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Indexing vs. individual stocks 

JC
Posts: 48

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7/16/2018
JC
Posts: 48
thanks NJ for the explanation!
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JC
Posts: 48

view JC's Portfolio
7/16/2018
JC
Posts: 48
plasticsurgeryrox wrote:
I have been investing in the stock market for the last 25 years.
Just a few thoughts....
I do think investing in the market is the best thing that everyone should do but it needs to be done the right way.
In general, think of stocks as owning a piece of a company and think of bonds as giving a loan to a company.
Ownership has more headaches (i.e. ups and downs of markets) but the return is better the vast majority of the time.
I have bought individual stocks and have bought index funds and have worked with multiple financial advisors and money managers.
In my experience, index funds (SPY, VFINX) on an annual basis will beat the returns of buying individual stocks (most of the time) and every financial advisor and money manager I have ever worked with (every time).
The problem with buying individual stocks is that no one I have met has the patience or stomach to deal with the ups and downs of volatility.
I think that most people should buy index funds and just ride them without thinking about them.
Although it does not make sense for most people, I strongly believe that the market will always go up in the long term (and will outperform bonds and other investments). I cannot prove mathematically it will go up, but I accept it the same way I accept gravity (which I also cannot prove mathematically).


Thanks plastic!


It means a lot coming from you. Basically confirms everything I've read so far. Esp the part about your indexing beating every advisor and manager every time. Glad to know I'm 93% on the same path, with 7% or so on individual stocks/a bit of fun.
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plasticsurgeryrox
Posts: 1

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7/4/2018
I have been investing in the stock market for the last 25 years.
Just a few thoughts....
I do think investing in the market is the best thing that everyone should do but it needs to be done the right way.
In general, think of stocks as owning a piece of a company and think of bonds as giving a loan to a company.
Ownership has more headaches (i.e. ups and downs of markets) but the return is better the vast majority of the time.
I have bought individual stocks and have bought index funds and have worked with multiple financial advisors and money managers.
In my experience, index funds (SPY, VFINX) on an annual basis will beat the returns of buying individual stocks (most of the time) and every financial advisor and money manager I have ever worked with (every time).
The problem with buying individual stocks is that no one I have met has the patience or stomach to deal with the ups and downs of volatility.
I think that most people should buy index funds and just ride them without thinking about them.
Although it does not make sense for most people, I strongly believe that the market will always go up in the long term (and will outperform bonds and other investments). I cannot prove mathematically it will go up, but I accept it the same way I accept gravity (which I also cannot prove mathematically).
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njhowie
Posts: 77

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6/28/2018
njhowie
Posts: 77
JC wrote:
Good to know there are people out there who can beat the market. I have friends who talk about stocks all the time. They'll claim they're up 50% on this stock or that. But, it's only a few thousand dollars worth. Nothing to change their lifestyle. Just a bit of gambling fun.


Also, they never mention if their other stocks are losers. Lol. So, who knows if their entire portfolios are beating the market, or making money at all.



Very true. Everyone has losers, even Buffett. However, over time, one hopes that the winners more than compensate for the losers.

When we have euphoria, everything works...no matter what investment approach you use, it works - everything goes up and all of a sudden everyone is an investment genius. Folks will quit their jobs thinking they can do so well "investing" sitting behind a keyboard at home - and why not, they did so well over the past 5+ years.

I may have mentioned this on a prior comment, but I get very skeptical when everyone is talking about stocks - just like your friends. On one of my trips last year to visit my mom at her retirement community, we went out for dinner at one of her favorite places. At the table next to us, there was a group of 3 couples - all in their 70s and 80s. The men were at one end of the table and their chatter the entire time was about their biotech (penny) stocks. They were all geniuses, day trading and of course making money getting in and out at just the right times.


The stock market is not the mechanism where everyone becomes multi-millionaires and brings untold wealth to the masses. Lots of folks want to believe that, the system does everything it can to further that sentiment, and for most it would not be possible to even dream of retirement based on their earnings/spending/savings. During the past year I saw a series of TV ads for Etrade. They showed rich people doing things flaunting their wealth and spending. The tag line "Don't get mad, get Etrade" - hey you, Average Joe, this can be you, just trade. When we get to this point, a collapse is imminent...it's the final couple rounds of musical chairs.


Folks like to quote Buffett when justifying what they do when it comes to investing, so I'll stop rambling and toss out my favorite Buffett quote - "When the tide goes out, then we'll see who's been swimming naked".
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njhowie
Posts: 77

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6/28/2018
njhowie
Posts: 77
JC wrote:
30sballarddad wrote:
It's all tracking error to the index. You need at least 25 stocks in a variety of industries to create a diversified portfolio. Alternatively, you could hold 90% in an index fund, then a handful of small individual stock positions, and you might have some fun, while not doing too much harm if you get things wrong.


What does "tracking error to the index" mean?


We only have 10 stocks, across a few industries. 2 are really indexes. So, yes, trying to have a bit of fun, while not doing too much harm if we get things wrong. Lol. If a crash comes, we'll just try to ride it out and buy more at depressed prices. So, probably won't do us much harm.



It basically means that even when you are invested in an index fund, for example, you have industry/sector concentration. Look at the S&P index and that the top 10 or so companies represent about 20% of the weighting/value. Now consider that 5 of those 10 are high tech comprising about 15% of the index weighting/value. If technology crashes (and it has a history of doing just that), the index and funds tracking the index will likewise take a big hit.
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JC
Posts: 48

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6/25/2018
JC
Posts: 48
Good to know there are people out there who can beat the market. I have friends who talk about stocks all the time. They'll claim they're up 50% on this stock or that. But, it's only a few thousand dollars worth. Nothing to change their lifestyle. Just a bit of gambling fun.


Also, they never mention if their other stocks are losers. Lol. So, who knows if their entire portfolios are beating the market, or making money at all.
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JC
Posts: 48

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6/25/2018
JC
Posts: 48
30sballarddad wrote:
It's all tracking error to the index. You need at least 25 stocks in a variety of industries to create a diversified portfolio. Alternatively, you could hold 90% in an index fund, then a handful of small individual stock positions, and you might have some fun, while not doing too much harm if you get things wrong.


What does "tracking error to the index" mean?


We only have 10 stocks, across a few industries. 2 are really indexes. So, yes, trying to have a bit of fun, while not doing too much harm if we get things wrong. Lol. If a crash comes, we'll just try to ride it out and buy more at depressed prices. So, probably won't do us much harm.
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JC
Posts: 48

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6/25/2018
JC
Posts: 48
NJhowie: wise words, as usual. We are the buy and hold type. And, so far, only 7-8% of our networth is in individual stocks. So, it's really just a bit of fun at this point. And, a bit of diversification.


I think we will be disciplined enough to not sell in a crash. We witnessed the last crash and didn't adjust our 401Ks. The result was our 401Ks pretty much quadrupled from 2009 to 2016. So, we'll likely follow the same strategy with stocks. If and when the next crash comes, we'll likely stay put and buy some more at sales prices.
edited by JC on 6/25/2018
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30sballarddad
Posts: 1

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6/21/2018
30sballarddad
Posts: 1
It's all tracking error to the index. You need at least 25 stocks in a variety of industries to create a diversified portfolio. Alternatively, you could hold 90% in an index fund, then a handful of small individual stock positions, and you might have some fun, while not doing too much harm if you get things wrong.
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njhowie
Posts: 77

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6/16/2018
njhowie
Posts: 77
I have always purchased individual stocks and have never bought in to indexing. The problem I have with indexing is that there is no logic behind it, simply a blind faith that in the long term the biggest stocks will do best and that overall the markets will go higher. Further, there are technical factors which can skew returns both higher and lower.

I have done very well with individual stocks over the long term. I have beaten the market over the long term. However, I am an extremely conservative investor. I have no issue being out of the market entirely if I'm not comfortable with it. Over time, that's likely reduced the overall returns I may have had if I would have had my entire portfolio fully invested in an index fund. Being so conservative, even when I was "fully invested" it was only 50% of the account with the other 50% in cash.


Now, for most folks, as Warren Buffett has spoken much about, they should simply put their money in to an index fund and forget about it. It's good advice, as most folks are not equipped to properly analyze companies/stock and invest accordingly. All too often they will simply take ridiculous risk, chase whatever stock is being talked about or is being pumped and has lots of momentum. This approach often leads to losses.


Today, my concern is that in general, as a result of such a long period of declining interest rates, cost of living increases, and lately (effective) economic stagflation, more folks have become reliant/dependent upon the stock market for increasing their wealth - utilizing any investment approach. Folks these days require growth of stock market investments to be able to reach retirement. My belief is that most companies and the stock market in general is significantly overvalued at this time. The government and corporations are doing their best to keep the current bubble inflated, but is nearing the end of what is capable of being done. Rising interest rates along with idiotic economic policies coming out of the current administration will ultimately pop the bubble, and when that happens, it will do a lot of damage to those who have taken on too much risk, putting more of their net worth in to the market than they should have.

Personally, today, we have about 3% of our net worth (excluding home value - which is mortgage free and we have no debt) in the market - almost nothing. 97% is in CDs, Treasuries, and municipal bonds - not funds, but actual securities. We sleep extremely well at night and my efforts are almost mindless, focused on taking funds as the securities mature and rolling them forward in to similar at higher interest rates. I expect to be doing much the same so long as interest rates continue to rise.

Many folks in the market today have never experienced a major correction or outright crash. They only know that the market always goes higher. Many others who have been through at least one have since forgotten. Many will say they will know when to push back and take their chips off the table. Others will say they are in it for the long term and should there be a major correction or crash that they'll just stay the course, buy more, and stick with it for the long term. It's nice to say that, however, when it really happens and you see the bottom line on your accounts down 30%, 40%, possibly 50% or more, psychology has a way of taking over. For those over 50 years old and within sight of retirement, there is even more risk involved as that retirement account represents a lifetime of savings, with a lot less time to make it back. To watch it take a hefty haircut in a short period might make the difference between a carefree retirement, or having to work an additional 10 years or more. Sequence of returns risk is an important topic which most folks have no knowledge or thoughts about, and they should. This is why it's suggested to reduce risk as you get older and closer to retirement.


Whether we are talking about indexing, investing in individual companies/stocks, or investing in general, my advice is the same - invest based on your investment objective and your risk profile. Also, keep in mind that diversification does not simply mean having a broad range of stocks or simply investing in an index fund alone. Diversification also means diversification across investment categories - you should consider having some amount in cash, maybe some in bonds, maybe some in hard assets ... some amount not even in the market at all where the value would not go down should the market crash. If you stick to that, no matter what happens in the market, you should be well prepared. All too often, folks get their risk profile wrong and as a result things turn out worse than it should.
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JC
Posts: 48

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6/11/2018
JC
Posts: 48
Anybody buy individual stocks? How have you done?


We've always stuck to indexing, but recently went into stocks after the last couple dips. So far, so good. But, I have no idea how we'll do long term.
How has your long term stock investing done? Beat the market? Is it possible?
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