Currently the majority of my investments are in VTSMX and I think they should stay there. But, I took a risk some months ago and have lost:
I invested approx. $1200 in a single company and my current balance is approx $700
I invested aprox 850 in a Vanguard energy ETF and my current balance is approx 600
So my question, should i sell these two and put the balance into VTSMX (where it belongs)?
My losses are about $750 on those 2 investments and I don't see them rising anytime soon. Especially the Energy ETF. VTSMX is very balanced and always praised here, and I love it as well. Should I scratch my losses?
Thank you!
There are a couple points here that are missing. If you have significant income and you don't have any reason to believe these investments will do better you then want to sell immediately and reinvest. This is because the tax deduction you get from selling in effect provides additional capital which you could reinvest in VTSMX, you would therefore end up with more money in the long run
if the performance of all three securities was the same. It seems to me that it is unlikely that this is the case, as you are a college student and might not have tax liability in 2015.
Regarding the single company, assuming you can gain no advantage from the tax code then you should ask yourself "What was my thesis when I bought this stock?" As a first pass if you didn't go to
www.sec.gov and pull the most recent few 10-K's you were gambling. The efficient market hypothesis suggests that your gamble should on average make you money, on average about as much as an index of equities with similar characteristics (beta, size, PE, etc.) However, because the money is invested in an undiversified way you are taking an uncompensated risk. Other people investing in this company can avoid some of its risk because they are invested in many other companies. Therefore, they are willing to bid the price up to an amount that does not compensate for this risk. If you wanted to take on a similar level of risk you could sell this company and buy an index with a little margin. This increases your volatility, but this volatility is compensated for with extra returns. (I would
strongly advise against doing this). If this idea concerns you, you ought to keep in mind that this is precisely what you are doing (by taking on uncompensated risk), except that you
don't get extra returns! If you weren't gambling and you researched this company in detail and are quite certain (understatement #1) that the firm is worth (or has an expected value) substantially more than it is trading at right now, you should certainly keep it. In which case do please tell us the name. :-)
Regarding the energy ETF, you should keep in mind that the market which you are trying to estimate a more accurate value is highly competitive (understatement #2).
Also, this bit concerns me:
I am under the impression that VTSMX will return more than a target fund. I want the most returns obviously, and I am comfortable with large fluctuations as it comes with larger returns in the end. So, that is why I am 100% in stocks.
So, once I get steady income, I plan to stick to stock indexes.. I thought this was a MMM mentality. But diversification is understandable, I just don't mind the inevitable fluctuations for higher returns that I thought would result in a 100% stock index. Does that make sense?
There is no law that says the stock market has to go up, even over the course of 30 years, and certainly no law that it will definitely do better than bonds. Adding a small bond component to your portfolio will probably not impact returns very much, but will almost certainly reduce your risk of doing worse than you expect. (This is the risk that matters in my view). If you plan on early retirement you aren't investing for 60 years from now. The US stock market has had a good run over the last hundred years, if you want to look at the next 30 and say it'll probably be similar to the last hundred, well I think you're right. But there's no way we have an appropriate amount of data to conclude that from historical results. (Using firecalc's methodology and saying that you're testing over 70 independent 30-year periods is pretty specious if you ask me.)
You may want to think of it this way If all that mattered was your ability to wait for the "long term" stock returns would be similar to very long term treasuries. They are not, therefore either the market is acting irrationally (possible) or you are taking a risk beyond simply being willing to wait until "fluctuations" work themselves out. The first rule of investing is
understand the risks you are taking.
tl;dr. Indexing isn't always the answer, but it probably is if you're asking the question. Diversify among asset classes.
