DIY Infex Fund

[SamIAm38]

So with Robin Hood and other 0$ fee trading platforms available today, is anybody here building their own index funds?

I've been thinking about experimenting with it, not sure if there is an issue with my logic though.

Idea is to minimize expense cost to just time in this case, no expense ratio, maintenance fees or trading fees. More hassle, but also more flexibility.

The idea is buy a set dollar amount of stock every month, of a different company of choice. Make that choice however you see fit, but don't touch it after the purchase. Could be decided by sector allocation, choice companies like fortune 500s, company earning reports, inclusion in already existing funds, however you want to chose them but with some thought involved, not random. Then when it comes time to tap this fund, you sell stocks strategically as well. Higher income years, sell the stocks that are low for a tax loss, lower income years sell the stocks that are higher and take advantage of lower tax brackets. Sure it's not the 10's of thousands in VTI, but this could get very large over time and all the stocks would pass some filter.

Am I missing something?

[forummm]

It's so much easier and more diversified to just buy the index fund. If you buy random stocks, you're most likely to miss out on buying those stocks that just shoot up in value. You'll probably underperform the index. And you'll probably fall prey to market timing of some sort.

If you had a very large amount of money--like a million bucks, it might not be terrible to make your own index fund from the S&P500. But you'd only be saving $500/year vs buying the index. And that savings ignores the bid/ask spread you'd be paying to buy and rebalance your stocks in the index that you don't have to pay when you just buy VTSAX. And VTSAX has 8x as many companies vs the S&P500. And you'd probably want to have 2 million bucks to make your own index, because 1 million would be for domestic and the other million will be for international.

[steevven1]

It's worth noting that "dart-at-a-wall" stock investing is VERY likely to outperform the index long-term, because you'll end up overweighting small caps this way. You'll end up with more risk and (likely) more return. No free lunch though.

As for building the actual total market index manually yourself, that sounds like a nightmare.

[Kaspian]

As for building the actual total market index manually yourself, that sounds like a nightmare.

Abso-bloody-lutely!  Fuck that.  One of the main points of index investing is its simplicity.  Something like the S&P is efficient as it is--the losers will drop off the 500 and better ones pop on to replace them.  And why all do this?  In the remote hope that you might make an extra 1 or 2%?  Don't be greedy, it's not worth it.  You saw what happened to the greedy people in "Charlie and the Chocolate Factory"--the guy who won was the person who did nothing.  (Credit to Jon Oliver.)

[forummm]

It's worth noting that "dart-at-a-wall" stock investing is VERY likely to outperform the index long-term, because you'll end up overweighting small caps this way. You'll end up with more risk and (likely) more return. No free lunch though.

As for building the actual total market index manually yourself, that sounds like a nightmare.

And if you believe that overweighting small caps will get you higher performance, and want to invest in that direction, then the way to achieve that tilt in your portfolio is to buy more of a small cap index fund. Not buy tons of individual stocks.

[Heckler]

I've got 9400 holdings in my 4 ETF index fund portfolio.  Good luck reproducing that.

[retiringearly]

You really want to file a tax return showing the dividends/purchases/sales for 500 stocks?

You are out of your mind if you do. 

[Heckler]

Good idea though to cut costs even more. Is selling free on Robinhood?

[MustacheAndaHalf]

How much money does someone have in Vanguard S&P 500 if they pay $20 / year from the expense ratio?
Would you believe $40,000?  The expense ratio is 0.05%, and 0.0005 x $40,000 = $20.
If you start out investing $10,000 then Vanguard is only taking $5 of your money per year.

Back to your index fund, maybe you start with purchasing 50 stocks.  Now tax time rolls around, and you have dozens of 1099-div forms, showing you dividends.  You get to read each form, type it into your taxes, and figure out how much you owe.  If your entries don't match what the IRS computers are seeing, you also raise your audit chances.  The time you spend purchasing, tracking, and doing taxes... is that worth $5 per $10,000 invested?  Meanwhile Vanguard Total Stock Market issues a single 1099-div for 3600+ stocks.  Investing $72,000 you pay just 1 penny in expense ratio per stock ($36/year).

The idea of creating an index fund is interesting, but you stated the reason is to save money.  But you need to weigh how much time it will take, and how much money you save.  If your reason is solely saving money, it doesn't sound like a good idea.  If you had another reason for doing it, maybe with a fraction of your investment money, maybe it's a different story.

[johnny847]

On top of what others said, index funds can actually beat their index, even after expenses.

http://forum.mrmoneymustache.com/investor-alley/want-to-beat-the-index-buy-an-index-fund!

Just buy an index fund.

[mrpercentage]

Yes I do. I do mostly direct stock purchasing because of fractional shares, but I do use Robinhood. The following are my rules.

1. Build a position up to $500 before starting a new one. If you are not willing to put $500 into a company you shouldn't buy it. I prefer $1000 but $500 is the minimum. Also if Robinhood doesn't make it and it is acquired by another company that begins to charge small commissions like $5 then you don't want to be stuck with a 1 share in a hundred companies

2. Buy companies that pay over a 3% dividend. The advantage of building my own index is a higher yield. My personal taxable accounts have a collective 5.22% yield. That is even after the Conoco cut with Conoco being 20% of my portfolio. I also have a position in Kinder Morgan. Those two are my lowest yielders.

3. Pay attention to how much of your yield comes from one company. Review #2 and contemplate this on the tree of woe.

4. Trust your gut and don't take it too serious. Despite my yield blunders I am still beating the S&P500. Im pulling Alpha and have a much higher yield with zero fees-- just taxed dividends.

Obviously diversification comes with time. You will be much more volatile in the beginning. If you can't stomach it then I suggest you index in a tax sheltered account.

[MustacheAndaHalf]

mrpercentage - Claiming to beat the S&P 500 is not the same as documenting your purchases as they happen and allowing others to track/audit what happens.  But my main point is that people should not be convinced to change portfolios because someone on this forum claims a certain performance.  Doubly so if you're talking last year, when a certificate of deposit could beat the S&P 500.

[mrpercentage]

mrpercentage - Claiming to beat the S&P 500 is not the same as documenting your purchases as they happen and allowing others to track/audit what happens.  But my main point is that people should not be convinced to change portfolios because someone on this forum claims a certain performance.  Doubly so if you're talking last year, when a certificate of deposit could beat the S&P 500.

Exactly, I smashed the five hundred and I know I did because I have more than 1.5% return without calculating yield. But equity isn't even my goal. I should have said that. Increasing my hourly wage is and I do it every time I buy a dividend company. But then again those are some of MY outlines. I thought he was asking if anyone else builds their own index. The answer is yes. I build my own oil and REIT index. I will add diversification as I go.

[retiringearly]

mrpercentage - Claiming to beat the S&P 500 is not the same as documenting your purchases as they happen and allowing others to track/audit what happens.  But my main point is that people should not be convinced to change portfolios because someone on this forum claims a certain performance.  Doubly so if you're talking last year, when a certificate of deposit could beat the S&P 500.

Exactly, I smashed the five hundred and I know I did because I have more than 1.5% return without calculating yield. But equity isn't even my goal. I should have said that. Increasing my hourly wage is and I do it every time I buy a dividend company. But then again those are some of MY outlines. I thought he was asking if anyone else builds their own index. The answer is yes. I build my own oil and REIT index. I will add diversification as I go.

For how many years have you smashed the S&P 500?

[mrpercentage]

mrpercentage - Claiming to beat the S&P 500 is not the same as documenting your purchases as they happen and allowing others to track/audit what happens.  But my main point is that people should not be convinced to change portfolios because someone on this forum claims a certain performance.  Doubly so if you're talking last year, when a certificate of deposit could beat the S&P 500.

Exactly, I smashed the five hundred and I know I did because I have more than 1.5% return without calculating yield. But equity isn't even my goal. I should have said that. Increasing my hourly wage is and I do it every time I buy a dividend company. But then again those are some of MY outlines. I thought he was asking if anyone else builds their own index. The answer is yes. I build my own oil and REIT index. I will add diversification as I go.

For how many years have you smashed the S&P 500?

This year. Past performance yada yada. Look I will be buying different stuff while holding the same stuff. The point is you can build you own index and you might get lucky doing it. If you can't handle the swings that come with the lack of diversification when you first start building your own you shouldn't do it. If you are happy with an index you shouldn't do it. But yes Im building my own and it's worked out for me even with cut dividends. At one point Conoco got real ugly. I held like I should and it worked out. It even went up around 15% at one point during a wild swing and I didn't sell. If you buy enough and hold you will likely match an index in time. I just don't suggest buying the S&P500 with individual shares in Robinhood because if the free commission ever changes you are screwed

[franklin w. dixon]

The biggest advantage of your method (in a taxable account) is not savings on fees, which as others have pointed out are pretty negligible, but the ability to take advantage of tax loss harvesting.

Here is what I do:

In order to make the accumulation of different stocks "random" i.e. unaffected by deliberate or accidental bias I go in alphabetical order. I buy a fixed dollar amount of every S&P (so equal weight indexing rather than weighing by market cap which I think will be better in the long term but who knows). Any time a stock declines by more than 10% I sell it and continue moving down the list. I guess eventually if I finish the list I'll start again but that's a problem for the future and much richer me.

With index fund investing it's only possible to take advantage of tax loss harvesting if the whole index declines but this way I can cut my taxes by 28% (or whatever) compared to what I would pay if I held all the same stocks in a traditional index.

You have to be attentive and disciplined though and it's only worth it if you're dealing with a taxable account.

[franklin w. dixon]

Ironically? Appropriately? The first company in the S&P by alphabetical order is 3M (MMM) haha

[SamIAm38]

You really want to file a tax return showing the dividends/purchases/sales for 500 stocks?

You are out of your mind if you do.

It's not too bad, I import all the robinhood tax documents straight into turbotax, makes it pretty easy

[SamIAm38]

Good idea though to cut costs even more. Is selling free on Robinhood?

Sure is, buying, selling and transfers are all free. Apparently they make all their money with the cash sitting in money market accounts

[SamIAm38]

On top of what others said, index funds can actually beat their index, even after expenses.

http://forum.mrmoneymustache.com/investor-alley/want-to-beat-the-index-buy-an-index-fund!

Just buy an index fund.

Thanks for sharing, very interesting, I suppose I should trust that the people running these funds to do the optimizing

[ShoulderThingThatGoesUp]

This seems like "forging your own tools" on the DIY scale. SCHB's expense ratio is 0.03%.