Moving out of ETF into growth stocks.. To do or not to?

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frotec
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Moving out of ETF into growth stocks.. To do or not to?

Post by frotec » Thu Mar 14, 2019 3:31 am

I have a portfolio 100% in S&P type ETFs (VOO, SPY etc). My friend has a portfolio of about 100 stocks that have outperformed S&P over last 20 years by about 60% (1.6 times S&P growth). (He is into growth stocks) He showed me his results and there has not been a single year when his portfolio underperformed the S&P.

His portfolio is diversified as under:
industrial 16%
Financials 15%
Utilities 15%
Consumer Staples 13%
Consumer Discretionary 11%
Real Estate 10%
Information Technologies 7%
Healthcare 5%
Materials 4%
Energy 3%
Communications 2%

1) Would it make sense for me to go with his portfolio vs S&P.

2) Is his diversification OK?

Thanks in advance for your guidance.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by Daryl » Thu Mar 14, 2019 3:37 am

What makes you think that the current trend will continue?

red5
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by red5 » Thu Mar 14, 2019 3:48 am

There are far smarter people in here who can articulate things better than I. But I would not do this. A couple things come to mind. Your friend is probably not showing you his entire picture. And also, past results will not necessarily be future results. Be careful in your decision. I would stick with the S&P 500.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by msk » Thu Mar 14, 2019 4:06 am

I would certainly listen to your friend's advice/suggestions/stock picks if you believe that his NW is at least several times yours. Otherwise it's just hot air. To make big money in stock picking you have to bet heavy on a handful, not on 100 stocks. Any stock picker will tell you that if you manage to pick a handful of multi-baggers during a whole lifetime you are doing very well. Most people stand as much chance of picking a multi-bagger as they do of ending with a wipe-out. Or is he just showing you some historical what if? The latter is absolute rubbish.

Warren Buffett spent years to pick just two investment managers. Since they were hired, both have underperformed the SP500 slightly (but so has Warren himself). Tell your friend to pick up paper evidence of all his past trades and rush to Warren to get a job @ many million $ a year.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by ivk5 » Thu Mar 14, 2019 4:21 am

I’m content to take what the market gives. I have no interest in trying to beat the market, since by definition that also comes with risk of lagging behind the market. I would rather focus on increasing income/contributions, managing expenses, spending time with my family and enjoying life.

But to each his/her own.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by mhadden1 » Thu Mar 14, 2019 4:32 am

ivk5 wrote:
Thu Mar 14, 2019 4:21 am
I’m content to take what the market gives. I have no interest in trying to beat the market, since by definition that also comes with risk of lagging behind the market. I would rather focus on increasing income/contributions, managing expenses, spending time with my family and enjoying life.

But to each his/her own.
This is a terrific Bogleheads mission statement. Hopefully the OP will realize that his takeaway is "Stay the course".
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by livesoft » Thu Mar 14, 2019 7:40 am

Over 20 years, 1.6 times the S&P500 growth is a mere 2.3% extra per year. This is great, but I can see a serious problem: Taxes.

If such an investor did just a few short-term term trades or even sold for long-term capital gains, then it is VERY LIKELY that they did not remove money to pay the taxes, but instead paid the taxes from OUTSIDE the account perhaps with paycheck money by extra withholding on their earned income. Thus, the taxes were paid with added money which did not go into their outperformance calculation. That would make the calculation appear to have a better performance than an index fund with virtually no taxes.

OTOH, they probably did some tax loss harvesting, too.

And another thing: I have seen portfolio performances like this where just one stock pick accounts for most of the performance. Remove that one single great pick from the calculation and it doesn't look so good. In fairness, one can remove the worst performer, too.

The OP has to decide for themselves what to do.

Added: The extra 2.3% a year is pretty close to the dividends paid out by companies. See @FFR1846's question that follows about dividends.
Last edited by livesoft on Thu Mar 14, 2019 9:14 am, edited 1 time in total.
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by hdas » Thu Mar 14, 2019 7:46 am

frotec wrote:
Thu Mar 14, 2019 3:31 am

1) Would it make sense for me to go with his portfolio vs S&P.

2) Is his diversification OK?

Thanks in advance for your guidance.
It’s all good if you are willing to do the homework and think for yourself. What would be the selection criteria for the stocks in your portfolio?
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by 3funder » Thu Mar 14, 2019 7:54 am

ivk5 wrote:
Thu Mar 14, 2019 4:21 am
I’m content to take what the market gives. I have no interest in trying to beat the market, since by definition that also comes with risk of lagging behind the market. I would rather focus on increasing income/contributions, managing expenses, spending time with my family and enjoying life.

But to each his/her own.
+1. Couldn't have said it better myself.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by Jack FFR1846 » Thu Mar 14, 2019 7:59 am

Did your friend compare with the S&P total returns (includes dividends re-invested)? Or did he do like bad chicken dinner salesmen do and just show the difference in the S&P index 20 years ago and today, letting the dividends magically float away?
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frotec
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by frotec » Thu Mar 14, 2019 9:24 am

@Jack FFR1846 In response to your question My friend took value of S&P in 2000 and S&P now and divided the two to get the growth in S&P. He then took his entire bucket of his stocks on the same dates and divided the values to get the growth for his bucket. The growth for his bucket was 1.6 times the growth for S&P. Is there and error in his calculation?? (in both case it is dividend reinvested)

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by DB2 » Thu Mar 14, 2019 10:11 am

frotec wrote:
Thu Mar 14, 2019 3:31 am
I have a portfolio 100% in S&P type ETFs (VOO, SPY etc). My friend has a portfolio of about 100 stocks that have outperformed S&P over last 20 years by about 60% (1.6 times S&P growth). (He is into growth stocks) He showed me his results and there has not been a single year when his portfolio underperformed the S&P.

His portfolio is diversified as under:
industrial 16%
Financials 15%
Utilities 15%
Consumer Staples 13%
Consumer Discretionary 11%
Real Estate 10%
Information Technologies 7%
Healthcare 5%
Materials 4%
Energy 3%
Communications 2%

1) Would it make sense for me to go with his portfolio vs S&P.

2) Is his diversification OK?

Thanks in advance for your guidance.
I believe this could happen. For example, if he bought a lot of Amazon 20 years ago that alone could account for a better than S%P performance. There could be some luck involved and I would not want to bet my odds on this strategy.

ohai
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by ohai » Thu Mar 14, 2019 10:15 am

Yes, because no one has ever bragged about or inflated their investment track record ever...

Seriously though, in theory, if you're looking to juice your returns with some additional risk, you should be better off with slight leverage in the market allocation, rather than trying to reweight things based on what worked 20 years ago. Keep in mind that the past 20 years saw the rise of a whole new investment class in tech giants - the growth has already happened.

In theory anyway.

MittensMoney
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by MittensMoney » Thu Mar 14, 2019 10:29 am

Growth stocks are also the ones losing 50-80% of their value in a 2000 or 2008 type scenario.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by bondsr4me » Thu Mar 14, 2019 10:36 am

frotec wrote:
Thu Mar 14, 2019 3:31 am
I have a portfolio 100% in S&P type ETFs (VOO, SPY etc). My friend has a portfolio of about 100 stocks that have outperformed S&P over last 20 years by about 60% (1.6 times S&P growth). (He is into growth stocks) He showed me his results and there has not been a single year when his portfolio underperformed the S&P.

His portfolio is diversified as under:
industrial 16%
Financials 15%
Utilities 15%
Consumer Staples 13%
Consumer Discretionary 11%
Real Estate 10%
Information Technologies 7%
Healthcare 5%
Materials 4%
Energy 3%
Communications 2%

1) Would it make sense for me to go with his portfolio vs S&P.

2) Is his diversification OK?

Thanks in advance for your guidance.
Why not take 1/2 of your portfolio and follow his investments and the other half in SPYG.
Then follow along to see how each performs.
You can always modify as time goes by.
Is this market timing? who cares.
this is how you will learn what is good for YOU; not me or your friend or anyone here.
Good Luck!

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by nisiprius » Thu Mar 14, 2019 10:49 am

Don't do it.

Tom Paine wrote:
Is it more probable that nature should go out of her course or that a man should tell a lie? We have never seen, in our time, nature go out of her course. But we have good reason to believe that millions of lies have been told in the same time. It is therefore at least millions to one that the reporter of a miracle tells a lie.
"There has not been a single year when his portfolio underperformed the S&P" is not quite a miracle, but it is better than Warren Buffett has done. Check the table on page 2 of the 2018 Berkshire Hathaway annual report. In the twenty-year period 1999-2018 inclusive, Berkshire Hathaway underperformed the S&P 500 seven times: in 1999, 2003, 2004, 2005, 2009, 2011, and 2015. In three of those years, it did so by losing money when the S&P 500 was making money.

So, which do you think is more probable: that your "friend" is better than Warren Buffett, or that, let's put this politely, there is something about the numbers and the situation that you do not understand?

You probably can't discuss this meaningfully with him, because the hard questions sound accusatory. It would be like a cross-examination. And he may be one of those slick people who has an answer for everything--"anyone can outperform Warren Buffett easily if they only have to manage millions instead of billions," for example.

But let me point out a number of possible danger areas.

First, he may actually be trying to scam you or cheat you. This does happen, and it's not even rare. (A warning sign would be any suggestion on his part that he can get you in on a deal in which you and he are going to work as partners to cheat somebody else. If there is any hint at all of anything like this, this is a real con game and you need to run.)

Second, he may just be lying, as in Tom Paine's quotation.

Third, and this is a common way in which people even fool themselves, he may have more than one "portfolio." He may have been trying out several strategies and showing you only the one that worked.

Fourth, he may not have actually been invested in this strategy or portfolio. He may have only been using it for a few years, and may be showing you "backtested results" on how he thinks it would have performed if he had been invested that way since 1999, but he was not. I can explain in more detail why this would be a fatal problem, if you don't see it already. Shoulda, woulda, coulda.

Fifth, he may have bungled his calculations, as the "Beardstown Ladies" did. This was an investment club of sixteen women who met in a church basement in Beardstown, Illinois during the 1980s and 1990s. In 1995 they published a bestselling book entitled "The Beardstown Ladies' Common-Sense Investment Guide: How We Beat the Stock Market - And How You Can Too." It turned out they had made a major blunder in how they calculated their annual return and they hadn't beaten the stock market at all.

FFR1846 has suggested one very likely way in which the calculations could have been bungled--comparing total return of the supposedly superior portfolio to price only of the S&P 500, and unfortunately you don't give enough detail to know whether that's what happened here.
Last edited by nisiprius on Thu Mar 14, 2019 11:28 am, edited 2 times in total.
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by jyoung » Thu Mar 14, 2019 10:50 am

I'm not saying that there aren't people out there who pick stocks that manage to beat the s&p over the long term, be it luck or skill. But I also know that most people only seem to win when they go to Vegas too... Not sure how that place keeps the lights on from the stories I hear. :confused

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by nisiprius » Thu Mar 14, 2019 11:19 am

Just for fun, rather than considering somebody's personal stock portfolio, let's see what we can do if we are not careful about how we make the comparison. That is, I will intentionally bungle the calculation and get a false result.

??? You said "twenty years." A twenty-year period ending at year-end 2018 begins at the start of 1999, not 2000...

The S&P 500 price index, the one that is usually quoted, e.g. in headlines,
--opened at 1,469.25 on 1/3/1999
--closed at 2,506.85 on 12/31/2018

"My friend took value of S&P in 2000 and S&P now and divided the two to get the growth in S&P." OK, that would be 2,506/1,469 = 1.71. An increase of a total of 71%, cumulatively, over 20 years.

"He then took his entire bucket of his stocks on the same dates and divided the values to get the growth for his bucket." Alas, this just isn't clear enough. However, let's consider the single most popular investment recommended in this forum: the Vanguard Total Stock Market Index Fund, VTSMX. We can chart the growth of this mutual fund on Morningstar:

Source

Image

It shows that if I had opened a brokerage account and put $10,000 into the Total Stock Market fund on the last day of 1998--so that I'd have shown $10,000 in the account in the morning of 1/3/1999--and then done nothing at the end of 2018 my account statement online would have shown $36,379.19.

By the way, that's exactly how it really works. The Morningstar growth charts jibe with what happen in my accounts on a few occasions when I've checked.

So, an investment in the Vanguard Total Stock Market Index Fund, if we do the division, $36,379.19 = 3.64.

So, the news-headline price value of the S&P 500 gained 71%.

And my account would have gained 264%.

So my account would have grown, 264/71 = 3.7 times as much as the S&P 500. Not just your friend's 1.6X, but 3.7X.

Could your friend actually be making this mistake? It's unlikely, but it's possible.
Last edited by nisiprius on Thu Mar 14, 2019 11:30 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by frotec » Thu Mar 14, 2019 11:25 am

@bondsr4me Good suggestion. I am thinking of paper trading initially.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by nisiprius » Thu Mar 14, 2019 11:26 am

jyoung wrote:
Thu Mar 14, 2019 10:50 am
I'm not saying that there aren't people out there who pick stocks that manage to beat the s&p over the long term, be it luck or skill. But I also know that most people only seem to win when they go to Vegas too... Not sure how that place keeps the lights on from the stories I hear. :confused
True story. A friend of mine, and a lovely honest person, spent a weekend at a casino in Atlantic City and told me the week after that she "had won." I was not asking any probing questions, just chatting, and eventually it emerged that a) She really had won. On Saturday. b) Also, she had lost. On Sunday. c) Also, the amount she lost on Sunday was larger than the amount she had won on Saturday. d) But on Saturday, she had stuck to her system, and on Sunday, she hadn't had the nerve to follow it, had not stuck to her system, and "outsmarted herself" (her words), and if she had followed her system on Sunday, she would have won on Sunday, too.

Therefore, in her mind, she went to a casino for a weekend and won.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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frotec
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by frotec » Thu Mar 14, 2019 11:40 am

@ nisiprius Great explanation. Thanks for taking time to jot down this example. Going along the lines of your example for the time period S&P went up 71% (1.7 times) his portfolio was up 2.71 times. He divided 2.71 by 1.7 to get the the 1.6 I listed. Yes, his portfolio had some churn and there must be tax consequences and some losses that will reduce the gains but still it was not shabby. I am told that M* also have some news letters that beat S&P handsomely hence I am confused at people indicating that beating S&P is not happening much. I am not very astute when it comes to Investing hence my confusion. I apologize for my ignorance.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by ivk5 » Thu Mar 14, 2019 12:02 pm

frotec wrote:
Thu Mar 14, 2019 11:40 am
I am not very astute when it comes to Investing hence my confusion. I apologize for my ignorance.
Your "friend" knows that...

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by frotec » Thu Mar 14, 2019 12:21 pm

@ivk5 My friend is not trying to sell me anything..All he did was mention to me that his portfolio has done better than S&P and if I wanted to emulate it he would be happy to share his holdings..It seems to me that on this forum people prefer ETFs to individual stocks..(even though he has a well diversified bucket of over 100 stocks).

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by bondsr4me » Thu Mar 14, 2019 12:53 pm

frotec wrote:
Thu Mar 14, 2019 11:25 am
@bondsr4me Good suggestion. I am thinking of paper trading initially.
+1

sounds like a very wise thing to do before laying any money on the table!

Good Luck!

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by David Jay » Thu Mar 14, 2019 1:00 pm

frotec wrote:
Thu Mar 14, 2019 11:40 am
Going along the lines of your example for the time period S&P went up 71% (1.7 times) his portfolio was up 2.71 times. He divided 2.71 by 1.7 to get the the 1.6 I listed.
It is a very common mistake to compare the SP500 Index to other portfolios, but the Index only represents the value (selling price) of the 500 stocks. The stocks also pay dividends, at about 2% each year. To capture the total performance of the SP 500 your friend should compare his portfolio to the SP500 Total Return (which does include the dividends).
I am told that M* also have some news letters that beat S&P handsomely hence I am confused at people indicating that beating S&P is not happening much.
Portfolios are always beating the SP500. In any given year probably thousands of portfolios can beat the SP500. But tens of thousands of possible portfolios underperform the SP500. The very smart fund managers who run active mutual funds do not, on average, outperform their respective indexes after expenses.

So you cannot use past performance as the single evaluation as to whether or not a given portfolio will outperform in the future.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by mhadden1 » Thu Mar 14, 2019 1:26 pm

frotec wrote:
Thu Mar 14, 2019 12:21 pm
It seems to me that on this forum people prefer ETFs to individual stocks..(even though he has a well diversified bucket of over 100 stocks).
You are correct - the Bogleheads approach is to buy and hold inexpensive index funds, rather than picking and trading individual stocks.
It is certainly possible to get better returns by trading stocks. Bogleheads would ascribe this mostly to luck rather than skill. It is also possible that to get his returns, your friend took more risk. A really interesting evaluation of your friend's portfolio would entail an accurate comparison of risk-adjusted returns. This is not rocket science but for me it would involve more than a trivial amount of work.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by carol-brennan » Thu Mar 14, 2019 1:28 pm

frotec wrote:
Thu Mar 14, 2019 3:31 am
Moving out of ETF into growth stocks.. To do or not to?
No. Bad idea.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by bondsr4me » Thu Mar 14, 2019 2:15 pm

frotec wrote:
Thu Mar 14, 2019 11:25 am
@bondsr4me Good suggestion. I am thinking of paper trading initially.
you might be able to do some performance using Portfolio Visualizer.
it would be interesting to check the performance, not that it will be what happens going forward.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by unclescrooge » Thu Mar 14, 2019 2:23 pm

If you think you need more excitement in your portfolio, add in some QQQs or emerging market funds.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by atdharris » Thu Mar 14, 2019 2:54 pm

What is he investing in? It's interesting that he isn't tech heavy and beating the market.

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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by nisiprius » Thu Mar 14, 2019 3:21 pm

frotec wrote:
Thu Mar 14, 2019 11:40 am
...I am told that M* also have some news letters that beat S&P handsomely hence I am confused at people indicating that beating S&P is not happening much...
Did you hear about the bet Warren Buffett made with a hedge fund manager, Ted Seides? Buffett bet a million dollars--with the winner giving all winnings to the charity of their choice--that Seides could not put together a portfolio of five or more hedge funds that would beat the Vanguard 500 Index Fund over the ten-year period 2008-2017 inclusive. Seides took the bet. He lost it.

Consider the following thought experiment. There are over 18,000 mutual funds in the US. I can't find the exact numbers but roughly half of them are stock mutual funds. So, let's say there are 9,000 funds. Let's say we look at them starting in some particular year.

By chance alone, 4,500 of them will beat the S&P in the first year.

By chance alone, half of those 4,500--2,250--will beat the S&P again next year.

In successive years, 1125 will have beaten the S&P three years in a row; 562 for four years; 281, 140, 70, 38, 17, and finally, there will be 8 funds that have beaten the S&P 500 ten years running, just by chance alone. They didn't have any magic, there's no rational reason to expect them to have more than half a chance of beating them again the next year.

But, which funds will you hear about and read about? Not the ones that fell short. You will hear about the eight funds that beat the S&P 500, not the 8,992 that didn't. And people will point to those eight and say, "look! people are beating the S&P, just look at these funds."

The Legg Mason Value Trust, managed by Bill Miller, beat the S&P 500 in 1991. And then again in 1992. And then again in 1993, 1994, 1995, 1996,1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005. People pointed to him as absolute proof that there were people who knew how to beat the S&P 500. Someone even wrote a book about him:

Image

So, in 2005, you would probably have thought that his mutual fund was a pretty safe bet, right?

I'll bet you've never heard of Bill Miller. Because in 2008, when the stock market (orange) crashed, his fund (blue) crashed much more severely. He gave back all of the cumulative gains he'd made against the S&P 500 in less than three years. But nobody talks much about it because his fund failed to beat the S&P 500, finally, after all.

Image
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by onourway » Thu Mar 14, 2019 3:34 pm

frotec wrote:
Thu Mar 14, 2019 12:21 pm
@ivk5 My friend is not trying to sell me anything..All he did was mention to me that his portfolio has done better than S&P and if I wanted to emulate it he would be happy to share his holdings..It seems to me that on this forum people prefer ETFs to individual stocks..(even though he has a well diversified bucket of over 100 stocks).
I hope the point has been adequately driven home by others, but if you would choose your friend’s portfolio based on out-performance that has occurred in the past, why would you not, instead, choose a mutual fund that has been wildly successful over some past period? Many have certainly had performance better than your friend’s stock picks.

The reason you should not do either of these things is because what happened in the past doesn’t tell you anything at all - nothing - about what will happen in the future. Nisiprius does this very well with his posts - brings up funds or fund managers that have been the darling of Wall Street at some point in the past - only to find out that at some point their funds imploded. It happens to nearly everyone who sticks around long enough. I make it a bit of a game myself when reading finance books to google fund managers who were spoken of in high esteem at the time of the book’s publication. It’s extremely informative how often their funds have gone on to perform poorly, often closed entirely.

Carol88888
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by Carol88888 » Thu Mar 14, 2019 3:46 pm

100 stocks? This is practically a stealth index. Cramer even says that 5 stocks is about all the average investor can easily follow by listening to earnings reports and staying on top of developments in each field. All this takes time and guess what - there are people who can do this much better than you can because they are all professionally trained to analyze balance sheets and they get their information faster than you.

So really it's like entering a high stakes poker game when you don't have any edge. Does that sound like a good bet?

ivk5
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by ivk5 » Thu Mar 14, 2019 3:50 pm

Something tells me OP is not here to be converted.

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CyclingDuo
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by CyclingDuo » Thu Mar 14, 2019 4:07 pm

frotec wrote:
Thu Mar 14, 2019 3:31 am
I have a portfolio 100% in S&P type ETFs (VOO, SPY etc). My friend has a portfolio of about 100 stocks that have outperformed S&P over last 20 years by about 60% (1.6 times S&P growth). (He is into growth stocks) He showed me his results and there has not been a single year when his portfolio underperformed the S&P.

His portfolio is diversified as under:
industrial 16%
Financials 15%
Utilities 15%
Consumer Staples 13%
Consumer Discretionary 11%
Real Estate 10%
Information Technologies 7%
Healthcare 5%
Materials 4%
Energy 3%
Communications 2%

1) Would it make sense for me to go with his portfolio vs S&P.

2) Is his diversification OK?

Thanks in advance for your guidance.
Read the Bogleheads Wiki on Passively Managing Individual Stocks here:

https://www.bogleheads.org/wiki/Passive ... ual_stocks

In Common Sense on Mutual Funds, [1] Jack Bogle suggests that a reasonable alternative to an index fund for some investors would be to hold a well-diversified portfolio of individual stocks, as long as they are held long-term, with a minimum of trading costs incurred. This article outlines some suggestions for how to build a portfolio of individual stocks to cover at least part of one's overall stock allocation. It will also attempt to summarize the advantages and possible pitfalls of doing so.

Note that the discussion here assumes that one is not trying to beat the market, but rather, by passively managing individual stocks create a "DIY index fund."


Read the studies at the above linked page with regard to a portfolio such as 100 stocks that your friend holds.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

TropikThunder
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by TropikThunder » Thu Mar 14, 2019 9:03 pm

frotec wrote:
Thu Mar 14, 2019 11:40 am
@ nisiprius Great explanation. Thanks for taking time to jot down this example. Going along the lines of your example for the time period S&P went up 71% (1.7 times) his portfolio was up 2.71 times. He divided 2.71 by 1.7 to get the the 1.6 I listed. Yes, his portfolio had some churn and there must be tax consequences and some losses that will reduce the gains but still it was not shabby. I am told that M* also have some news letters that beat S&P handsomely hence I am confused at people indicating that beating S&P is not happening much. I am not very astute when it comes to Investing hence my confusion. I apologize for my ignorance.
I fear you've missed the entire point of nisi's post. Your friend's portfolio beat the S&P500 price return but that price return does not include dividends. So, no, he didn't beat the S&P500. In fact, VTSMX (Total Stock which essentially matches the S&P500) beat your friend's portfolio.
nisiprius wrote:
Thu Mar 14, 2019 11:19 am
Could your friend actually be making this mistake? It's unlikely, but it's possible.
It appears the OP's friend is doing exactly that given the repeated references to the starting and ending values of the index, which as has been discussed ad nauseum does not include dividends.

GoldenFinch
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by GoldenFinch » Thu Mar 14, 2019 9:39 pm

ivk5 wrote:
Thu Mar 14, 2019 12:02 pm
frotec wrote:
Thu Mar 14, 2019 11:40 am
I am not very astute when it comes to Investing hence my confusion. I apologize for my ignorance.
Your "friend" knows that...
...and remember that it’s a bad idea to invest in things you do not understand.

Topic Author
frotec
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by frotec » Thu Mar 14, 2019 10:45 pm

@CyclingDuo Thanks for that link. I will study it in detail. Your input is very helpful

Topic Author
frotec
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Joined: Sat Mar 24, 2018 10:19 am

Re: Moving out of ETF into growth stocks.. To do or not to?

Post by frotec » Thu Mar 14, 2019 10:57 pm

@ nisiprius Thanks.. This post from you is an eye opener Thanks for sharing. Really appreciate it.

AlphaLess
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by AlphaLess » Thu Mar 14, 2019 11:32 pm

NO...

The reason for 3 dots: forum does not allow 2-letter answers. Must have at least 5.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

msk
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Re: Moving out of ETF into growth stocks.. To do or not to?

Post by msk » Fri Mar 15, 2019 2:12 am

Keeping track of the returns on a live portfolio is MUCH more complicated than one expects at first sight. Our own live portfolios have an endless series of inflows (additional investing) and cash outs (to buy a car/house?). All these have to be accounted for. Basically you have to use short windows (e.g. monthly steps, daily takes excessive effort) to account for all inflows and cash-outs in order to calculate the percentage rate of return for that brief time-step. Then all the monthly percentages have to be chain-linked to get the annual percentage rate of return. The whole lot has to be chain-linked so that you get a COMPOUND rate, over one year or 20 years. I did this diligently over decades and I was very happy to conclude that I had beaten the SP500 soundly, as an index, by picking individual stocks, SPY, options, etc. etc. but I was always worried that I had not taken precise account of dividends, for which I was clobbered by a 30% withholding tax. Duh! I finally found the charts for the SP500TR (total return with dividends reinvested untaxed). Just Google SP500TR and you can find the Yahoo! charts. So I finally got deflated. My performance did NOT beat the SP500TR but it did beat the SP500 net of dividends very handily, despite the 30% withholding tax. It also makes you stare in awe at Warren Buffett who has beaten the SP500TR over decades. Mind you I did carry about 40% of that portfolio in BRK and another 40% in SPY for decades :mrgreen: Now, 4 decades later, I have sold all my RE and individual stocks and am steering towards worldwide stocks by market weight. I have to be patient to sell some stocks that are cyclically depressed... Unlikely that I will live to see how things pan out over the next 4 decades but I am trying to maximize the pot for my heirs :annoyed

All young investors wish to believe that they can beat the SP500 and without actually trying it out over a decade or two will never know for sure. I would suggest that the OP opens a brokerage account and play with options. Options allow leverage with moderate risk and they do show rather quickly whether you have the nose for stock picking. Do not play with options without first reading and digesting a good book on options strategies (so that you know how to limit your losses) and please treat this brokerage account as your play money. Keep your investments in a separate account in sober stuff like the SP500. Predictably, you will make good money initially, get sucked into risking ever more $, then wham! Do not confuse beginners' luck with acumen. Evaluate your performance over acouple of years before increasing your stakes beyond play money. Good luck!

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