Why dismiss sectors?

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milosz19
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Why dismiss sectors?

Post by milosz19 » Thu Oct 18, 2018 1:34 pm

I have been reading this forum for quite some time, paying attention to people's views on asset allocation, investment strategies etc. It seems to me that most Bogleheads dislike sectors. While I see why you should not put a big chunk of your money into a specific sector, I do not quite see why a person should avoid increasing the weight of an under-weighted sector such as utilities. Could you please shed some light on this issue?

Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle? Of course, some will say that the bull market can continue and we have no idea when the bull will end, but these seem like quality sectors in general. (I am considering VPU and VDC)
Lastly, are utilities and staples inappropriate for an aggressive investor as these tend to pay high dividends?

mak1277
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Re: Why dismiss sectors?

Post by mak1277 » Thu Oct 18, 2018 1:37 pm

My reason: Because I don't know enough, and don't have enough desire to do the research, to have an opinion on which sector(s) are better than others. Total market makes sure I have some of everything and I don't have to think about it. Perfect.

delamer
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Re: Why dismiss sectors?

Post by delamer » Thu Oct 18, 2018 1:39 pm

It seems that you at first are arguing that utilities are underweighted but then are considering overweighting them.

I don’t understand your argument.

Ron Scott
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Re: Why dismiss sectors?

Post by Ron Scott » Thu Oct 18, 2018 1:51 pm

I think most here avoid investing in sectors vs. TSM because they believe their net return will be higher with TSM.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Alexa9
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Re: Why dismiss sectors?

Post by Alexa9 » Thu Oct 18, 2018 1:58 pm

It is speculative and active investing as much as picking stocks. The sectors are already priced efficiently. Name one sector you're bullish on and there are likely as many people bearish. Unpredictable.

Jack FFR1846
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Re: Why dismiss sectors?

Post by Jack FFR1846 » Thu Oct 18, 2018 2:05 pm

I buy the entire market on a cap weighted basis.

Utilities? Yah, I got those.
Consumer? Sure
Transportation, Energy, Technology, Health Care, Financial, Manufacturing, Auto? Yup, yup.....yup.

I bought the whole market. There's nothin' I ain't got. Why do I have to mess it all up by looking for the needle in my haystack. I know it's in there. I know I own it.
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JoMoney
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Re: Why dismiss sectors?

Post by JoMoney » Thu Oct 18, 2018 2:19 pm

milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
I have been reading this forum for quite some time, paying attention to people's views on asset allocation, investment strategies etc. It seems to me that most Bogleheads dislike sectors. While I see why you should not put a big chunk of your money into a specific sector, I do not quite see why a person should avoid increasing the weight of an under-weighted sector such as utilities. Could you please shed some light on this issue?

Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle? Of course, some will say that the bull market can continue and we have no idea when the bull will end, but these seem like quality sectors in general. (I am considering VPU and VDC)
Lastly, are utilities and staples inappropriate for an aggressive investor as these tend to pay high dividends?
I don't "dismiss" sectors, I dismiss slice-n-dice portfolios altogether. I think it's an unnecessary complication, that isn't likely to add anything to my portfolio but an element of gambling as I try to guess what I think will outperform (despite having no reason other than luck for why my choice would make a difference).

Utilities and Staples tend to be less volatile, slower growing, higher dividend stocks. That doesn't strike me as the type of stocks an "aggressive investor" would target. In a low interest rate environment, I would think companies that can reinvest capital and grow the companies equity intrinsically would be more valuable than a company paying out high dividends where the investor will pay market multiples on the equity to buy more shares.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

milosz19
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Re: Why dismiss sectors?

Post by milosz19 » Thu Oct 18, 2018 2:29 pm

Thank you, I really appreciate your feedback.

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ruralavalon
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Re: Why dismiss sectors?

Post by ruralavalon » Thu Oct 18, 2018 2:33 pm

milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
I have been reading this forum for quite some time, paying attention to people's views on asset allocation, investment strategies etc. It seems to me that most Bogleheads dislike sectors. While I see why you should not put a big chunk of your money into a specific sector, I do not quite see why a person should avoid increasing the weight of an under-weighted sector such as utilities. Could you please shed some light on this issue?

Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle? Of course, some will say that the bull market can continue and we have no idea when the bull will end, but these seem like quality sectors in general. (I am considering VPU and VDC)
Lastly, are utilities and staples inappropriate for an aggressive investor as these tend to pay high dividends?
I don't know if any particular sector is underweight. I don't know if its early or late in the market cycle. I don't know which sector might be better.

I have used a real estate index fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

MittensMoney
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Re: Why dismiss sectors?

Post by MittensMoney » Thu Oct 18, 2018 2:38 pm

In general it seems like sectors are dismissed on this forum for simplicity's sake, and secondarily because the common belief here is that market weighting is efficient and will produce optimal returns.

Personally I do buy Vanguard's sector ETF's to 'balance' (in my opinion) my portfolio. S&P 500 indexes will leave you holding about 40 cents out of every dollar in Tech & Financials, with 14 cents out of every dollar going directly into just 4 companies (Apple, Microsoft, Google & Amazon.)

Carol88888
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Re: Why dismiss sectors?

Post by Carol88888 » Thu Oct 18, 2018 2:50 pm

While I think the total stock market index or S&P index will provide great returns requiring no thought I can still see the use of sectors.

Personally, I like high dividends despite the tax drag and the slower growth but I don't want to beat that old horse to death here. People are this board are for the most part adamantly opposed to a high dividend stream. Maybe they will feel differently in retirement when they don't want the hassle of figuring out when to sell off slices of their funds to live on.

I just pay taxes on dividends and reinvest the surplus (after living expenses).

So, yes, I can definitely see the appeal of a uitility fund or consumer staple fund for the high dividends.

Conversely, if you really hated dividends so much that you preferred to receive as few as possible, then going with a technology fund like Vanguard's Information fund, VGT, would get you only about 1% in dividends as opposed to say 1.75% in the S&P. The total return would be similar but probably as much bumpier ride with the sector fund.

It's your money. You pays your money and you takes your chances.

Valuethinker
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Re: Why dismiss sectors?

Post by Valuethinker » Thu Oct 18, 2018 4:08 pm

ruralavalon wrote:
Thu Oct 18, 2018 2:33 pm
milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
I have been reading this forum for quite some time, paying attention to people's views on asset allocation, investment strategies etc. It seems to me that most Bogleheads dislike sectors. While I see why you should not put a big chunk of your money into a specific sector, I do not quite see why a person should avoid increasing the weight of an under-weighted sector such as utilities. Could you please shed some light on this issue?

Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle? Of course, some will say that the bull market can continue and we have no idea when the bull will end, but these seem like quality sectors in general. (I am considering VPU and VDC)
Lastly, are utilities and staples inappropriate for an aggressive investor as these tend to pay high dividends?
I don't know if any particular sector is underweight. I don't know if its early or late in the market cycle. I don't know which sector might be better.

I have used a real estate index fund.
(I am pretty sure rural avalon knows all this, but for the benefit of newer readers)

A REIT fund is not quite a stock fund:

- there is no double taxation because REITs don't pay capital gains or income tax as long as they distribute 90% of their income (that's a simplification of the actual tax law)

- commercial property (unleveraged) is generally lower risk than equities as a whole. To stay in business, companies need premises. Thus they tend to pay their rent, even in situations where they cannot pay their bills as a whole (rents are also generally linked to inflation over time, which is a separate point)

That's the case for REITs as a diversifier. Ordinary equity sector funds don't have those characteristics.

Those of us who have an objection to REITs think that 2008-09 showed that REITs are actually more volatile than stocks as a whole (due to the leverage effect ie borrowings against assets, but also due to the nature of the 2008-09 crash). Thus we feel that they are not necessary in a portfolio. Lots of very intelligent people (including Burton Malkiel and David Swensen) disagree.

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bertilak
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Re: Why dismiss sectors?

Post by bertilak » Thu Oct 18, 2018 4:19 pm

milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
I have been reading this forum for quite some time, paying attention to people's views on asset allocation, investment strategies etc. It seems to me that most Bogleheads dislike sectors. While I see why you should not put a big chunk of your money into a specific sector, I do not quite see why a person should avoid increasing the weight of an under-weighted sector such as utilities. Could you please shed some light on this issue?

Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle? Of course, some will say that the bull market can continue and we have no idea when the bull will end, but these seem like quality sectors in general. (I am considering VPU and VDC)
Lastly, are utilities and staples inappropriate for an aggressive investor as these tend to pay high dividends?
A cap weighted index defines what the market weighting is. Nothing cap weighted is either under- or over-weighted -- unless you believe the market has got it wrong. You should then wonder what you know that the rest of the market participants don't know. I believe there are people who can do this, but I'm not among them. Are you?
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

megabad
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Re: Why dismiss sectors?

Post by megabad » Thu Oct 18, 2018 6:00 pm

MittensMoney wrote:
Thu Oct 18, 2018 2:38 pm
In general it seems like sectors are dismissed on this forum for simplicity's sake, and secondarily because the common belief here is that market weighting is efficient and will produce optimal returns.
Well I would actually change your last conclusion to more of "market weighting will produce market returns". I don't think most folks claim that they are "optimal returns". In fact, by definition, they are not.

jalbert
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Re: Why dismiss sectors?

Post by jalbert » Thu Oct 18, 2018 6:11 pm

Personally, I like high dividends despite the tax drag and the slower growth but I don't want to beat that old horse to death here. People are this board are for the most part adamantly opposed to a high dividend stream. Maybe they will feel differently in retirement when they don't want the hassle of figuring out when to sell off slices of their funds to live on.
What is there to figure? You can just set a regular schedule say quarterly for withdrawals from mutual funds to augment the dividends they distribute. Some of the withdrawal will be return of capital and not contribute to income, and you don’t have to withdraw more than you need only to pay the taxes and reinvest.

And that does not even get into the issue of uncompensated sector risk or the tendency of higher dividend stocks to incorporate some interest rate term risk.

None of the above changes at retirement, so not sure why I should feel different about it in retirement.
Last edited by jalbert on Thu Oct 18, 2018 10:50 pm, edited 1 time in total.
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bertilak
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Re: Why dismiss sectors?

Post by bertilak » Thu Oct 18, 2018 6:12 pm

megabad wrote:
Thu Oct 18, 2018 6:00 pm
MittensMoney wrote:
Thu Oct 18, 2018 2:38 pm
In general it seems like sectors are dismissed on this forum for simplicity's sake, and secondarily because the common belief here is that market weighting is efficient and will produce optimal returns.
Well I would actually change your last conclusion to more of "market weighting will produce market returns". I don't think most folks claim that they are "optimal returns". In fact, by definition, they are not.
I would say "as optimal as you're gonna get."

What definition are you referring to?

I would agree that cap-weighted index funds don't get you the maximum possible returns, but nobody is going to get maximum possible returns.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

Chief_Engineer
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Re: Why dismiss sectors?

Post by Chief_Engineer » Thu Oct 18, 2018 6:35 pm

bertilak wrote:
Thu Oct 18, 2018 6:12 pm
I would say "as optimal as you're gonna get."

What definition are you referring to?

I would agree that cap-weighted index funds don't get you the maximum possible returns, but nobody is going to get maximum possible returns.
What is optimal depends on what your objective is. I would say for most here it would be a portfolio that maximizes return or perhaps risk-adjusted return. Certainly market weighting is not either of those. An optimal portfolio would be composed of only winners. Problem is, no one has a crystal ball.

Nate79
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Re: Why dismiss sectors?

Post by Nate79 » Thu Oct 18, 2018 6:59 pm

I would just buy an active fund before trying to market time and pick sectors myself. I know the managers of active funds, especially at the reputable funds are much smarter than myself when it comes to investing.

megabad
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Re: Why dismiss sectors?

Post by megabad » Thu Oct 18, 2018 7:35 pm

bertilak wrote:
Thu Oct 18, 2018 6:12 pm
I would say "as optimal as you're gonna get."

What definition are you referring to?

I would agree that cap-weighted index funds don't get you the maximum possible returns, but nobody is going to get maximum possible returns.
Optimal
best or most favorable; optimum.

In reality, market returns can never be the "best". There will always be a collection of investment(s) that outperform the market. There will always be a number that wins ("outperforms") on a Roulette spin too. I am not very good at picking either.

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Re: Why dismiss sectors?

Post by oldcomputerguy » Thu Oct 18, 2018 7:41 pm

mak1277 wrote:
Thu Oct 18, 2018 1:37 pm
My reason: Because I don't know enough, and don't have enough desire to do the research, to have an opinion on which sector(s) are better than others. Total market makes sure I have some of everything and I don't have to think about it. Perfect.
+1.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

boglemania
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Re: Why dismiss sectors?

Post by boglemania » Thu Oct 18, 2018 8:00 pm

Since inception 11/12/2001 11.08% fund 7.16% benchmark
Always believed in one sector. VGHAX Health care. No stopping it. They have tried and tried.

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Taylor Larimore
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Re: Why dismiss sectors? Here's why.

Post by Taylor Larimore » Thu Oct 18, 2018 8:38 pm

milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
It seems to me that most Bogleheads dislike sectors. While I see why you should not put a big chunk of your money into a specific sector, I do not quite see why a person should avoid increasing the weight of an under-weighted sector such as utilities. Could you please shed some light on this issue?
milosz19:

In my view, there is no such thing as an "underweighted" sector. Every sector stock is part of a huge total market auction where each stock/sector has a price that is exactly what the majority of investors believe it to be.

It is also important to know that about 90% of all stock trades are made by professional investors. It is unlikely that you and I know more than they do about individual and sector stocks. Total market investors never worry about underperforming the market.
Don't buy the needle. Buy the haystack. -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Why dismiss sectors?

Post by AlohaJoe » Thu Oct 18, 2018 8:43 pm

milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle?
What does "make sense" even mean here? It sounds like hand waving, which seems like a not great way to manage one's life savings. Do you have numbers, data, charts, academic theories, backtests, historical returns of real strategies, etc? If not, I'm not sure what people are supposed to argue for or against?

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Re: Why dismiss sectors?

Post by LadyGeek » Thu Oct 18, 2018 8:59 pm

This thread is now in the Investing - Theory, News & General forum (general question).
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Re: Why dismiss sectors?

Post by patrick » Thu Oct 18, 2018 10:20 pm

MittensMoney wrote:
Thu Oct 18, 2018 2:38 pm
In general it seems like sectors are dismissed on this forum for simplicity's sake, and secondarily because the common belief here is that market weighting is efficient and will produce optimal returns.

Personally I do buy Vanguard's sector ETF's to 'balance' (in my opinion) my portfolio. S&P 500 indexes will leave you holding about 40 cents out of every dollar in Tech & Financials, with 14 cents out of every dollar going directly into just 4 companies (Apple, Microsoft, Google & Amazon.)
If you use global market weight instead of overweighting US stocks, you won't have so much in those few companies.

venkman
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Re: Why dismiss sectors?

Post by venkman » Thu Oct 18, 2018 10:49 pm

milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
I have been reading this forum for quite some time, paying attention to people's views on asset allocation, investment strategies etc. It seems to me that most Bogleheads dislike sectors.

Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle? Of course, some will say that the bull market can continue and we have no idea when the bull will end, but these seem like quality sectors in general. (I am considering VPU and VDC)
Bogleheads generally don't dislike sectors so much as they dislike market timing. Personally, I think a permanent tilt toward defensive sectors could be a good way to reduce volatility without sacrificing much return.

I did backtests of 100% VTI vs. 50% VTI, 25% VDC, 25% VPU. Starting in 2005 (first full year for VPU), the mixed portfolio beat VTI slightly, but with significantly smaller standard deviation. If you start the test in 2010, VTI has better absolute returns, but a much larger Stdev and a lower Sharpe ratio.
Link to backtest: https://www.portfoliovisualizer.com/bac ... tion5_1=25

The issue with high-dividend stocks is that people tend to use them as a proxy for bonds. When interest rates go up, high dividend yields don't look as attractive by comparison, so the stock prices tend to suffer. Hence, they might not do as well in a rising rate environment.

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Re: Why dismiss sectors?

Post by TropikThunder » Thu Oct 18, 2018 10:55 pm

MittensMoney wrote:
Thu Oct 18, 2018 2:38 pm
In general it seems like sectors are dismissed on this forum for simplicity's sake, and secondarily because the common belief here is that market weighting is efficient and will produce optimal returns.

Personally I do buy Vanguard's sector ETF's to 'balance' (in my opinion) my portfolio. S&P 500 indexes will leave you holding about 40 cents out of every dollar in Tech & Financials, with 14 cents out of every dollar going directly into just 4 companies (Apple, Microsoft, Google & Amazon.)
How do you know what the sector weights should be vs what they currently are in the S&P500?

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JoMoney
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Re: Why dismiss sectors?

Post by JoMoney » Thu Oct 18, 2018 11:53 pm

TropikThunder wrote:
Thu Oct 18, 2018 10:55 pm
MittensMoney wrote:
Thu Oct 18, 2018 2:38 pm
In general it seems like sectors are dismissed on this forum for simplicity's sake, and secondarily because the common belief here is that market weighting is efficient and will produce optimal returns.

Personally I do buy Vanguard's sector ETF's to 'balance' (in my opinion) my portfolio. S&P 500 indexes will leave you holding about 40 cents out of every dollar in Tech & Financials, with 14 cents out of every dollar going directly into just 4 companies (Apple, Microsoft, Google & Amazon.)
How do you know what the sector weights should be vs what they currently are in the S&P500?
Heck... how do you even decide whose definition of a 'sector' you want to use? The 'GICS' sectors don't match the 'ICB' sectors. If you compared Total Stock Market to the S&P 500 on Vanguard's website, and didn't notice the different standards being used, you might think there are some big difference between the sectors weightings (there isn't much difference when compared using the same standard, i.e. on Morningstar VFINX VTSMX)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

2015
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Re: Why dismiss sectors?

Post by 2015 » Fri Oct 19, 2018 12:43 pm

I dismiss them for the same reason I don't go to the race track.

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Phineas J. Whoopee
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Re: Why dismiss sectors?

Post by Phineas J. Whoopee » Sat Oct 20, 2018 4:26 pm

milosz19 wrote:
Thu Oct 18, 2018 1:34 pm
I have been reading this forum for quite some time, paying attention to people's views on asset allocation, investment strategies etc. It seems to me that most Bogleheads dislike sectors. While I see why you should not put a big chunk of your money into a specific sector, I do not quite see why a person should avoid increasing the weight of an under-weighted sector such as utilities. Could you please shed some light on this issue?

Doesn't it makes sense to overweight utilities, healthcare, and consumer staples this late in the market cycle? Of course, some will say that the bull market can continue and we have no idea when the bull will end, but these seem like quality sectors in general. (I am considering VPU and VDC)
Lastly, are utilities and staples inappropriate for an aggressive investor as these tend to pay high dividends?
If the total market capitalization of a sector is not the correct weighting, then there must be something else that is.

What is the correct weighting of each sector?

PJW

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Phineas J. Whoopee
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Re: Why dismiss sectors?

Post by Phineas J. Whoopee » Sat Oct 20, 2018 4:30 pm

Carol88888 wrote:
Thu Oct 18, 2018 2:50 pm
...
Personally, I like high dividends despite the tax drag and the slower growth but I don't want to beat that old horse to death here. People are this board are for the most part adamantly opposed to a high dividend stream. Maybe they will feel differently in retirement when they don't want the hassle of figuring out when to sell off slices of their funds to live on.
...
Aside from taxation there is no argument here against dividends. Dividends are not argued to be bad.

The argument isn't that dividends are bad. It's only that they're not superior to other sources of total return. Other sources are equally good.

Selectively buying high-dividend stocks or funds concentrates one's portfolio into certain types of companies. It that's what one wants, then fine.

PJW

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Re: Why dismiss sectors?

Post by nisiprius » Sat Oct 20, 2018 4:57 pm

Larry Swedroe, "Rules of Prudent Investing:"
In 'The Quest for Alpha,' p. 156, Larry Swedroe wrote:#17: Owning individual stocks and sector funds is more akin to speculating, not investing. The market compensates investors for risks that cannot be diversified away, like the risk of investing in stocks versus bonds. Investors shouldn't expect compensation for diversifiable risk--the unique risks related to owning one stock or sector or country fund. Prudent investors only accept risk for which they will be compensated with higher expected returns.
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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