I think your basic premise is solid: that by investing in a variety of individual stocks you will have more frequent opportunities to harvest losses than if you invest in a single index fund that holds all of those stocks (and more).
The premise of individual stocks and being able to capture losses is solid, but the problem is the gap between theory and practice. The two root cause problems are: Not using all 500 stocks and transaction fees.
This is exactly what at least one of the big robo-advisors does. Instead of investing in an S&P 500 fund, they'll buy you all 500 stocks individually and harvest losses.
Yes, there are a few ways to get this, mostly at scale (multiple millions of dollars). The problem is that below that point, you get swamped by transaction fees.
Trying to do it yourself, a complicating factor might be balancing diversification against trading commissions.... Unless you have a good source of free trades lined up, the cost to set this system up could eat up a good portion of the benefit from increased loss harvesting.
It will certainly either (1) eat MORE THAN the benefit or (2) have sufficient tracking error that you have exposed yourself to risk of capital loss.
To the cost of a trade, please be aware, no trades are free. You may pay no commission, but there are ways for Robinhood to be paid for the transaction anyway. See:
https://www.reddit.com/r/RobinHood/comments/7sxxbj/robinhood_paid_by_routing_companies_which_enable/The net result is that you pay a bit more for each stock you purchase and a bit less on each stock you sell. This increased bid-ask spread will eat up just as much as the commission otherwise would have...
There is no such thing as a free lunch.Both of you are right I should probably use 25-30 rather than 6 stocks.
Actually - just so we are clear - my recommendation is "Don't track the S&P 500 with individual stocks it unless you can afford to buy all 500 stocks (in the right ratio), which is practical at about $20M in assets". The $20M is calculated from looking at the stocks and where a $5 loss is into fractions of a percent of the amount being traded. This is about where the investment level is needed to get 100 shares of the least-share quantity stock... from a quick glance I used stock #501, ticker BHF
Are there any other concerns/issues I should be aware of?
To be honest, I'm concerned you don't understand the issues that have already been raised. Since I've already stated my concerns, let me try it a different direction. If you were trying to convince me to do this here are the questions I would ask:
1) What will I lose to transaction costs (this is more than commission and SEC fees - see above for "It's not free")
2) You've stated 30 stocks has an R squared of 0.75. Of the tracking error that occurs, what is the distribution of the tracking error? Is the distribution random? Skewed? What is the likelihood I will lose vs gain vs the index?
3) Wealthfront starts at $100K before it will buy individual stocks in this methodology, and even then is using an ETF for the smaller companies. How much are you putting into this strategy, and if it's not well over $100K, why do you believe your strategy is superior to theirs (given they have more money and have done the research)
4) From the investopedia article I linked in an earlier post, it notes that "64% of stocks underperformed the Russell 3000" and "25% of stocks were responsible for all of the market's gains". You state you are not stock picking, but how are you going to ensure the 30 stocks you pick will select a sufficient number of the winners in order to track the index in any meaningful way? (Said another way - if you are randomly selecting stocks, then what are the implications of the skew and kurtosis of stock returns to the implication of an incorrect random selection?)
5) How will you ensure your selection doesn't include Bear Stearns or Lehman or Enron or GM or another company that goes bankrupt? What is the impact to a concentrated portfolio of 30 stocks if one goes bankrupt? How long will it take to recover? (Can it ever recover?)
6) What is the differential IRR you expect to produce? See:
https://research.wealthfront.com/whitepapers/stock-level-tax-loss-harvesting/