Funds vs stocks

[cardtrick]

Yes, you get diversification with funds but if you have a large enough balance, why not just buy individual stocks and save the fees? Even if expense ratios are say 0.10%, why not just buy and hold stocks and pay zero fees? I learnt in my modern portfolio theory class that you can create a portfolio of about 20 stocks that provides about the same level of diversification as the S&P 500. No need to buy all 500 stocks or index funds.

Any opinions on whether this is a good strategy? I'm planning on just buying and holding individual stocks in my Roth IRA. I suspect that I won't find many people here who are fans of this kind of investing...

[Petunia 100]

Yes, you get diversification with funds but if you have a large enough balance, why not just buy individual stocks and save the fees? Even if expense ratios are say 0.10%, why not just buy and hold stocks and pay zero fees? I learnt in my modern portfolio theory class that you can create a portfolio of about 20 stocks that provides about the same level of diversification as the S&P 500. No need to buy all 500 stocks or index funds.

Any opinions on whether this is a good strategy? I'm planning on just buying and holding individual stocks in my Roth IRA. I suspect that I won't find many people here who are fans of this kind of investing...

The biggest obstacle I would face is choosing the buy-in price. Paying too much for a stock can kill your return for years.

You are right that expense ratios can be completely avoided with this method. Vanguard's VTI has an expense ratio of .05%. I believe that Schwab has a total market etf with an expense ratio of .04%. That's not very much of a drag, and IMO is worth it for me.

Will you try to mimic mid and small cap indices too, or do you wish to hold a proxy for the S& P 500 only?

[Retired To Win]

Take Control With a Portfolio of Individual Stocks

I made the decision 4 years ago to build up my own stock portfolio rather than hold mutual funds. I realized that the mutual fund managers were just as much out of control during a market downturn as any individual investor. So I took control of my own portfolio, dumped all the mutual funds and assembled a book that holds between 20 and 24 evenly-weighted dividend-paying stocks. I have never regretted it.

Retired to Win
making the most of my time and my money

[cardtrick]

The biggest obstacle I would face is choosing the buy-in price. Paying too much for a stock can kill your return for years.

You are right that expense ratios can be completely avoided with this method. Vanguard's VTI has an expense ratio of .05%. I believe that Schwab has a total market etf with an expense ratio of .04%. That's not very much of a drag, and IMO is worth it for me.

Will you try to mimic mid and small cap indices too, or do you wish to hold a proxy for the S& P 500 only?

I don't know what exactly I'm going to do. I hold enough of my assets in funds through my 401K. Terrible choices but diversified. I'm thinking of buying great names in depressed sectors once a year when I fund the Roth. As long as I can be confident that the company I'm buying will not go bankrupt, I should be fine over the long term.

I won't worry too much about buy prices, just like fund investors. They average in. I will just buy once a year. And every year, I plan to buy different companies, to diversify.

[jIM_Ohio]

Yes, you get diversification with funds but if you have a large enough balance, why not just buy individual stocks and save the fees? Even if expense ratios are say 0.10%, why not just buy and hold stocks and pay zero fees? I learnt in my modern portfolio theory class that you can create a portfolio of about 20 stocks that provides about the same level of diversification as the S&P 500. No need to buy all 500 stocks or index funds.

Any opinions on whether this is a good strategy? I'm planning on just buying and holding individual stocks in my Roth IRA. I suspect that I won't find many people here who are fans of this kind of investing...

You are correct, individual stocks are cheaper.

To own and hold...
what about asset allocation and the cost to acquire?

If you plan to keep the Roth for 40-60 years, how do you know the companies you own now, will exist in 60 years?
And even if it is a large company which exists, how do you know it represents the asset class you want correctly? GE was created as an energy company, now it is health care and financial.

EDS and Eastman Kodak were decent investments 15 and 30 years ago.

The mutual fund route makes those transitions efficient for diversification. At $5000-$6000 per year going into Roth, I doubt diversification can be achieved until account balance approaches $100-$300k

[jIM_Ohio]

The biggest obstacle I would face is choosing the buy-in price. Paying too much for a stock can kill your return for years.

You are right that expense ratios can be completely avoided with this method. Vanguard's VTI has an expense ratio of .05%. I believe that Schwab has a total market etf with an expense ratio of .04%. That's not very much of a drag, and IMO is worth it for me.

Will you try to mimic mid and small cap indices too, or do you wish to hold a proxy for the S& P 500 only?

Keep in minds both individuals and mutual funds have the same buy in price, just sayin

[cardtrick]

You are correct, individual stocks are cheaper.

To own and hold...
what about asset allocation and the cost to acquire?

If you plan to keep the Roth for 40-60 years, how do you know the companies you own now, will exist in 60 years?
And even if it is a large company which exists, how do you know it represents the asset class you want correctly? GE was created as an energy company, now it is health care and financial.

EDS and Eastman Kodak were decent investments 15 and 30 years ago.

The mutual fund route makes those transitions efficient for diversification. At $5000-$6000 per year going into Roth, I doubt diversification can be achieved until account balance approaches $100-$300k

At $3.95 per trade, my cost would be a one-time charge of 0.07% for a $5500 trade. If companies get into more than one sector, even better.. Because that gives you even more diversification without the transaction cost. I will only make trades where my transaction costs are under 0.10%.

I figure that in 10 years, I'll own 10 different companies and if one of them goes under, that will not destroy my portfolio.

[Petunia 100]

Keep in minds both individuals and mutual funds have the same buy in price, just sayin

That's true. However, if Stock A is overpriced, there is a big difference to my bottom line if I am buying 5k of Stock A, or if I am buying 5k of a total market fund which includes a small slice of Stock A.

[jIM_Ohio]

That's true. However, if Stock A is overpriced, there is a big difference to my bottom line if I am buying 5k of Stock A, or if I am buying 5k of a total market fund which includes a small slice of Stock A.

That is either a volatility issue or an asset allocation issue, not a buy in issue. In 40 years the exact price you purchased at should not matter if the security was a good buy.

[feh]

I'm willing to pay < .1% for true diversification (hundreds or thousands of stocks) and the convenience of not having to buy/sell stocks.

Your chosen stocks, as a group, would need to come within .1% of the total market for this strategy to make sense. Professional fund managers cannot beat the indices. What makes you think you'll be able to?

Just buy the total market index.

[Petunia 100]

That is either a volatility issue or an asset allocation issue, not a buy in issue. In 40 years the exact price you purchased at should not matter if the security was a good buy.

Paying too much would be an issue for me. YMMV.

[cardtrick]

I'm willing to pay < .1% for true diversification (hundreds or thousands of stocks) and the convenience of not having to buy/sell stocks.

Your chosen stocks, as a group, would need to come within .1% of the total market for this strategy to make sense. Professional fund managers cannot beat the indices. What makes you think you'll be able to?

Just buy the total market index.

That's 0.1% a year. Mine would be a one time fee of 0.07%. I don't expect to beat the index. I just think over time, as I diversify, I'll track the index. It definitely won't perfectly track, but I'm fine with that. I think I have a pretty good ability to pick good stocks. I work in the industry. Although, that doesn't mean much.

[DisciplinedSaver101]

I learned the hard way. It's tough to beat the S&P 500 Index over the long run. I would get the index and forget about it until you retire.

[humandraydel]

Yes, you get diversification with funds but if you have a large enough balance, why not just buy individual stocks and save the fees? Even if expense ratios are say 0.10%, why not just buy and hold stocks and pay zero fees? I learnt in my modern portfolio theory class that you can create a portfolio of about 20 stocks that provides about the same level of diversification as the S&P 500. No need to buy all 500 stocks or index funds.

Any opinions on whether this is a good strategy? I'm planning on just buying and holding individual stocks in my Roth IRA. I suspect that I won't find many people here who are fans of this kind of investing...

How much short term tracking error are you willing to deal with? Imagine 2009 - if the S&P500 is down 50%, are you okay being down 65%? 70%?

I ask in all seriousness. In 2007 I held a "basket" of stocks in my Roth IRA (which was maybe 25% of my assets). By the middle of 2008 after about a 25% drop, I no longer felt comfortable (okay, I panicked!) with such a small number of stocks. I sold every individual stock I owned and bought Vanguard index funds on the same day. As the market continued to tank, the fact that I was as diversified as possible is what helped me stay IN the market the entire time - I've been 100% stocks since I started investing in 2005.

[cardtrick]

How much short term tracking error are you willing to deal with? Imagine 2009 - if the S&P500 is down 50%, are you okay being down 65%? 70%?

I ask in all seriousness. In 2007 I held a "basket" of stocks in my Roth IRA (which was maybe 25% of my assets). By the middle of 2008 after about a 25% drop, I no longer felt comfortable (okay, I panicked!) with such a small number of stocks. I sold every individual stock I owned and bought Vanguard index funds on the same day. As the market continued to tank, the fact that I was as diversified as possible is what helped me stay IN the market the entire time - I've been 100% stocks since I started investing in 2005.

My portfolio now is too small for it to matter. I just made my first contribution to Roth. Maybe, when I get up to $100K or higher, I might reconsider. But, by then, I'll have at least 10 stocks.

I have a strategy. I'm going to be buying stocks in beaten down sectors. Stocks that have very little risk of bankruptcy. Stocks that are among the best in their industry.