvous Financial Banking, WRE Washington Real Estate Invement trust, FUN - Cedar Fair Amusement park

What would my index be that I should compare to ? S&P500 it is really what most people where I live think of when indexing comes around, but really these aren't all in the S&P500 so maybe the Value line these all in the Value LIne Index of 1700 stocks? These are all dividend payers so maybe the Dow Jones Select Dividend Index? Since I am picking from every investment eligible maybe the Vanguard Total World Index? But they are all US stocks so maybe the Vanguard Total US market.

Since future stock performance cannot be predicted and timing of markets is impossible per the thought process I am sure you follow are all indexes equal? Or are some more equal than others? this would be over a long term - 30years or so time period.

 

[renferme]

Owning index funds means agreeing that you aren't smart enough to outguess the tens of thousands of highly paid and well educated analysts who are trying to do the same thing as you are. I make my living analyzing the market and investing other people's life savings. Individual stocks will never be part of our portfolio review process. (nor mine)

If you really believe you have the ability to outsmart them, then please have at it. The data suggests otherwise.

What everyone fails to mention is RISK. There are numerous actively managed non-index funds out there that do just as well as index funds with less risk. Wellington is one of them.

 

[lswswein]

What everyone fails to mention is RISK. There are numerous actively managed non-index funds out there that do just as well as index funds with less risk. Wellington is one of them.

Sorry but Wellington is a Balanced fund with 40% bonds. It is a great fund to buy if you are going to buy only one fund for all your investments. I highly recommend it to anyone who is looking for a set it and forget it fund. But that is not what we are discussing here I think. Anyway if yiu happy and can sleep well at night that is all that matters.

As they say on the other board, there are many roads to Dublin!

-h

 

[saluki9]

What would my index be that I should compare to ? S&P500 it is really what most people where I live think of when indexing comes around, but really these aren't all in the S&P500 so maybe the Value line these all in the Value LIne Index of 1700 stocks? These are all dividend payers so maybe the Dow Jones Select Dividend Index? Since I am picking from every investment eligible maybe the Vanguard Total World Index? But they are all US stocks so maybe the Vanguard Total US market.

Assuming that you really do want to learn about your stock picking prowess, there are several methods of performance attribution.

Your first step would be to weight appropriate indexes according to P/E, SDev, etc that match your picks.

9/10 times when you see somebody bragging about beating their index, you find out that they are using the wrong one.

 

[Running_Man]

But are all indexes equal in the long run? Std deviation should have no impact on an expected return only the range of returns between years, so would the long term performance of the indexes I selected S&P500, Value LIne, Dow Jones Select Dividend, US total Market and Totoal World Market be equivalent over a 30 year time peiord?

 

[saluki9]

But are all indexes equal in the long run? Std deviation should have no impact on an expected return only the range of returns between years, so would the long term performance of the indexes I selected S&P500, Value LIne, Dow Jones Select Dividend, US total Market and Totoal World Market be equivalent over a 30 year time peiord?

Of course they wouldn't.

Look, it is very easy to figure out if your returns are due skill, luck or something else. There are certain factor betas that can be used to remove the effects of size, valuation, growth orientation, value, etc to see what is due to skill.

when you've done that come back and tell me what a great stockpicker you are.

 

[Nords]

Look, it is very easy to figure out if your returns are due skill, luck or something else. There are certain factor betas that can be used to remove the effects of size, valuation, growth orientation, value, etc to see what is due to skill.
when you've done that come back and tell me what a great stockpicker you are.

I thought that about two decades was one of the necessary discriminators of luck from skill...

... failing that, however, there's always website PDFs of Schedules D & brokerage statements.

 

[saluki9]

I thought that about two decades was one of the necessary discriminators of luck from skill...

... failing that, however, there's always website PDFs of Schedules D & brokerage statements.

Sorry, Nords is correct.

Please bring 20 years worth of brokerage statements to evaluate.

 

[renferme]

Sorry but Wellington is a Balanced fund with 40% bonds. It is a great fund to buy if you are going to buy only one fund for all your investments. I highly recommend it to anyone who is looking for a set it and forget it fund. But that is not what we are discussing here I think. Anyway if yiu happy and can sleep well at night that is all that matters.

As they say on the other board, there are many roads to Dublin!

-h

Yes, Wellington is balanced, but it is still a mutual fund. less risk than index funds,
as good a return as index funds. If you just want a 100% stock fund, then look at some of the equity income funds; some are safer than index funds.
And... take a look at how the S&P500 Index Fund did from 2000 thru 2002 and it should scare you. Anyone loaded with that fund who retired in 2000 is still trying to recover.
BTW, won't be going to Dublin; however, will be flying to Belfast in May...
a bit of golf in Ireland is calling me !

 

[unclemick]

Just like sanity being overrated - performance is irrelavent. The real question is - does the stock/s you have selected satisfy the putz factor. A nice Norwegian widow dividend and enough movement to provide watching entertainment - 'thrill of victory and agony of defeat'. Also it's nice if the stock goes dormant in good weather parts of the year - the old saw 'sell in May and go away' - so as to get yer vacations and outdoor activities in before October.

heh heh heh heh

 

[FinanceDude]

This is why I hold mutual funds (other than MMF's) only in IRA's. I hold individual stocks in taxable accounts. This way I have maximum flexibility with respect to realizing capital gains and losses, and don't have to fool with mutual fund basis problems.

Smart idea............

 

[clifp]

I don't think trying to beat the market (whatever that is) is the only reason to invest in individual equities vs funds, nor is it primarily a testosterone issue (although that is part of it.) In my case, and I think for other retirees on for instance the M* dividend boards, we are looking at retirement income primarily from dividends. I think it is much easier to construct a portfolio of dividend income with individual equities for a 4% SWR than with an index or actively managed funds.

Frankly, I don't really care if my portfolio perform as well as the S&P 500, or total stock market index, or the EAFE. If I get a 4% income from portfolio (for my4% SWR) +4-6% increase/year from increased dividends I am a very happy camper. The problem I see it with index funds is more often than not the market looks like this.
Year 1 +15% year 2 +25% Year 3 -15%, plus a dividend yield of about 1.6%. Now over a 3 year average the total returns is +25%/3 +1.6% dividend or almost 10%. However as we all know sometimes year 3 gets repeated for a a few years, which can cause some restless nights for an early retiree.

Personally, I much more comfortable seeing a portfolio have this type of return Year 1 +10% Year 2+10 Year 3 -5% and a 4% dividend income even though the average total return is less 9% vs 10%.

The problem I have with a pure index fund/ETF approach is I don't see a way of getting 4% income amount without having too heavy of a bond allocation, which sacrifices future income growth. For instance with a $1 mil portfolio with a 80/20 stock/bond mix. Your income would look like this
Cash/bonds 200,000 @5% = 10,000
Total Stock Market 800,000@1.6% =12,800
Income = $22,800
This leaves a short fall of $17K that needs be met by selling stocks/dipping into cash reserve. Now I maybe making to big a deal about having to sell some stock to pay for expenses but it does make me feel a bit uncomfortable.

A couple of alternate approach are to get a balanced fund like Vanguard Wellington but the yield on this is only 3% (although total returns have been perfectly acceptable and volatility is low).

Even substituting the total market index for a high yield dividend ETF like Vanguards High Yield Dividend Index or Wisdom Tree Dividend Index only increases the yield to 2.8-2.9% leaving one $7,000-$8,000 short of your income goal.

The other problems I have with index funds is there are some individual issues (like Berkshire Hathaway) that they don't generally don't buy, as well as some entire classes like REIT, Master Limited Partnerships, and tanker stocks, or Canadian royalty trust, that most funds and almost all index funds ignore. All of these offer (except for BRK) potentially good sources of growing income for a retiree.

Now I am not sure how safe the 10% dividend is on a tanker stock like DSX, but I am quite sure that 6% distribution yield of KMP which owns 25,000 miles of gas and oil pipelines is quite safe and likely to grow in the future at least the rate of inflation. However, because of tax reasons master limited partnership are difficult for mutual funds to own, so for the most part they don't.

Now, I haven't quite achieved my 4% income goal for my taxable portfolio (3.8%), but I am gratified to see that it considerable less volatile than the market as whole. (most of my stocks have a beta in the .5 range.) The way I figure it no matter what the economy does America will need salt (CMP), natural gas/oil transported (KMP), propane distributed (APU), packaging sold (BMS), banking (BAC),drugs and toiletries (JNJ) etc. The above average dividend yields these stocks provide cushions the price during bears markets (albeit of acting as drag during bull markets.)

 

[Running_Man]

I thought that about two decades was one of the necessary discriminators of luck from skill...

... failing that, however, there's always website PDFs of Schedules D & brokerage statements.

Interesting time frame.....if the S&P500 falls 30% this year as I feel it will the 10 year return on the S&P will be near 0 at that point. And if I continue to earn the 7% annually on my portofolio as I have since 1999, even if after this year the S&P averages 11% per year it will take it 20 years to catch me

So a future indication should be determinable in the next 9 months......

 

[saluki9]

Interesting time frame.....if the S&P500 falls 30% this year as I feel it will the 10 year return on the S&P will be near 0 at that point. And if I continue to earn the 7% annually on my portofolio as I have since 1999, even if after this year the S&P averages 11% per year it will take it 20 years to catch me

So a future indication should be determinable in the next 9 months......

PREDICTIONS! ... Just kidding

Anyway, too bad you didn't diversify with small cap and international indexes. You would have done far better than 7%

 

[Nords]

If I get a 4% income from portfolio (for my4% SWR) +4-6% increase/year from increased dividends I am a very happy camper. The problem I see it with index funds is more often than not the market looks like this.
Even substituting the total market index for a high yield dividend ETF like Vanguards High Yield Dividend Index or Wisdom Tree Dividend Index only increases the yield to 2.8-2.9% leaving one $7,000-$8,000 short of your income goal.

The issue you're confronting is a different approach from the conventional wisdom of Trinity & FIRECalc. You're trying to run an ER portfolio that throws off your ER's lifetime living expenses and your inflation adjustment. (Nothing wrong with that!) But most people are happy with FIRECalc telling them that they can retire for 30 years while consuming principal.

Conventional wisdom says that we'd need an ER portfolio of 25x our expenses. The dividend-income method is more like 33x, and at a 2.8% dividend it might be 36x. Not much comfort in Cubicleville...

 

[wabmester]

The issue you're confronting is a different approach from the conventional wisdom of Trinity & FIRECalc. You're trying to run an ER portfolio that throws off your ER's lifetime living expenses and your inflation adjustment. (Nothing wrong with that!) But most people are happy with FIRECalc telling them that they can retire for 30 years while consuming principal.

It's not really a different approach. Historically, the dividend yield has been much higher than it is today. Dividends have always been a major component of equity returns. So, it's interesting to ask if future returns will be lower due to current puny dividend yields.

 

[Alan]

Year 1 +15% year 2 +25% Year 3 -15%, plus a dividend yield of about 1.6%. Now over a 3 year average the total returns is +25%/3 +1.6% dividend or almost 10%. However as we all know sometimes year 3 gets repeated for a a few years, which can cause some restless nights for an early retiree.

I'm afraid that the math is incorrect here. You cannot calculate an average simply by adding them year by year and dividing by the number of years.

In the example you give, +15%, +25%, -15% is equivalent to 6.9% annually, it is not 25/3 (8.3%).

 

[clifp]

I'm afraid that the math is incorrect here. You cannot calculate an average simply by adding them year by year and dividing by the number of years.

In the example you give, +15%, +25%, -15% is equivalent to 6.9% annually, it is not 25/3 (8.3%).

I realize that, I should have stated on one million dollar portfolio gains of 150K,250K, and -150K respectively equaling a total gain of 25% or 7.7% CAGR, but I was just making the math a bit simpler. Obviously the order of gains or losses matter tremendously, which is why one should avoid retiring just before a major bear market , like I did in 1999.

 

[clifp]

The issue you're confronting is a different approach from the conventional wisdom of Trinity & FIRECalc. You're trying to run an ER portfolio that throws off your ER's lifetime living expenses and your inflation adjustment. (Nothing wrong with that!) But most people are happy with FIRECalc telling them that they can retire for 30 years while consuming principal.

Conventional wisdom says that we'd need an ER portfolio of 25x our expenses. The dividend-income method is more like 33x, and at a 2.8% dividend it might be 36x. Not much comfort in Cubicleville...

The problem with FIRECalc, other calculators, and the vast majority of early retirement literature is that actual implementation of the withdrawal is pretty much hand-waved away and left as exercise for the retiree.

So for instance if in year 2 your porfolio is now 700K stocks and 200K cash bonds, inflation is 2.5%.
Exactly what is the process of coming up with the 41K withdrawal for next year? In theory, I guess you are suppose to take 41K from your cash/bond portfolio at the beginning of the year move into your checking/money market and then rebalance your remaining $859,000 in assets into 80/20 687K in equities and 172K in cash/bonds. The reality is I doubt there is a person on the board that actually makes withdrawals like this. I also believe that even season investor would be happy about selling stocks after a down year.

Personally, I like having a much better forecast of what my income will be than just assume that over the long-term raising stock prices will bail me out and so it is ok to sell some of my stocks funds. Barring, major changes in interest rates or the quite rare massive dividend cuts, I pretty much know what my income will be next year, and am generally pleasantly surprised at rising dividends. (Now if was just better about budgeting my expenses)

The trade off as you correctly point out is that an equity income portfolio requires 33-36X nest egg based even on a dividend fund ETF (and 50x nest egg on the broader market), a truely depressing amount for people struggling to accumulate 10x their salary.

My trade off is rather than relying on index funds exclusively, for a portion (1/3) of my portfolio, I hand pick stocks that have an above average dividend (ideally 4%+) and what I believe are good prospect for future dividend heights. Essentially, I am substituting the higher risk of owning individual stocks, for the lower risk of being dependent on future rising stock prices for future income. One of the side benefits is that I find is that this higher yielding stocks are less volatile than the market as a whole. Of course the disadvantage is that in a bull market my portfolio lags the indexes.

If you think this is different just wait tell I start yammering about using covered calls, based on my patented methods

 

[samclem]

William Bernstein has a new article at his site that discusses the value of active management. As usual, it is a good read.

http://www.efficientfrontier.com/ef/0adhoc/excel.htm

Some nuggets:
"For many years, I’ve been troubled by a conundrum: If mutual fund investors are not earning the market return, even adjusting for expenses, who is taking the winning side of their transactions? The yawning gap between dollar-weighted and time-weighted mutual fund data demonstrates just how far short John Q. Public falls. Amazingly, professionals, as represented by the managers of hedge funds, mutual funds, and pension funds, don’t do that much better."

. . .
"The message of both pieces is: If you want to earn high investment returns, you’re going to have to look far from the overgrazed investment commons. At a bare minimum, you have to tune out the noise from the media and analysts of all stripes, and actually think for yourself. This is not something everyone can do; abstracting investment ideas from Forbes does not count.

Beyond that, you’ll probably need to avoid the public securities markets altogether and invest privately. Needless to say, purchasing and running a diversified stable of small concerns is not for the faint hearted, the quantitatively weak, or those without razor-sharp interpersonal skills, exquisite business training, and huge gobs of spare time."
. . .

"If you want to pick your own stocks and bonds, be my guest. Just don’t imagine that making your decisions on the basis of publicly available information and analysis will lead you anywhere but to the poor house. You’re going to have to look at the primary data and analyze it entirely by yourself. And you’d better be good at it."