This reference post for newer investors uses Indexing as an example to illustrate stock price action, planning for potential future negative outcomes, and how a basic Sell & Buy strategy can be employed to preserve previous capital gains. Anything here is just my opinion only. Please note: if you disagree, this post will soon disappear from the forum page if there are no comments.
Index funds appear to offer market diversification of 1000s of stocks, but an index itself functions and acts as 1 stock, because there’s only 1 price. That means 0 Price Diversification, which is often not a good thing.
Those who Buy & Hold an index (or mutual), are essentially Buying & Holding 1 stock. If you keep Adding (Buying more) to it, that is like Buying more of a stock, making a bet that the market, fund, or stock will go up, Hoping that there are only small, brief downturns. But both indexes & stocks (which compose indexes) go up & down (stocks more than indexes).
Buying an index is like buying 1 Titanic, instead of multiple, separate, smaller yachts. An index Titanic is basically putting all the yachts in the market onto 1 big Titanic. There’s a reason why most successful individual stock Investors-Traders don’t just Buy & Hold 1 stock. It’s 0 Price Diversification, and Higher Risk.
The Dow index right now is at about 12,000 in 2011. (I’m using the Dow as an example, since most new investors are familiar with it, and many indexes tend to follow each other, anyway.) If you start index investing now, you will only double your initial investment if the Dow hits 24,000. And you will less than double if you keep adding all the way up (that raises your total buy average). But going straight up to Dow 24,000 with no major bear markets… isn’t likely, imo. There’s been a bear market or 2 every decade for the last 30 years. These boom & bust cycles seem pretty normal (a separate post on why I think they’re virtually inevitable). And if you look at the “All” chart (40 yrs) on Google Finance, we’re currently not too far away from the 2 historical peaks of S&P @ 1500. Anytime that peaks are reached, one must be careful – it’s a major crossroads.
CG-IT: 1 Index = 1 Stock = 1 Price
What’s more likely is something like this: the Dow goes up to say 16,000 (arbitrary number) @ 2014 (giving you +33%), but then drops to 10,000 (-37.5%) @ 2016 in the next bear market. After 7 years, you’ve lost -17% from your initial investment (accounting for the first +33% gain). Remember, if you kept adding on the way up between 12,000 & 16,000, you’d be raising your total buy average above your initial 12,000, so you’d actually lose more dollars if the market tanked to 10,000. (You only keep Adding if you think the index or stock is ultimately going much higher than your average buy price.)
-17% might not sound like a huge loss (it does to me), but after 7 years, it’s horrendous: about -2.4% per year. Only when the Dow goes back up again to 12,000 (maybe another 1 year) would you get back to square one, breakeven. That’s 7-8 years of nothing. And this process is exactly what happened to many new indexers who started investing during this past Lost decade from 2000-10.
But what if, instead of Holding Forever, you decided to Sell. If the Dow goes up to 16,000, then starts dropping to 15,000. It looks like a big drop & the beginning of a bear market, but you’re not sure since you haven’t been following the market or news. If you Sell, you still secure a +25% gain from the initial capital, but at that later date it will be a -6.25% loss for that year, so it will feel like a loss. (Which is why most people don’t Sell, Hoping it will go back up.) Again, if you had kept adding money between 12,000 & 16,000, you would be losing more dollars, so the +25% gain would be smaller, and the -6.25% would be larger.
After you Sell, if the Dow drops to 10,000, and you wait until it recovers & goes back up to 12,000 before more safely buying again, everyone else is at breakeven, but you’re still up +25%.
But what if you Sell at 15,000 and are wrong about a bear market? After sinking to 15,000, the Dow goes back up to 16,000, and you Buy back in. Everyone else is ahead of you at +33%, while you are “only” up +25%.
Btw, this index price action is very similar to stock price action, but in much slower, longer time frames. But the type of thinking here is the same that I would use with many individual stocks (not all, however).
In the end, which do you think is the safer, Lower Risk option when the Dow hits 16,000 & then sinks to 15,000, and there is a higher probability of a bear market? Buy & Hold = 0%, +33%; or Buy & Sell = +25%, +25%?
Clearly, Buy & Sell needs to be considered. Which funds always recommend you NOT do.
-17% might not sound like a huge loss (it does to me), but after 7 years, it’s horrendous: about -2.4% per year. Only when the Dow goes back up again to 12,000 (maybe another 1 year) would you get back to square one, breakeven. That’s 7-8 years of nothing. And this process is exactly what happened to many new indexers who started investing during this past Lost decade from 2000-10.
But what if, instead of Holding Forever, you decided to Sell. If the Dow goes up to 16,000, then starts dropping to 15,000. It looks like a big drop & the beginning of a bear market, but you’re not sure since you haven’t been following the market or news. If you Sell, you still secure a +25% gain from the initial capital, but at that later date it will be a -6.25% loss for that year, so it will feel like a loss. (Which is why most people don’t Sell, Hoping it will go back up.) Again, if you had kept adding money between 12,000 & 16,000, you would be losing more dollars, so the +25% gain would be smaller, and the -6.25% would be larger.
After you Sell, if the Dow drops to 10,000, and you wait until it recovers & goes back up to 12,000 before more safely buying again, everyone else is at breakeven, but you’re still up +25%.
But what if you Sell at 15,000 and are wrong about a bear market? After sinking to 15,000, the Dow goes back up to 16,000, and you Buy back in. Everyone else is ahead of you at +33%, while you are “only” up +25%.
Btw, this index price action is very similar to stock price action, but in much slower, longer time frames. But the type of thinking here is the same that I would use with many individual stocks (not all, however).
In the end, which do you think is the safer, Lower Risk option when the Dow hits 16,000 & then sinks to 15,000, and there is a higher probability of a bear market? Buy & Hold = 0%, +33%; or Buy & Sell = +25%, +25%?
Clearly, Buy & Sell needs to be considered. Which funds always recommend you NOT do.
Obviously, you can’t just Sell every time the Dow drops 1,000. This is where following the market & news comes in. The Dow never drops 1,000 for no reason. People sell in masses only when they’re worried about something major. They could be overreacting - or they could be right. So there’s always a reason – you just might now know what because you haven’t been following the market & news. In Feb-Mar, the Dow dropped 800 points because of the Japan nuclear incident. You have to make a judgment whether this is a short-term downturn = minor economic impact (Hold), or a significant long-term downturn = major economic impact (Sell).
Btw, if you were paying attention to the market, you could have sold earlier in the first 200 point drop, waited for the bottom at 800, then after it shot up 200 points from that bottom, bought back in, earning the 400 point spread. (Note that this is the exact same strategy as the one being discussed above, but on a smaller scale.)
The only scenario where Buy & Hold (of anything) will succeed is if the index or stock goes up & up somewhere and stays there, with only small, brief downturns that never go back down to your initial buy price, which if you started today would be 12,000.
So if you buy an Index, you still have to watch it, and keep track of your average buy price (which the funds don’t tell you to do). Again, if you look at the “All” chart, if you’re buying now, you’re Buying High as we close in on relative historical peaks, unlike the old-timer indexers who bought pre-2000. These indexers are essentially giving Buy & Hold advice because it worked for them when they Bought Low +10 yrs ago, but it certainly didn’t work for most who invested during this decade. And since we’re at relative historical peaks now, Buy & Hold may not work during the next one, either. As world markets & economies become increasingly interconnected, individual events & crises abroad will have greater global impact, so I expect more volatility – not less.
Buying High is not a good idea – unless 1) there’s still some room to go higher (which there is), and 2) you’re ready to Sell Higher. As the Wall Street saying goes, “Buy High, Sell Higher” - the basis for momentum trading. Which, if you think about it, doesn’t contradict “Buy Low, Sell High” - both strategies can work (even on the same asset), and both can fail. Either way, if you’re a new investor, it’s important to be prepared.
Just because Mr. Bogle says the S&P will return an average of 8% during this decade, doesn’t mean that’s what will happen. (Guess what would happen if he said only 3%.)
The following post in this series refers to Market Timing of larger Bull/Bear cycles.
Btw, if you were paying attention to the market, you could have sold earlier in the first 200 point drop, waited for the bottom at 800, then after it shot up 200 points from that bottom, bought back in, earning the 400 point spread. (Note that this is the exact same strategy as the one being discussed above, but on a smaller scale.)
The only scenario where Buy & Hold (of anything) will succeed is if the index or stock goes up & up somewhere and stays there, with only small, brief downturns that never go back down to your initial buy price, which if you started today would be 12,000.
So if you buy an Index, you still have to watch it, and keep track of your average buy price (which the funds don’t tell you to do). Again, if you look at the “All” chart, if you’re buying now, you’re Buying High as we close in on relative historical peaks, unlike the old-timer indexers who bought pre-2000. These indexers are essentially giving Buy & Hold advice because it worked for them when they Bought Low +10 yrs ago, but it certainly didn’t work for most who invested during this decade. And since we’re at relative historical peaks now, Buy & Hold may not work during the next one, either. As world markets & economies become increasingly interconnected, individual events & crises abroad will have greater global impact, so I expect more volatility – not less.
Buying High is not a good idea – unless 1) there’s still some room to go higher (which there is), and 2) you’re ready to Sell Higher. As the Wall Street saying goes, “Buy High, Sell Higher” - the basis for momentum trading. Which, if you think about it, doesn’t contradict “Buy Low, Sell High” - both strategies can work (even on the same asset), and both can fail. Either way, if you’re a new investor, it’s important to be prepared.
Just because Mr. Bogle says the S&P will return an average of 8% during this decade, doesn’t mean that’s what will happen. (Guess what would happen if he said only 3%.)
The following post in this series refers to Market Timing of larger Bull/Bear cycles.
@44deagle:
That's not my motive, which is stated elsewhere on the forum. (On second thought, many people probably won't make good investors.)
I've Held & Fallen through a bear market once. Not a pleasant or profitable experience to say the least. But if you want to Hold through bear markets, that's up to you. Good luck during the next Fall.
That's not my motive, which is stated elsewhere on the forum. (On second thought, many people probably won't make good investors.)
I've Held & Fallen through a bear market once. Not a pleasant or profitable experience to say the least. But if you want to Hold through bear markets, that's up to you. Good luck during the next Fall.
So much nonsense... An index IS NOT like an individual stock. Individual stocks have individual risks... IE: they miss earnings and drop 33% when the index it's listed on is flat.
Across an entire index large movements from unique stock events don't matter much.
I'd like to pick and choose individual stocks for the equities portion of the permanent portfolio, but don't because 1 event from 1 stock could significantly impact total portfolio.
Across an entire index large movements from unique stock events don't matter much.
I'd like to pick and choose individual stocks for the equities portion of the permanent portfolio, but don't because 1 event from 1 stock could significantly impact total portfolio.
@ johnny:
If it were common for companies to drop 33% on earnings, then the indexes would drop accordingly. Obviously that doesn't happen (except in bear markets).
Obviously, 1 event from 1 stock could significantly impact a portfolio. Events can be positive or negative. And what's even more important than events, are trends (which can be viewed as macro-events). In the case of the stock market, 1 very common event in a bull market is a continuous trend of a company growing earnings (or the perception by the market that it will). And that's true for a large number of companies - otherwise the indexes would never go up in bull markets or over time.
In other words, you're overestimating the Specific Risk (of a specific asset or company), and underestimating the Specific Reward. (As opposed to Market Risk, which affects both specific companies & indexes).
Just yesterday, Alcoa (AA) reported earnings, beating EPS by a 1c. The stock fell 6% because it missed revenue estimates by a couple hundred million, growing only 5% from last quarter. Now, does that mean it's going to stay at $16.70 forever? Of course not. If you look at the "All" chart, it's still 50% off its pre-2008 normal levels of $30. If you're a long-term investor, then it's just a blip. If the economy & market continues its recovery, you'll likely see AA go up past it's $17.50 pre-earnings price within a couple months or by year's end latest. AA has a fairly strong chart. (Btw, this isn't a recommendation to buy AA.)
If Big Black Swans attacking & slaughtering stocks were common, indexes would also stay beaten down. What's more common is growing White Swans getting bigger & bigger, which occasionally get hit by baby Black Swans, sometimes by bigger Black Swans or Bears, but eventually fending them off (after getting wounded, if you didn't happen to Sell).
Even in the case of Black Swans, there's always opportunity & Reward in the stock market. When 1 bad thing happens, it's always good for someone else. When a war occurs, defense stocks go up. When the economy plunges into recession, dollar stores go up. When Japan nuclear went off, NG & alternatives went up.
As an indexer, you obviously don't watch individual stocks, so your opinions about them aren't based on observation or experience - just theory of what events "could" happen, but not what commonly happens. Perhaps you should question the true source of nonsense.
If it were common for companies to drop 33% on earnings, then the indexes would drop accordingly. Obviously that doesn't happen (except in bear markets).
Obviously, 1 event from 1 stock could significantly impact a portfolio. Events can be positive or negative. And what's even more important than events, are trends (which can be viewed as macro-events). In the case of the stock market, 1 very common event in a bull market is a continuous trend of a company growing earnings (or the perception by the market that it will). And that's true for a large number of companies - otherwise the indexes would never go up in bull markets or over time.
In other words, you're overestimating the Specific Risk (of a specific asset or company), and underestimating the Specific Reward. (As opposed to Market Risk, which affects both specific companies & indexes).
Just yesterday, Alcoa (AA) reported earnings, beating EPS by a 1c. The stock fell 6% because it missed revenue estimates by a couple hundred million, growing only 5% from last quarter. Now, does that mean it's going to stay at $16.70 forever? Of course not. If you look at the "All" chart, it's still 50% off its pre-2008 normal levels of $30. If you're a long-term investor, then it's just a blip. If the economy & market continues its recovery, you'll likely see AA go up past it's $17.50 pre-earnings price within a couple months or by year's end latest. AA has a fairly strong chart. (Btw, this isn't a recommendation to buy AA.)
If Big Black Swans attacking & slaughtering stocks were common, indexes would also stay beaten down. What's more common is growing White Swans getting bigger & bigger, which occasionally get hit by baby Black Swans, sometimes by bigger Black Swans or Bears, but eventually fending them off (after getting wounded, if you didn't happen to Sell).
Even in the case of Black Swans, there's always opportunity & Reward in the stock market. When 1 bad thing happens, it's always good for someone else. When a war occurs, defense stocks go up. When the economy plunges into recession, dollar stores go up. When Japan nuclear went off, NG & alternatives went up.
As an indexer, you obviously don't watch individual stocks, so your opinions about them aren't based on observation or experience - just theory of what events "could" happen, but not what commonly happens. Perhaps you should question the true source of nonsense.
@ csdx:
No to the first question. If you have 1 index, you have 1 price. It doesn't matter how many stocks that index has, they all combine to form 1 price.
If you have 10 different stocks, that's 10 different prices which often move rather independently of each other (depending on their correlation). So I call that "Price Diversification". If you have 10 different prices moving rather independently, then you will know right away which sectors (and individual stocks of course) are doing better at any point in time. You can then reallocate or rebalance as you see fit (instead of just Holding for a year and seeing what happens). I find this information very valuable for Portfolio Management.
If you buy into a stock and it continues to go up, you can compare it with its industry peers/competitors to see how they're doing. After doing more research, if you conclude that sector will likely continue going up for a medium-longer term due to a catalyst or macro-trend, then you can choose to divert more holdings into that sector. I say, "can" because you shouldn't chase a sector just because it's doing well; there should be a long-term catalyst or trend, and not just brief short-term sentiment.
Conversely, if you buy into a stock and it does nothing (or goes down), and you look at the sector peers and see they're doing nothing (or going down), then you can choose to divest & avoid that sector (or stay in it because you believe the negative sentiment is temporary).
If the stock is doing well but the sector isn't (or vice versa), then you know that its particular to the stock, and you can also take action accordingly.
You can't do any of this if you just buy 1 index. You're stuck with that index, and what's inside of it isn't decided by you. So if I buy 10 stocks, that does equal 1 fund with 1 portfolio price (or NAV), but I can change those stocks as I see fit, which has a direct effect on my 1 fund price.
An indexer can't do that - they're always stuck with whatever price that the index is. Same is true if I bought only 1 stock and just Held it. 1 index or 1 stock = no influence over the Pricing.
So no, buying 1 index or 1 stock offers No Price Diversification (and thus no Price Control), and that's a Huge difference from buying 5 or 10 stocks, which you can all control.
Yes to the last answer. If you want "true" asset diversification, you'd have to diversify away from equities (indexes & individual stocks belong to the same asset class of equities; indexes or ETFs are just investment vehicles that carry loads of stock equities). Bonds, annuities, etc. Conventional investing recommends asset diversification (called asset allocation), but I personally don't do it yet.
No to the first question. If you have 1 index, you have 1 price. It doesn't matter how many stocks that index has, they all combine to form 1 price.
If you have 10 different stocks, that's 10 different prices which often move rather independently of each other (depending on their correlation). So I call that "Price Diversification". If you have 10 different prices moving rather independently, then you will know right away which sectors (and individual stocks of course) are doing better at any point in time. You can then reallocate or rebalance as you see fit (instead of just Holding for a year and seeing what happens). I find this information very valuable for Portfolio Management.
If you buy into a stock and it continues to go up, you can compare it with its industry peers/competitors to see how they're doing. After doing more research, if you conclude that sector will likely continue going up for a medium-longer term due to a catalyst or macro-trend, then you can choose to divert more holdings into that sector. I say, "can" because you shouldn't chase a sector just because it's doing well; there should be a long-term catalyst or trend, and not just brief short-term sentiment.
Conversely, if you buy into a stock and it does nothing (or goes down), and you look at the sector peers and see they're doing nothing (or going down), then you can choose to divest & avoid that sector (or stay in it because you believe the negative sentiment is temporary).
If the stock is doing well but the sector isn't (or vice versa), then you know that its particular to the stock, and you can also take action accordingly.
You can't do any of this if you just buy 1 index. You're stuck with that index, and what's inside of it isn't decided by you. So if I buy 10 stocks, that does equal 1 fund with 1 portfolio price (or NAV), but I can change those stocks as I see fit, which has a direct effect on my 1 fund price.
An indexer can't do that - they're always stuck with whatever price that the index is. Same is true if I bought only 1 stock and just Held it. 1 index or 1 stock = no influence over the Pricing.
So no, buying 1 index or 1 stock offers No Price Diversification (and thus no Price Control), and that's a Huge difference from buying 5 or 10 stocks, which you can all control.
Yes to the last answer. If you want "true" asset diversification, you'd have to diversify away from equities (indexes & individual stocks belong to the same asset class of equities; indexes or ETFs are just investment vehicles that carry loads of stock equities). Bonds, annuities, etc. Conventional investing recommends asset diversification (called asset allocation), but I personally don't do it yet.
Ah, so if I'm understanding you you want more fine control over your investments. For an common or index investor they might be ok with using specific indexes or even funds that target specific sectors as their method of diversification. They might just want control at that level, and not want to research individual stocks to try and pick from within a sector. However, you want more control of that down to the individual stock pick. So I think I'm reading it as that whereas you might pick 10 individual stocks, someone might pick 10 indexes/funds to try and achieve a similar price diversification, and both would be valid, just you have more work/control by choosing an individual stock (e.g. trying to find one that you think will beat it's sector versus being willing to take the average of the sector).
I'm also willing to bet that there people who want even more control, but that probably fits the model of running a buisness rather than investing if you get down to that granularity. i.e. the difference is between buying bank stock and being a loan officer who chooses who to give loans, or investing in a REIT versus being a landlord.
I'm also willing to bet that there people who want even more control, but that probably fits the model of running a buisness rather than investing if you get down to that granularity. i.e. the difference is between buying bank stock and being a loan officer who chooses who to give loans, or investing in a REIT versus being a landlord.
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Wolfpaws58
- Posts: 18
- Joined: Sun Apr 10, 2011 2:41 am
I agree with Sky2evan in the sense that a mutual fund has s single price. It also has internal fees that are charged even when the fund is losing money. Some have entry an exit fees as well. Mutual funds are an alternative for those who don't want to take the time to research and invest in individual stocks or those who are forced into them by employer sponsored plans. I have both as dictated by the nature of my various accounts. I will say this about mutual funds VS individual stocks. It has been my experience that my individual stocks far out perform my mutual fund holdings. This might easily be written off as dumb luck but after studying the markets for 30 some years I'm going to take just a little credit for having a brain. The performance differential may be somewhat weighted by the lack of fees and presence of dividends in my actual equity holdings. I am primarily a buy and hold investor and I like anything that I percieve as a value stock that has historically increased their dividends over time. My motto continues to be that slow and steady wins the race. So far so good!
I posted how I manage my Mutual Fund laden 401K in another thread. There again so far so goodb after 30 years and counting.
If we're going to call Mutual Funds an individual stock wouldn't we then using the same logic call conglomarates like PG a Multi-National Mutual Fund since that's what they in fact are?
I get the point Skyt2evan is trying to make regarding mutual funds. I don't tend to agree with the notion of successfully timing anything in life and that includes the stock market. I buy when it makes sense and hold, because I focus on quality companies with long term outlooks and growth stratagies that reward me with decent annual dividends for having invested in them. If anything I hold goes considerably higher than I anticipated then I thank the hevans and sell if it gets too hot. I am not greedy and all I want is respectable returns on my investments. Once that is achieved I like to give my money a well deserved breather. There are a few people who have prospered using leverage or betting their future on a single stock. For every one of those there are thousands of skeletons of those who got burnt in the process.
CSDX,,, you hit the nail on the head. A person should in fact run their financies like a business. I even have a five year plan that I update annually. I see nothing wrong with being that involved.
Enjoy!
"It's nice to be important but it's more important to be nice."
I posted how I manage my Mutual Fund laden 401K in another thread. There again so far so goodb after 30 years and counting.
If we're going to call Mutual Funds an individual stock wouldn't we then using the same logic call conglomarates like PG a Multi-National Mutual Fund since that's what they in fact are?
I get the point Skyt2evan is trying to make regarding mutual funds. I don't tend to agree with the notion of successfully timing anything in life and that includes the stock market. I buy when it makes sense and hold, because I focus on quality companies with long term outlooks and growth stratagies that reward me with decent annual dividends for having invested in them. If anything I hold goes considerably higher than I anticipated then I thank the hevans and sell if it gets too hot. I am not greedy and all I want is respectable returns on my investments. Once that is achieved I like to give my money a well deserved breather. There are a few people who have prospered using leverage or betting their future on a single stock. For every one of those there are thousands of skeletons of those who got burnt in the process.
CSDX,,, you hit the nail on the head. A person should in fact run their financies like a business. I even have a five year plan that I update annually. I see nothing wrong with being that involved.
Enjoy!
"It's nice to be important but it's more important to be nice."
This "control" that more stocks supposedly provides translates to a bunch of work, transaction costs and increased volatility... Even then over 75% of an individual stocks movement mirrors that of the broader market.
Owning an index provides lower effort, lower transaction costs and lower volatility.
Again, there is a broad body of research showing that 95-99% of people are better off not actively trading... I would bet that even the OP of these threads falls in that category.
Owning an index provides lower effort, lower transaction costs and lower volatility.
Again, there is a broad body of research showing that 95-99% of people are better off not actively trading... I would bet that even the OP of these threads falls in that category.
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Wolfpaws58
- Posts: 18
- Joined: Sun Apr 10, 2011 2:41 am
97.5% of statistics are made up. Have you ever owned individual stocks JohhnyH? I'm not challanging what you posted I'm just wondering if you read it somewhere or post based on actual experience. I can buy $10,000 worth of any stock in the US for $7.00,, if i buy the same amount of a mutual fund with a 6% from end load it's going to be $600 right off the top (that's a lot of ground to make up compared to an individual stock). Then there are 12b and potentially other fees that hit me anually,, not the case with an individual stock,, then there's the fact that in a mutual fund there is lower volatility that paces lower growth potential because the poor perfomers drag down the out performers. I'm interested in your take on these actual facts. It takes very little effort to buy an individual stock and the fees are reasonable in and out. Another difference is I get 100% of my dividends,,, where are they in my S&P 500 Index fund? I see a few cents a year as opposed to say AT&T that pays me quite a bit every quarter holding far less than I hold in my S&P 500 index fund. Where are the divedends? I have called and asked and got the run around and some BS voodoo jibrish for an answer. A single stock is straight forward and not subject to some mutual fund manager's take on a fund objective that someone else more than likely wrote. As I stated earlier,,, my individual stocks have out performed my mutual fund holdings for nearly 20 years so I'll be sticking with what has worked well for me for almost 20 years. In the early days I too was led to believe that mutual funds were the be all end all to investing. I was missled by people who stood to profit from my then ignorance. My eyes are pretty well opened after a life time of experience.
You should re-read my initial post if you in any way gathered that I am a proponent of active trading. I clearly stated that I am a buy and hold investor. Can you offer a link on this study indicating that potentially as many as 99% are better off not trading? I tend to agree but it would be nice to see the results of an actual study and what criteria were used to make that assessment of individuals ability to select their own investiments.
You should re-read my initial post if you in any way gathered that I am a proponent of active trading. I clearly stated that I am a buy and hold investor. Can you offer a link on this study indicating that potentially as many as 99% are better off not trading? I tend to agree but it would be nice to see the results of an actual study and what criteria were used to make that assessment of individuals ability to select their own investiments.
@ csdx:
That's exactly correct. Great intuitive example with the bank/REIT vs. loan officer/landlord. But I don't like having 10 different sectors. I only want 3-4 at the most, because I like having several stocks (at least 3) in the same sector.
The "problem" of having a sector ETF is similar to having an index - you get a whole bunch of stuff you might not want if you knew what it actually was.
Using a real-life example, I'm heavily overweighted in the solar sector. 2 ETFs in that field are KWT and TAN. Both of them have First Solar (FSLR) as their largest holding. But I would never buy FSLR because it has a p/e 20 multiple (compared to its Chinese peers which have p/es of 4-7, plus it makes thin-film panels which actually has much lower market share than crystalline. They have a bunch of other companies I wouldn't want either for multiple reasons.
Using a hypothetical example, let's say there was an Ice Cream ETF. So it'd probably include Baskin Robbins, Haagen Daaz, Ben & Jerry's, Coldstone, Dairy Queen, Breyers, Movenpick, etc. See the problem? I wouldn't want all those companies. Would anyone? A lot of them compete with each other, and some of them are just new fads or old dying breeds. Investing in individual stocks is like shopping for Quality. Buying an ETF or index is like buying a whole store, or a section of the store. Little or No Quality Control. That's what you always get if you don't invest Time or Work.
If you correctly identify the better opportunities in a sector, you'll do much, much better than the ETF, because the ETF includes competitors, average players, and literally losers. Just like an index. That's why ETF & index price movements are much smaller & slower than individual stocks. Even if the sector takes a hit, the stronger companies may even do better because the weaker companies struggle.
As a loan officer/landlord, I don't want to accept every loan that gets to my desk, nor every tenant knocking on my door. I want a strict Quality Control process so that I only have what I think are the best opportunities. If I make a mistake and find I have a bad loan or tenant on my hands, I terminate them (Sell). I don't want Crap in my life, and I certainly don't want it in my portfolio. Wolfpaws is right in that managing your portfolio is like managing your own business. In my business, I Hold the performers, Fire the underperformers. An index or ETF doesn't do that - they're all "passively managed", and literally Hold everybody. That's why they move so much more slowly than individual stocks. They're an average - and averages tend to be well, average, and sometimes they even suck.
I can live with being average in many areas of life. But not in my job or portfolio performance. If that takes Time & Work to improve (it always does), I gladly pay that price. Not everyone is, and that's fine. And just like Quality Control shopping, Investing becomes faster & easier the more you do it. But in the beginning, it can be a slow, difficult, learning process with buyer's remorse - especially if you're used to impulse buying, & not doing consumer research, comparison shopping, reading labels, etc.
Those who want to buy the whole store, be my guest. You get what you pay for.
That's exactly correct. Great intuitive example with the bank/REIT vs. loan officer/landlord. But I don't like having 10 different sectors. I only want 3-4 at the most, because I like having several stocks (at least 3) in the same sector.
The "problem" of having a sector ETF is similar to having an index - you get a whole bunch of stuff you might not want if you knew what it actually was.
Using a real-life example, I'm heavily overweighted in the solar sector. 2 ETFs in that field are KWT and TAN. Both of them have First Solar (FSLR) as their largest holding. But I would never buy FSLR because it has a p/e 20 multiple (compared to its Chinese peers which have p/es of 4-7, plus it makes thin-film panels which actually has much lower market share than crystalline. They have a bunch of other companies I wouldn't want either for multiple reasons.
Using a hypothetical example, let's say there was an Ice Cream ETF. So it'd probably include Baskin Robbins, Haagen Daaz, Ben & Jerry's, Coldstone, Dairy Queen, Breyers, Movenpick, etc. See the problem? I wouldn't want all those companies. Would anyone? A lot of them compete with each other, and some of them are just new fads or old dying breeds. Investing in individual stocks is like shopping for Quality. Buying an ETF or index is like buying a whole store, or a section of the store. Little or No Quality Control. That's what you always get if you don't invest Time or Work.
If you correctly identify the better opportunities in a sector, you'll do much, much better than the ETF, because the ETF includes competitors, average players, and literally losers. Just like an index. That's why ETF & index price movements are much smaller & slower than individual stocks. Even if the sector takes a hit, the stronger companies may even do better because the weaker companies struggle.
As a loan officer/landlord, I don't want to accept every loan that gets to my desk, nor every tenant knocking on my door. I want a strict Quality Control process so that I only have what I think are the best opportunities. If I make a mistake and find I have a bad loan or tenant on my hands, I terminate them (Sell). I don't want Crap in my life, and I certainly don't want it in my portfolio. Wolfpaws is right in that managing your portfolio is like managing your own business. In my business, I Hold the performers, Fire the underperformers. An index or ETF doesn't do that - they're all "passively managed", and literally Hold everybody. That's why they move so much more slowly than individual stocks. They're an average - and averages tend to be well, average, and sometimes they even suck.
I can live with being average in many areas of life. But not in my job or portfolio performance. If that takes Time & Work to improve (it always does), I gladly pay that price. Not everyone is, and that's fine. And just like Quality Control shopping, Investing becomes faster & easier the more you do it. But in the beginning, it can be a slow, difficult, learning process with buyer's remorse - especially if you're used to impulse buying, & not doing consumer research, comparison shopping, reading labels, etc.
Those who want to buy the whole store, be my guest. You get what you pay for.
@ wolfpaws:
Thanks for sharing your experiences! 20 yrs is a formidable track record. My main point throughout these threads is just investors don't have to just consider & trust in fund investing, and that it's possible for individuals to do okay by themselves, if they're willing to spend some upfront Time & Work developing their own style/strategies. For me, it's DIY all the way. So your input is much appreciated!
How can an S&P 500 index fund only return a few cents in dividends? That sounds crazy. And very good point about conglomerates = 1 big fund with too many diverse holdings. That's why I tend to avoid them; I can't understand them as well.
@ johnnyH:
Wolfpaws' reply would be similar to mine. I have a pretty good 5-yr return so far (listed elsewhere), whether you believe it or not, up to you. You & others can use their BS detection skills to discern whether or not anything I'm saying is true or makes sense. All investors need & should probably cultivate their BS detection skills.
Good "luck" with indexing.
Thanks for sharing your experiences! 20 yrs is a formidable track record. My main point throughout these threads is just investors don't have to just consider & trust in fund investing, and that it's possible for individuals to do okay by themselves, if they're willing to spend some upfront Time & Work developing their own style/strategies. For me, it's DIY all the way. So your input is much appreciated!
How can an S&P 500 index fund only return a few cents in dividends? That sounds crazy. And very good point about conglomerates = 1 big fund with too many diverse holdings. That's why I tend to avoid them; I can't understand them as well.
@ johnnyH:
Wolfpaws' reply would be similar to mine. I have a pretty good 5-yr return so far (listed elsewhere), whether you believe it or not, up to you. You & others can use their BS detection skills to discern whether or not anything I'm saying is true or makes sense. All investors need & should probably cultivate their BS detection skills.
Good "luck" with indexing.