Author Topic: Individual Stocks vs. Stock Indexing  (Read 23148 times)

divinvestor

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Individual Stocks vs. Stock Indexing
« on: July 09, 2014, 09:15:26 PM »
Hi fellow mustachians, this is my first posting in the forum but I've read a fair amount of topics and I think it's fantastic. I am currently 34 years old. I inherited some money from my grandfather after he passed away in 1987. My dad then invested $2k into an income stock mutual fund and $6k in a money market (all in a taxable brokerage account). Interestingly he invested that money right before the October '87 market crash, but the markets recovered fairly quickly. Anyway, in 1998 he transferred some of the money into an S&P500 index fund and a growth & income mutual fund where the money sat and grew.

Starting in late 2012, I started to look at my investments and questioned the performance of those mutual funds. As you probably could guess, over time the S&P500 index fund outperformed the actively managed mutual funds. And of course, after the financial collapse of 2008, the interest rate on my money market account was paltry at best.  So, after doing some research and reading up on various investment strategies, I decided to sell all of the money out of the funds and implement a dividend growth strategy with individual stocks. The main reasons being the fees associated with the funds, and the fact that individual stocks I could buy have a higher yield than those funds and could have a better long-term performance. I bought individual stocks in solid companies that pay good dividends, and have a track record of regularly increase their dividend year after year, or have the potential to in the future. Also, in October 2013 I changed my traditional IRA to a self-directed IRA so I could buy individual stocks, instead of just owning mutual/index funds.

First, I would like your opinion on the quality and long-term potential of my portfolio; and second if you think I should stick to investing in index funds instead of individual stocks. So far the strategy is paying off really well, knock on wood. BTW I am taking dividends as cash in my brokerage account, and reinvesting all dividends in my IRA.

IRA: American Water Works (AWK); Colgate-Palmolive (CL); Chevron (CVX); Honeywell International (HON); Johnson & Johnson (JNJ); 3M (MMM); Microsoft (MSFT); AT&T (T); Union Pacific (UNP)

Taxable Brokerage: Clorox (CLX); Cisco Systems (CSCO); General Mills (GIS); NW Natural (NWN); Procter & Gamble (PG)

Thank you so much in advance for all your opinions and 'stach on. 

lano

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Re: Individual Stocks vs. Stock Indexing
« Reply #1 on: July 09, 2014, 09:53:03 PM »
It's a lot of work to try to analyse the long-term potential of 14 companies.

Have you done any type of a similar analysis before you bought them?  If yes, can share your ideas -- then it would be easier for others to chime in. 

MichaelR

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Re: Individual Stocks vs. Stock Indexing
« Reply #2 on: July 09, 2014, 10:11:53 PM »
Most on this forum would support indexing over purchasing individual stocks. The later may well give better returns in a given time period, but carry a higher risk at the same time.

On the other hand if you are buying and holding for the long term and you are knowledgable about what you are doing then you may well outperform the index. Although very few do in the long term.

Indexing is for lazy, risk averse people like me.

divinvestor

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Re: Individual Stocks vs. Stock Indexing
« Reply #3 on: July 09, 2014, 10:22:26 PM »
I know a good deal about investing and have an MBA so I'm not totally clueless. I would definitely classify myself as a long-term buy and hold (and monitor) investor. I'm fairly risk averse too and the stocks I bought aren't very volatile which is what I was going for. I absolutely researched the stocks before buying them, so it wasn't just randomly selecting stocks that other people may have recommended.

AssetGrinder

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Re: Individual Stocks vs. Stock Indexing
« Reply #4 on: July 09, 2014, 11:15:26 PM »
I own many of the same stocks you own. Its a good group but not as diversified as I like. I like owning individual stocks as I have more control and enjoy picking stocks. I too like dividend growth stocks like many you have selected. So much so my entire portfolio of 56 global stock are all dividend payers and primarily dividend growth stocks.

Can i beat an index fund? I dont know, maybe yes, maybe no? Common knowledge is most investors don't beat the market. With that said I still rather take my chances. I modeled my portfolio to mimic index funds as I have stocks in every major sector thus my stocks often follow very closely to index funds. Only difference is the amount of dividends I receive which is close to double of an index fund.

If I didn't have that much time or interest in stocks then I really do believe index investing is the way to go for most. Even a step further I would follow an index of specifically dividend stocks or dividend aristocrats.

You could always do an approach to tackle both aspects. Like individual US stocks and an index for europe/asia.

Best of luck and Grind On!

divinvestor

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Re: Individual Stocks vs. Stock Indexing
« Reply #5 on: July 09, 2014, 11:35:03 PM »
Thanks for the feedback Grinder, much appreciated. Much like you I wanted to develop a portfolio that has a higher yield than an S&P fund which is only about 1.8%. My portfolio currently yields about 3%. My main objectives with the individual stocks are diversification and income, and not just arbitrarily trying to beat the S&P. If it happens, great. It just so happens that through the first 6 months of 2014, my portfolio is up 13% while the S&P is up about 7%. But one thing that causes me confusion and/or concern is just how many stocks I should have. On one hand you've got someone like Jim Cramer who says that owning 5-10 stocks is fine, while others say you should own 30. I'm thinking 20 is a pretty good number to be sufficiently diversified, but 30 seems like a lot of babysitting to do.

Thedudeabides

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Re: Individual Stocks vs. Stock Indexing
« Reply #6 on: July 10, 2014, 01:16:36 AM »
Thanks for the feedback Grinder, much appreciated. Much like you I wanted to develop a portfolio that has a higher yield than an S&P fund which is only about 1.8%. My portfolio currently yields about 3%. My main objectives with the individual stocks are diversification and income, and not just arbitrarily trying to beat the S&P. If it happens, great. It just so happens that through the first 6 months of 2014, my portfolio is up 13% while the S&P is up about 7%. But one thing that causes me confusion and/or concern is just how many stocks I should have. On one hand you've got someone like Jim Cramer who says that owning 5-10 stocks is fine, while others say you should own 30. I'm thinking 20 is a pretty good number to be sufficiently diversified, but 30 seems like a lot of babysitting to do.

I would try to look at sector and industry group diversification and make sure you have good coverage. There are 10 sectors and 24 industry groups (I'm guessing this is where the 10-30 number comes from). There are some companies that have good coverage in all sector industry groups.

In more volatile sectors, such as tech, it may be good to think about more diversification especially in retirement accounts.

Other considerations: international exposure (Looks good in your list) and potentially look at some mid/small caps.

AJDZee

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Re: Individual Stocks vs. Stock Indexing
« Reply #7 on: July 10, 2014, 04:22:28 AM »
If you haven't come across Dividend Mantra already, you'll love his blog. He's doing exactly what you are (dividend growth investing) he's very passionate and even keeps his portfolio undated on his blog.

http://www.dividendmantra.com

He recently posted an article on why he's going to keep his portfolio at ~50 dividend stocks, (if one absolutely tanks it's only a 2% hit on income, but he'd expect that to be overshadowed by the ~5% annual dividend growth of the other 49)
It is a lot of babysitting as you said, but you can tell he really loves this stuff.
I just hope he has (or anyone managing their own portfolio) a way to measure when a company is at risk of cutting their dividend in the near future, rather than just reacting to the news.

I'm one year into seeing which investment strategy I like better. Half is in ETFs, the other half in dividend stocks. I enjoy researching stocks, but it's hard to judge which is a better strategy when the market is rallying like it has over last year...

Thedudeabides

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Re: Individual Stocks vs. Stock Indexing
« Reply #8 on: July 10, 2014, 07:08:23 AM »
Two things you could consider doing to evaluate your strategy:

1) backtest your strategy. Download historical data and evaluate how well your strategy would have done in the past

2) Compare your portfolio to a benchmark. Look at the alpha, beta, r2, std dev, Sharpe ratio and max drawdown of your portfolio. This will give you an idea of performance relative to the benchmark. If you're focusing on dividend stocks, then you'll also want to look at yield as well.

There are limitations to this analysis. One big limitation is that it will only tell you the past. It won't tell you the future. However, it's a good starting point to evaluate your strategy and compare it to an index.

johnhenry

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Re: Individual Stocks vs. Stock Indexing
« Reply #9 on: July 10, 2014, 08:20:00 AM »
Most on this forum would support indexing over purchasing individual stocks. The later may well give better returns in a given time period, but carry a higher risk at the same time.

On the other hand if you are buying and holding for the long term and you are knowledgable about what you are doing then you may well outperform the index. Although very few do in the long term.

Indexing is for lazy, risk averse people like me.

+1 for index funds.  No matter how diligent you are and how accurate your analysis, you can't know enough to protect you against huge potential falls in stock prices for one publicly traded company, let alone a dozen companies.  You don't have the ears of the company executives planning a major merger or sale, you won't have the insight of regulators planning to start prosecution for criminal activity against 1 of your well-researched companies.  You sure can't predict the next major oil spill, or deadly chemical leak, etc that could affect any of your chosen companies and the price of their stock.  Choosing index funds over individual stocks is partially about recognizing and respecting the risk involved in the risk/reward equation. 

Quote
As you probably could guess, over time the S&P500 index fund outperformed the actively managed mutual funds.
It's ironic that you acknowledge this and then announce that your strategy is to basically create your own actively managed fund, run by an amateur... you.  Yes, you'll avoid the fees paid to the active fund manager, but you'll incur per-transaction fees if you plan to ever rebalance the account or add new companies to the mix, or sell others off.  But, the active fund managers have a huge advantage over you.  They get paid win or lose, and they play with other people's money :) 

skyrefuge

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Re: Individual Stocks vs. Stock Indexing
« Reply #10 on: July 10, 2014, 11:26:58 AM »
My main objectives with the individual stocks are diversification and income

Why? What do you need cash income for? Are you already in retirement, and you need cash to spend on groceries?

If not, then you can simplify your life by focusing only on diversification, which an index fund will take care of nicely.

If you still want to generate cash income via dividends when you retire (even though that's a fairly inefficient and unpredictable way to do it), then just switch over to dividend stocks at that point. Think of all that extra life you'll have been able to live in the interim by ignoring the stock market! (and you'll likely have more money too, since the chances of you beating the market are pretty low)

Franklin

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Re: Individual Stocks vs. Stock Indexing
« Reply #11 on: July 10, 2014, 11:40:41 AM »
It's not an either/or decision.  Why can't you do both?  You could get the stability and diversity of an index fund while also purchasing individual stocks if you feel like you have good knowledge and a good buying opportunity.  I'm doing both, but I don't actively trade.  I hold most of my individual stocks for about 10 years.  One of them since I was a teenager.

AssetGrinder

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Re: Individual Stocks vs. Stock Indexing
« Reply #12 on: July 10, 2014, 03:18:14 PM »
Thanks for the feedback Grinder, much appreciated. Much like you I wanted to develop a portfolio that has a higher yield than an S&P fund which is only about 1.8%. My portfolio currently yields about 3%. My main objectives with the individual stocks are diversification and income, and not just arbitrarily trying to beat the S&P. If it happens, great. It just so happens that through the first 6 months of 2014, my portfolio is up 13% while the S&P is up about 7%. But one thing that causes me confusion and/or concern is just how many stocks I should have. On one hand you've got someone like Jim Cramer who says that owning 5-10 stocks is fine, while others say you should own 30. I'm thinking 20 is a pretty good number to be sufficiently diversified, but 30 seems like a lot of babysitting to do.

Read the book random walk down wallstreet. Great advice in there as it echoes the dividend growth stock principal. Most will say you need at least 20-30 stocks to be properly diversified. I must admit babysitting over 50 stock in my portfolio is alot of work but I enjoy it.

Index investing is completely passive. One thing I really do not like about indexing is that you capture the good but unfortunately the real bad as well. I certainly dont want to own blackberry but you get those types of falling stocks in indexing. I think you should mix it up a bit with your great core dividend payers and a few low cost etf dividend payers to capture the rest of the market. This way you are properly diversified and dont have to watch stocks like a hawk.

GreenPen

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Re: Individual Stocks vs. Stock Indexing
« Reply #13 on: July 10, 2014, 04:15:00 PM »

One thing I really do not like about indexing is that you capture the good but unfortunately the real bad as well.

What makes indexing attractive is that it is difficult to pick which will be the good/bad stocks in the future. Unless you have inside information, then everything you know about the company is already built into the price of the stock.

I would recommend indexing, and setting up something like a three-fund portfolio. If you really want to beat the S&P, you would be better off adding a small/value tilt (by buying these types of index funds) rather than rolling the dice with individual stocks.

Aussie Brad

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Re: Individual Stocks vs. Stock Indexing
« Reply #14 on: July 10, 2014, 10:23:46 PM »
...if you think I should stick to investing in index funds instead of individual stocks.

This would depend on how much time you would like to dedicate to research and monitoring your portfolio. But I would recommend either sticking with a handful of stocks (like half a dozen) or, if you don't wish to spend the time actively managing your stocks, go with extreme diversification in the form of an index fund or exchange traded fund.

I say about 6 or so stocks because really, how is your 7th best stock pick going to be close to being as good as your number one stock pick? With around six the hope is that you will have say 1-2 losers, 2 or so that might be pretty flat and two or more that go up and hopefully one that is a 2, 3, 4 or even 10 bagger! If you do better then you're laughing all the way to the bank.

I decided to sell all of the money out of the funds and implement a dividend growth strategy with individual stocks.

Unless you really need the direct income from the dividends in the short term. It may be better to avoid focus on the dividends themselves. If you want growth and you pick companies where you think their future prospects are rosy then you would want them to retain the earnings and pay out less dividends so that they can reinvest those earnings and produce even more growth. More growth than you could achieve with that same money. Dividends are even more attractive over here thanks to our dividend imputation system, so I don't say that lightly.


IRA: American Water Works (AWK); Colgate-Palmolive (CL); Chevron (CVX); Honeywell International (HON); Johnson & Johnson (JNJ); 3M (MMM); Microsoft (MSFT); AT&T (T); Union Pacific (UNP)

Taxable Brokerage: Clorox (CLX); Cisco Systems (CSCO); General Mills (GIS); NW Natural (NWN); Procter & Gamble (PG)

I don't have any of these stocks. Most of my stocks are in my home country's main exchange (ASX). But if you are aiming for the really long term (10 years+) then generally you would stay away from technology providers like Microsoft. Think back ten years or more; did anyone picture the technology landscape as it is today? With Google, Apple and Amazon all leading the market and Microsoft lagging behind. Hard to predict long term in a fast moving industry like tech.

More generally, it would be helpful if you brought something to the table in terms of research you have done on your stock picks - such as the strengths of each company and their financials and why you think they are a good buy. You will probably get much better/specific feedback than posting a list and asking generally what people think about the stocks as long term investments.

Thedudeabides

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Re: Individual Stocks vs. Stock Indexing
« Reply #15 on: July 10, 2014, 11:02:08 PM »

I don't have any of these stocks. Most of my stocks are in my home country's main exchange (ASX). But if you are aiming for the really long term (10 years+) then generally you would stay away from technology providers like Microsoft. Think back ten years or more; did anyone picture the technology landscape as it is today? With Google, Apple and Amazon all leading the market and Microsoft lagging behind. Hard to predict long term in a fast moving industry like tech.

Couldn't agree more. I personally would not hold Microsoft long term. In fact, I would be wary of any tech company that pays a dividend. It's a tech company's kiss of death in my opinion and the harbinger of the end of growth.

TomTX

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Re: Individual Stocks vs. Stock Indexing
« Reply #16 on: July 11, 2014, 05:45:42 AM »
I would sell all individual stocks and move everything to Vanguard, into the Total Stock Market Admiral fund.

Franklin

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Re: Individual Stocks vs. Stock Indexing
« Reply #17 on: July 11, 2014, 06:24:27 AM »
I would sell all individual stocks and move everything to Vanguard, into the Total Stock Market Admiral fund.

Even his winners?

TomTX

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Re: Individual Stocks vs. Stock Indexing
« Reply #18 on: July 11, 2014, 07:44:30 AM »
I would sell all individual stocks and move everything to Vanguard, into the Total Stock Market Admiral fund.

Even his winners?

Absolutely.

You cannot predict how they will do in the future. Why should he just "sell low" by selling the losers? This is the same trap many individual investors get into, particularly with individual stocks. Buy when the news is all great and the price is high, sell when the news is bad and the price is low.

Other asset allocations are quite valid choices as well (10-30% bonds perhaps, possibly international stocks) but individual stock picking is not the best route for the individual investor. Personally, I feel that US stocks are pretty darn well exposed to the world market as it is.

1) Low expenses
2) Broad index funds
3) Rational asset allocation, with at least 50% in US stocks.

Personally, I'm 100% in stocks for my investment money - but I am vested in a fixed return pension, which pretty well covers it. Half of my emergency fund is in an I-bond. That's the only bond I have.

EricL

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Re: Individual Stocks vs. Stock Indexing
« Reply #19 on: July 11, 2014, 07:53:19 AM »
If you got the brains, edumucation, and time to work the stock market mojo, go for it!  I recommend The Motley Fool.  They pick winners at least 75% of the time and a savvy investor can weed out their losers for an overall win.

Franklin

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Re: Individual Stocks vs. Stock Indexing
« Reply #20 on: July 11, 2014, 08:20:54 AM »
I would sell all individual stocks and move everything to Vanguard, into the Total Stock Market Admiral fund.

Even his winners?

Absolutely.

You cannot predict how they will do in the future. Why should he just "sell low" by selling the losers? This is the same trap many individual investors get into, particularly with individual stocks. Buy when the news is all great and the price is high, sell when the news is bad and the price is low.

Other asset allocations are quite valid choices as well (10-30% bonds perhaps, possibly international stocks) but individual stock picking is not the best route for the individual investor. Personally, I feel that US stocks are pretty darn well exposed to the world market as it is.

1) Low expenses
2) Broad index funds
3) Rational asset allocation, with at least 50% in US stocks.

Personally, I'm 100% in stocks for my investment money - but I am vested in a fixed return pension, which pretty well covers it. Half of my emergency fund is in an I-bond. That's the only bond I have.

I know, I was being provocative.  The fact is there are ways to hedge and lock-in a winner without selling everything and moving to index funds.

divinvestor

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Re: Individual Stocks vs. Stock Indexing
« Reply #21 on: July 11, 2014, 08:07:36 PM »
Hi everyone, I just wanted to update you on my strategy. I've listened to your opinions and want to thank you for them. I've decided to sell all my individual stocks with the exception of: General Mills, NW Natural, Johnson & Johnson, and 3M. The reason I am keeping those is because I purchased them at excellent prices, and I believe in their long-term potential to continue to produce profits. Luckily, and I suppose the emphasis is on luck, all of my positions have been winners. With the proceeds of the sold stocks, I will purchase an S&P Index fund, Vanguard Wellesley fund (VWINX), and Vanguard Equity Income fund (VEIPX). I decided that I didn't want to hold only individual stocks because 1) I'm not a professional trader, 2) I don't have a crystal ball and access to internal company information, and 3) All the homework that comes with researching individual stocks. Of course with all due respect to AssetGrinder, I don't want the responsibility nor have the time to babysit 30 or 40 stocks. For the record I think you have an excellent portfolio. Again, thank you all and have a great weekend!

viper155

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Re: Individual Stocks vs. Stock Indexing
« Reply #22 on: July 11, 2014, 08:24:54 PM »
If you got the brains, edumucation, and time to work the stock market mojo, go for it!  I recommend The Motley Fool.  They pick winners at least 75% of the time and a savvy investor can weed out their losers for an overall win.

Please dont listen to this.

brewer12345

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Re: Individual Stocks vs. Stock Indexing
« Reply #23 on: July 11, 2014, 08:29:12 PM »
If you got the brains, edumucation, and time to work the stock market mojo, go for it!  I recommend The Motley Fool.  They pick winners at least 75% of the time and a savvy investor can weed out their losers for an overall win.

Please dont listen to this.

Yeah, no kidding.  Its like taking marital advice from a 5 time divorcee.

Lance Burkhart

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Re: Individual Stocks vs. Stock Indexing
« Reply #24 on: July 11, 2014, 08:50:22 PM »
If you haven't come across Dividend Mantra already, you'll love his blog. He's doing exactly what you are (dividend growth investing) he's very passionate and even keeps his portfolio undated on his blog.

http://www.dividendmantra.com

He recently posted an article on why he's going to keep his portfolio at ~50 dividend stocks, (if one absolutely tanks it's only a 2% hit on income, but he'd expect that to be overshadowed by the ~5% annual dividend growth of the other 49)
It is a lot of babysitting as you said, but you can tell he really loves this stuff.
I just hope he has (or anyone managing their own portfolio) a way to measure when a company is at risk of cutting their dividend in the near future, rather than just reacting to the news.

I'm one year into seeing which investment strategy I like better. Half is in ETFs, the other half in dividend stocks. I enjoy researching stocks, but it's hard to judge which is a better strategy when the market is rallying like it has over last year...

Burton Malkiel did the analysis for you in, "A Random Walk Down Wallstreet." For people like us, nothing beats indexing.

To the OP: you'll underperform the SP500 by 2-3% on average if you're one of the best fund managers out there.

EricL

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Re: Individual Stocks vs. Stock Indexing
« Reply #25 on: July 12, 2014, 01:51:39 AM »
If you got the brains, edumucation, and time to work the stock market mojo, go for it!  I recommend The Motley Fool.  They pick winners at least 75% of the time and a savvy investor can weed out their losers for an overall win.

Please dont listen to this.

Yeah, no kidding.  Its like taking marital advice from a 5 time divorcee.
OK. I'll admit I'm not an investing genius (and have before). I'm actually very much in the "just put your money in an index fund regularly and be done with it" camp.  People with time, education, and smarts can beat the market.  And I'm assuming the OP has all three in which case he'll do just fine.  I'm sure he's adult enough to tell.  As for the Motley Fool, their advice can get you in the ballpark recommendation wise.  It just can't be taken uncritically. 

I'm saying this because your pithy comments aren't very detailed on just how unwise my advice is.  Perhaps you can elaborate?  The bit about the five time divorcee isn't relevant since I don't give marital advice.  But I am an early retiree who is financially independent so even if my opinion isn't all that it's at least an informed opinion.  Y'all aren't still butt hurt I disagreed with you in that thread (thankfully closed) about toting assault rifles around Target, are you?   If so, do the OP a favor and get your revenge by refuting me with a logical argument rather than just disparaging remarks.

AssetGrinder

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Re: Individual Stocks vs. Stock Indexing
« Reply #26 on: July 12, 2014, 04:19:54 PM »
I would stay away from the motely fool as well. I subscribed to a couple of their newsletters in the mid 2000,s where they dished out their portfolio picks. Every portfolio of theirs lost money during that period and they shut down all the newsletters due to horrid performance. Even worse it seemed obvious they were paid to promote certain stocks. Bottom line is dont trust anyone especially for stock picks. Do your own research and come up with your own judgements. I trust my own charts and not people.

divinvestor

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Re: Individual Stocks vs. Stock Indexing
« Reply #27 on: July 12, 2014, 04:25:48 PM »
I'm with you, sometimes I read stuff on Motley Fool and Seeking Alpha, but I take what they say with a huge grain of sea salt. Doing your own homework and using good judgment is the best way to go.

brewer12345

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Re: Individual Stocks vs. Stock Indexing
« Reply #28 on: July 12, 2014, 04:33:59 PM »
If you got the brains, edumucation, and time to work the stock market mojo, go for it!  I recommend The Motley Fool.  They pick winners at least 75% of the time and a savvy investor can weed out their losers for an overall win.

Please dont listen to this.

Yeah, no kidding.  Its like taking marital advice from a 5 time divorcee.
OK. I'll admit I'm not an investing genius (and have before). I'm actually very much in the "just put your money in an index fund regularly and be done with it" camp.  People with time, education, and smarts can beat the market.  And I'm assuming the OP has all three in which case he'll do just fine.  I'm sure he's adult enough to tell.  As for the Motley Fool, their advice can get you in the ballpark recommendation wise.  It just can't be taken uncritically. 

I'm saying this because your pithy comments aren't very detailed on just how unwise my advice is.  Perhaps you can elaborate?  The bit about the five time divorcee isn't relevant since I don't give marital advice.  But I am an early retiree who is financially independent so even if my opinion isn't all that it's at least an informed opinion.  Y'all aren't still butt hurt I disagreed with you in that thread (thankfully closed) about toting assault rifles around Target, are you?   If so, do the OP a favor and get your revenge by refuting me with a logical argument rather than just disparaging remarks.

I could give a flying reproductive act about what you think about the second amendment and related issues.

Go look at the history of Motley Fool stock picking portfolios.  Simply put, they were all disastrous.  Worse, they continue humping the leg of anyone dumb enough to give them their email address to get them to sign up for the latest, greatest, super-de-duper new portfolio advice they are crapping out.  The signal to noise ratio at TMF approaches zero.  But if you think its a great idea to buy what they are selling, just make sure you confine that great idea to your own portfolio and don't fuck up anyone else's with bad advice.

chasesfish

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Re: Individual Stocks vs. Stock Indexing
« Reply #29 on: July 12, 2014, 05:39:00 PM »
I have to agree with the comments on TMF - I think they make a great radio show about the markets, but for their "picks", I'd be cautious.  Most of them just aren't for me, they're high risk, high reward choices.

One philosophy I do like is their comments about founder led companies and long-term growth.  I think most founders are stubborn enough to not worry about next quarter and worry about their business 5-10 years from now.

RapmasterD

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Re: Individual Stocks vs. Stock Indexing
« Reply #30 on: July 12, 2014, 06:26:45 PM »
I would underscore staying away from Motley Fool. In my former life running corporate communications at public companies, I ran across a few of their analysts. They were typically former tech reporters that had a passion (but no expertise or skills) for investing. And they invariably asked inane questions. The two guys who started Motley Fool aren't behind the lion's share of their recommendations.

The genesis of Motley Fool started in an era before the internet, before ubiquitous low cost trading, before indexing became popular, before ETFs...in the day their first few books were informative. But now in 2014 I'd run in the other direction.

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Re: Individual Stocks vs. Stock Indexing
« Reply #31 on: July 12, 2014, 07:10:28 PM »
Quote
I could give a flying reproductive act about what you think about the second amendment and related issues.

Heh, so I guess the answer is yes, you are still butt hurt. 

But going back to the Fool, I've usually had good experiences with their stock picks.  I usually made money or at least didn't lose enough to discount them.  You anecdotal tales of they're being screwed up isn't much better than mine.  That said, other mustachians kindly rode in to your rescue with arguments much more helpful anti Fool input than nonsensical dismissals.  Rapmaster D and chasesfish, thank you.

Like I said in my original post, you still have to apply critical thinking to what they say.  I'll throw a bone to the crowd and mention an incident where the Motley Fool did let me down.  They once recommended a Chinese homeopathic drug small cap stock.  It looked very nice and was exploding in price.  I got on the Motley Fool boards and pointed out "homeopathic" is code for superstitious BS drugs.  An industry that might succeed in rural China but might be crushed by Chinese authorities at any time.  Also, all we knew about the company was what the Chinese told us and all the other relevant documents were in Chinese.  Finally, I noted China was a former third world country going through a period roughly analogous to America's Gilded Age.  As in our Gilded Age the overwhelming temptation is to kill the goose that laid the golden egg through various types of stock chicanery.  Even if this company's tiger scrotum soup cured cancer the owners were more likely to take the money and run.  My opinion was NOT well received by fellow posters (imagine that!) and I was even called a racist.  But a month later the stock dried up and blew away.  So yeah, as the KGB motto states: trust but verify.  Finally, you don't actually have to buy the Motley Fool's newsletters to get their picks.  They pretty much put them in their public web pages for free.  The newsletters only explain why they think the stocks are great and by how much. 

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Re: Individual Stocks vs. Stock Indexing
« Reply #32 on: July 12, 2014, 07:42:11 PM »
If you got the brains, edumucation, and time to work the stock market mojo, go for it!  I recommend The Motley Fool.  They pick winners at least 75% of the time and a savvy investor can weed out their losers for an overall win.

Please dont listen to this.

Yeah, no kidding.  Its like taking marital advice from a 5 time divorcee.
OK. I'll admit I'm not an investing genius (and have before). I'm actually very much in the "just put your money in an index fund regularly and be done with it" camp.  People with time, education, and smarts can beat the market.  And I'm assuming the OP has all three in which case he'll do just fine.  I'm sure he's adult enough to tell.  As for the Motley Fool, their advice can get you in the ballpark recommendation wise.  It just can't be taken uncritically. 

I'm saying this because your pithy comments aren't very detailed on just how unwise my advice is.  Perhaps you can elaborate?  The bit about the five time divorcee isn't relevant since I don't give marital advice.  But I am an early retiree who is financially independent so even if my opinion isn't all that it's at least an informed opinion.  Y'all aren't still butt hurt I disagreed with you in that thread (thankfully closed) about toting assault rifles around Target, are you?   If so, do the OP a favor and get your revenge by refuting me with a logical argument rather than just disparaging remarks.

Once upon a time, Motley Fool used to be useful. Years ago it morphed into a huge hype machine whose sole purpose is to extract your cash for their newsletters/picks/special access/whatever.

If they were as good at stock picking as they claim, they should have retired as billionaires by now. They've been in the business literally for decades.

brewer12345

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Re: Individual Stocks vs. Stock Indexing
« Reply #33 on: July 12, 2014, 08:09:57 PM »
Quote
I could give a flying reproductive act about what you think about the second amendment and related issues.

Heh, so I guess the answer is yes, you are still butt hurt. 

But going back to the Fool, I've usually had good experiences with their stock picks.  I usually made money or at least didn't lose enough to discount them.  You anecdotal tales of they're being screwed up isn't much better than mine.  That said, other mustachians kindly rode in to your rescue with arguments much more helpful anti Fool input than nonsensical dismissals.  Rapmaster D and chasesfish, thank you.

Like I said in my original post, you still have to apply critical thinking to what they say.  I'll throw a bone to the crowd and mention an incident where the Motley Fool did let me down.  They once recommended a Chinese homeopathic drug small cap stock.  It looked very nice and was exploding in price.  I got on the Motley Fool boards and pointed out "homeopathic" is code for superstitious BS drugs.  An industry that might succeed in rural China but might be crushed by Chinese authorities at any time.  Also, all we knew about the company was what the Chinese told us and all the other relevant documents were in Chinese.  Finally, I noted China was a former third world country going through a period roughly analogous to America's Gilded Age.  As in our Gilded Age the overwhelming temptation is to kill the goose that laid the golden egg through various types of stock chicanery.  Even if this company's tiger scrotum soup cured cancer the owners were more likely to take the money and run.  My opinion was NOT well received by fellow posters (imagine that!) and I was even called a racist.  But a month later the stock dried up and blew away.  So yeah, as the KGB motto states: trust but verify.  Finally, you don't actually have to buy the Motley Fool's newsletters to get their picks.  They pretty much put them in their public web pages for free.  The newsletters only explain why they think the stocks are great and by how much.

I will enjoy watching how well you are served by following TMF stock picks.  Other than that, have a nice life.

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #34 on: July 12, 2014, 09:14:20 PM »
Hi everyone, I just wanted to update you on my strategy. I've listened to your opinions and want to thank you for them. I've decided to sell all my individual stocks with the exception of: General Mills, NW Natural, Johnson & Johnson, and 3M. The reason I am keeping those is because I purchased them at excellent prices, and I believe in their long-term potential to continue to produce profits.

I know you've made your decision, but for what it's worth, purchase price should have nothing to do with it.  It's important to get rid of this type of thinking now, because as TomTX mentioned, it's that same line of thinking that will lead you to not rebalance in the future.

clifp

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Re: Individual Stocks vs. Stock Indexing
« Reply #35 on: July 12, 2014, 10:15:21 PM »
I would underscore staying away from Motley Fool. In my former life running corporate communications at public companies, I ran across a few of their analysts. They were typically former tech reporters that had a passion (but no expertise or skills) for investing. And they invariably asked inane questions. The two guys who started Motley Fool aren't behind the lion's share of their recommendations.

The genesis of Motley Fool started in an era before the internet, before ubiquitous low cost trading, before indexing became popular, before ETFs...in the day their first few books were informative. But now in 2014 I'd run in the other direction.

+1 stay away from the Motley Fool.  In the early internet years they were good, but once they figured there was no money in telling people DIY, and buy index funds they went down hill rapidly.

I did a trial membership on two fool newsletters, and subscribed to the dividend income one in 2005. While the newsletter had no great non obviousness picks, (JNJ, MMM, KO all fall in the duh category for dividend stocks) it had a couple amazing dogs. One in particular I remember was New Zealand Telecom.  This was I thought a sleepy Telecom with a high (but not crazy) high yield within two months of the TMF recommendation the company had announced a major write off, slashed the dividend and the stock dropped 40%. Now in retrospect many of the signs were there, and I blame myself for not doing my own research.  However, it is hard for individual to research foreign stocks.  (Which is why my international exposure is done via index funds.)   I certainly would have expected the Motley Fool to have at least warn their was a risk potential.

To the OP, I think you made the right call.  I am personally a fan of dividend stocks but primarily for those in the withdrawal phase and most importantly for those with experience and the time and inclination to keep tabs on them.

kyleaaa

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Re: Individual Stocks vs. Stock Indexing
« Reply #36 on: July 13, 2014, 11:13:16 AM »
In principal there's nothing wrong with holding individual stocks instead of indexing, but you aren't nearly diversified enough to meet those criteria. You're gambling. You might end up winning, but that doesn't make it a smart move. The kinds of stocks you're investing in (large-cap with perhaps a slight value tilt) don't lend themselves to out-performing the market on a risk-adjusted basis. In your situation, the case for indexing is iron-clad. If you want more dividends, just buy a value index instead.
« Last Edit: July 13, 2014, 11:16:16 AM by kyleaaa »

YoungInvestor

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Re: Individual Stocks vs. Stock Indexing
« Reply #37 on: July 13, 2014, 12:50:44 PM »
I don't really buy that beating the market is so hard.

With paper trading over the last two years, I've beaten my index by a few points when you include dividend yield. And definitely by a lot more based on the entertainment value.

Buying X$ worth of an S&P500 index fund seems a lot more boring than hand-picking your favorite stocks.

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #38 on: July 13, 2014, 01:14:52 PM »
I don't really buy that beating the market is so hard.

With paper trading over the last two years, I've beaten my index by a few points when you include dividend yield. And definitely by a lot more based on the entertainment value.

Buying X$ worth of an S&P500 index fund seems a lot more boring than hand-picking your favorite stocks.

There's nothing to buy, the studies and data show how hard it is over the long term.  Note, these are the results after months of research on each stock purchase, in some cases including visiting the company, looking at the books, and interviewing the CEO.  In other words, they have access to much more information than we do.



Personally, I don't recommend tying your investment decisions to its entertainment value.

AlanStache

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Re: Individual Stocks vs. Stock Indexing
« Reply #39 on: July 14, 2014, 12:08:05 PM »
I know I am late to the party here but there are plenty of dividend centered etf's.  You dont just have to buy a sp500 index you can get something with higher yield if that is your thing.  Ishares has like ten.

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Re: Individual Stocks vs. Stock Indexing
« Reply #40 on: July 14, 2014, 04:44:56 PM »
The indexing beat all argument is a lil biased on this thread.

Even specific select dividend or aristocrat etf funds tend to beat index funds year after year. Nobody has the right answer here including myself and nobody is an expert. Do your own homework and do whats best for you for your own unique situation.

These charts people throwing around  up here are ridiculous. One could easily throw up a chart against them to support their data just as easily.

in fact  I am pro indexing, dividend etf funds and dividend growth stocks. The close minded investor is a scary thought.

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #41 on: July 14, 2014, 11:12:02 PM »
The indexing beat all argument is a lil biased on this thread.

Even specific select dividend or aristocrat etf funds tend to beat index funds year after year. Nobody has the right answer here including myself and nobody is an expert. Do your own homework and do whats best for you for your own unique situation.

These charts people throwing around  up here are ridiculous. One could easily throw up a chart against them to support their data just as easily.

in fact  I am pro indexing, dividend etf funds and dividend growth stocks. The close minded investor is a scary thought.

You don't need to be an expert to read results of the various studies, scholarly journals, and profit statistics tracking these funds, which all point to the same thing.

The right answer is most definitely out there.  If you believe you can show past performance does indicate future results for these "specific select dividend or aristocrat etf funds", please do so.

surfhb

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Re: Individual Stocks vs. Stock Indexing
« Reply #42 on: July 15, 2014, 12:41:33 AM »
Can i beat an index fund? I dont know, maybe yes, maybe no? Common knowledge is most investors don't beat the market. With that said I still rather take my chances.

Investing isnt a game of chance.  :)

The facts are pretty clear:   Most Actively managed funds or investors don't beat the indexes over the long term.   If you were managing your own portfolio for the last 20-30 years you'd be one seriously lucky mother fucker with balls of steal to beat the S&P.   Assuming youre an amateur investor

Understanding and becoming a passive investor was a game changer for me
« Last Edit: July 15, 2014, 01:22:20 AM by surfhb »

hodedofome

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Re: Individual Stocks vs. Stock Indexing
« Reply #43 on: July 15, 2014, 08:14:04 AM »
Beating the index is possible but it is not easy. It may be very simple, but it is very difficult. And it doesn't have to do anything with intelligence.

It has to do with YOU.

It is your own cognitive biases, your psychological makeup and emotional state. We are not born with the state of mind to be a good trader or investor. We have to transform ourselves and overcome our natural bias to making bad decisions before we can ever hope to do better than the average.

Then once you've conquered yourself, you have to realize that markets change over time and a strategy that worked at one time may (and probably will) stop working. Look at Buffett, he started out as a Graham value investor but has morphed into a Philip Fischer type quality investor. He's also into derivatives, private equity, loaning money etc etc. Not to mention he runs a company that manages many other companies. He's more of a multi-strat hedge fund these days.

In any case, IF you've conquered yourself and IF you've found a strategy that 'should' work over the long term, focus on the places that could be the most inefficient. Look for small and micro caps that are off-limits to the professionals that know what they are doing. Buffett has claimed that he 'knows' he can do 50% if he only had $1 mil to invest. Look for the things that take advantage of people's weaknesses and in places where the majority of professionals can't go.

All that to say, if someone really wants it bad enough and is willing to do the work (we're talking thousands of hours of deliberate practice), I'll never tell them not to at least try themselves. If all someone does is match the index with individual stocks, but they did something they loved and received great satisfaction from, how is that bad?

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #44 on: July 15, 2014, 09:32:28 AM »
Beating the index is possible but it is not easy. It may be very simple, but it is very difficult. And it doesn't have to do anything with intelligence.

It has to do with YOU.

It is your own cognitive biases, your psychological makeup and emotional state. We are not born with the state of mind to be a good trader or investor. We have to transform ourselves and overcome our natural bias to making bad decisions before we can ever hope to do better than the average.

Then once you've conquered yourself, you have to realize that markets change over time and a strategy that worked at one time may (and probably will) stop working. Look at Buffett, he started out as a Graham value investor but has morphed into a Philip Fischer type quality investor. He's also into derivatives, private equity, loaning money etc etc. Not to mention he runs a company that manages many other companies. He's more of a multi-strat hedge fund these days.

In any case, IF you've conquered yourself and IF you've found a strategy that 'should' work over the long term, focus on the places that could be the most inefficient. Look for small and micro caps that are off-limits to the professionals that know what they are doing. Buffett has claimed that he 'knows' he can do 50% if he only had $1 mil to invest. Look for the things that take advantage of people's weaknesses and in places where the majority of professionals can't go.

All that to say, if someone really wants it bad enough and is willing to do the work (we're talking thousands of hours of deliberate practice), I'll never tell them not to at least try themselves. If all someone does is match the index with individual stocks, but they did something they loved and received great satisfaction from, how is that bad?

I believe this is very dangerous advice, especially for an early retirement forum.  All the evidence I've seen, shows no correlation between the people who beat the market one year, also beating it the next year.  The same goes for any observed time period (5 year winners have no increased chance of being winners in the next 5 years...etc).

Bob W

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Re: Individual Stocks vs. Stock Indexing
« Reply #45 on: July 15, 2014, 09:39:09 AM »
My crystal ball hasn't been working to well for the last few decades so I really can't tell you what the future will hold.   

But I might suggest that your portfolio lacks REITs.   Many REITs pay a nice dividend and have great long term track records.  Some say they even track inversely to the stock market thus buffeting the inevitable downturn.   

Personally,  I like funds.  You can check your investment screen for funds that have low betas (volatility compared to the market) with above average return and low annual turnover.  I'm talking managed and unmanaged here.   Then you can put together a portfolio of about 10 or 12 funds (stocks, bonds,  REITs, international )with a history of averaging 11%+ when combined and a maximum downside of 4%. 

The return will be higher or lower than 11% in the future. 

You won't get the big 30% years but you will be happy over the long term.  People tend to sell low when markets crash.  I'm guessing you might do the same. 

Thanks for sharing.

hodedofome

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Re: Individual Stocks vs. Stock Indexing
« Reply #46 on: July 15, 2014, 09:42:26 AM »
Personally,  I like funds.  You can check your investment screen for funds that have low betas (volatility compared to the market) with above average return and low annual turnover.  I'm talking managed and unmanaged here.   Then you can put together a portfolio of about 10 or 12 funds (stocks, bonds,  REITs, international )with a history of averaging 11%+ when combined and a maximum downside of 4%. 

Um no. Historically, depending on the AA, the maximum drawdown of a balanced strategy like that is more like 30%+

Worldwide Stocks and REITs were killed during '08, and that's where most of the risk is in a typical 50/50 or 60/40 portfolio.

hodedofome

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Re: Individual Stocks vs. Stock Indexing
« Reply #47 on: July 15, 2014, 09:45:14 AM »
I believe this is very dangerous advice, especially for an early retirement forum.  All the evidence I've seen, shows no correlation between the people who beat the market one year, also beating it the next year.  The same goes for any observed time period (5 year winners have no increased chance of being winners in the next 5 years...etc).

If you spent thousands of hours of deliberate practice on beating the market, then you'd know to start out with a small amount of money and work up from there. It's not dangerous if done correctly. Most won't put in this kind of effort however, so it's a moot point.

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #48 on: July 15, 2014, 09:58:51 AM »

I believe this is very dangerous advice, especially for an early retirement forum.  All the evidence I've seen, shows no correlation between the people who beat the market one year, also beating it the next year.  The same goes for any observed time period (5 year winners have no increased chance of being winners in the next 5 years...etc).

If you spent thousands of hours of deliberate practice on beating the market, then you'd know to start out with a small amount of money and work up from there. It's not dangerous if done correctly. Most won't put in this kind of effort however, so it's a moot point.

Let's imagine someone with 1000 hours of study, starting small and working their way up over 5 years. Over those 5 years they do very well, beating the market handily. Based on this, they feel comfortable investing with their whole nest egg, because "Look! I have 1000 hours of experience beating the market, and check out my 5 year returns for proof!"

The problem is, the evidence shows that this person does not have an increased likelihood of beating the market over the *next* 5 years.

I wouldn't recommend this path for anyone, especially in a forum like this where people are planning to live on the money they've saved up.

hodedofome

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Re: Individual Stocks vs. Stock Indexing
« Reply #49 on: July 15, 2014, 10:04:48 AM »
1000 hours isn't enough. I said thousands. 10k is usually the magic number.

Doesn't really matter though, the ones that go out and do things that everyone else said was impossible, don't really care what others think.