Why not invest in sector ETFs?

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AO3
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Why not invest in sector ETFs?

Post by AO3 » Fri Aug 16, 2019 12:11 am

I have read and understand why you guys don't support investing in ETFs such as tech or REIT, but what's the worst that could happen with a healthcare, utilities, or consumer staples one? A possible recession doesn't really seem like a big enough reason to me since pretty much everything would be affected.

A portfolio of VOO/VTI with health/staples/utilities seems safer to me than pairing it with the international stock market. You'd be overweighting, but it'd be with safer stocks.

P.S. I'm new to this and still learning.

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Re: Why not invest in sector ETFs?

Post by AlohaJoe » Fri Aug 16, 2019 1:18 am

AO3 wrote:
Fri Aug 16, 2019 12:11 am
A portfolio of VOO/VTI with health/staples/utilities seems safer to me than pairing it with the international stock market. You'd be overweighting, but it'd be with safer stocks.
I don't know why you think they are "safer" stocks. But leaving that aside, the biggest problem with ideas like this is tracking error, regret, and bad decisions.

You decide to invest $10,000 in Vanguard Consumer Staples in 2005. The first year it loses -5% while the broader market is up 6%. (So much for your claim about "safer".) The next year they are neck & neck at 16%. The year after that it loses -11% while the broader market is up 5%. (Again, so much for your "safer"....)

At the end of those 3 years your $10,000 has shrunk to $9,859. But $10,000 in the broader market would have grown to $12,949. You are 30% behind. You are tired of losing money. Especially when everyone else is making money. So you look at those numbers, and start thinking maybe your idea wasn't so good. Maybe consumer isn't safer. Maybe something has changed in the economy. So you throw in the towel. You sell all of your healthcare and buy into a the broader index.

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nisiprius
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Re: Why not invest in sector ETFs?

Post by nisiprius » Fri Aug 16, 2019 8:01 am

The basic problem is that stocks, all stocks, all kinds of stocks, all subcategories of stocks, all "asset classes," all "factors," are subject to very long periods of outperformance and underperformance. This means that your ability to predict the future by looking at the past is extremely limited.

Right now, we are in a ten-year-long bull market. This means that even ten years of data is limited to one particular set of market conditions, and a fairly unusual set. Right now this is driving value factor advocates bananas, because "the value premium has been missing in action" for a decade.

Worse yet, many of the trendy new ideas involve mutual funds and ETFs that don't even have ten years of history.

I wouldn't take this chart too seriously; it's due to a writer named Jim Otar and I fear that the straight lines encourage you to see a pattern that may not be there, but he used it to make a very important point. When you look at a hundred years of data, you are not looking at a hundred different "years," you are only looking at about eight "things," eight or so "bull and bear markets."

Image

So, the last ten years is never a good representation of the past. Even over, say, the past thirty years, what happens is dominated by the luck of whether that thirty years includes two good periods and one bad one, or two bad periods and one good one.

By narrowing your spectrum of stocks, you are increasing your risk because you are becoming more and more reliant on a group of stocks that represent similar businesses and that rise and fall together. And that means there is more and more risk that you are tying your judgement to what might just be how those stocks have behaved during just one or two market conditions.

For example, since you happen to mention VOO/VTI, I imagine that your idea is to use a Vanguard sector ETF to add a concentration in your chosen sectors; VPU for utilities, perhaps. But VPU has only existed since 2004, so if you are doing your homework experimenting with backtesting, if you are using VPU itself, you can't possibly be looking at more than fifteen years of data.

Of course, there do exist other utilities funds, and utility sector indexes (but it is hard to find no-cost data, available to investors like me, on specialized indexes), and looking only at data sets that aren't implemented with real money in the real world with mutual funds has hazards of its own.
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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JoMoney
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Re: Why not invest in sector ETFs?

Post by JoMoney » Fri Aug 16, 2019 8:26 am

AO3 wrote:
Fri Aug 16, 2019 12:11 am
... A portfolio of VOO/VTI with health/staples/utilities seems safer to me than pairing it with the international stock market. You'd be overweighting, but it'd be with safer stocks...
That may be true, but it would be even safer to pair it with bonds/cash.
There are a lot of ways to reduce risk, especially if you identify the specific risk(s) you're trying to avoid. In some cases though, you may just be trading one risk for another.
There are lots of potential portfolios that might be just fine. Trying to find the perfect portfolio can easily turn into a fools errand. If you explore this board I'm sure you'll see plenty of reasons a simple market-weighted portfolio is preferred.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Why not invest in sector ETFs?

Post by Forester » Fri Aug 16, 2019 8:41 am

AO3 wrote:
Fri Aug 16, 2019 12:11 am
I have read and understand why you guys don't support investing in ETFs such as tech or REIT, but what's the worst that could happen with a healthcare, utilities, or consumer staples one? A possible recession doesn't really seem like a big enough reason to me since pretty much everything would be affected.

A portfolio of VOO/VTI with health/staples/utilities seems safer to me than pairing it with the international stock market. You'd be overweighting, but it'd be with safer stocks.

P.S. I'm new to this and still learning.
Risk is not always rewarded. Instead of the S&P 500 maybe consider USMV as a core holding.

S&P 500
https://www.msci.com/www/fact-sheet/msc ... x/07527616

US Minimum Volatility
https://www.msci.com/documents/10199/f5 ... 761d009094

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Sandtrap
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Re: Why not invest in sector ETFs?

Post by Sandtrap » Fri Aug 16, 2019 9:04 am

AO3 wrote:
Fri Aug 16, 2019 12:11 am
I have read and understand why you guys don't support investing in ETFs such as tech or REIT, but what's the worst that could happen with a healthcare, utilities, or consumer staples one? A possible recession doesn't really seem like a big enough reason to me since pretty much everything would be affected.

A portfolio of VOO/VTI with health/staples/utilities seems safer to me than pairing it with the international stock market. You'd be overweighting, but it'd be with safer stocks.

P.S. I'm new to this and still learning.
Here is a substantial past thread that will help you understand "forum members" varying relationships to REIT's.
Well worth reading. Also the links.
viewtopic.php?f=1&t=283581

Also, search the forum archives (upper right corner) for threads on "alternatives" and "tilting".

j
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SimpleGift
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Re: Why not invest in sector ETFs?

Post by SimpleGift » Fri Aug 16, 2019 9:15 am

As mentioned, one of the biggest drawbacks to investing in sectors can be their high volatility relative to the total market. Even traditionally "safe sectors" are often exposed to dramatic inflows and outflows, based on the "risk on, risk off" dynamic of the market, as well as return fluctuations over the business cycle (chart below).
  • Image
    Data source: Morningstar
For a buy-and-hold investor, an argument can perhaps be made for a separate allocation to the real estate sector, since it's a large part of the economy that's not fully represented in the stock market — but this sector is not immune to high volatility either.

PS. Welcome to the Bogleheads Forum!
Last edited by SimpleGift on Fri Aug 16, 2019 11:03 am, edited 2 times in total.

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LiveSimple
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Re: Why not invest in sector ETFs?

Post by LiveSimple » Fri Aug 16, 2019 9:25 am

if you have a plan on the % of allocation to sectors and stick to the plan, it may work out.
If the allocation goes down, buy cheap and re balance. If the allocation goes high, sell high re balance.

Shut the noise and stay the course !!!

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Re: Why not invest in sector ETFs?

Post by asif408 » Fri Aug 16, 2019 9:40 am

OP,

Since you are new, here's a history lesson. Here is a graph from 2001-2011 showing the returns of healthcare, utilities, energy, precious metals, and the US market from late 2001 through early 2011: https://finance.yahoo.com/chart/VTSMX#e ... 19fQ%3D%3D

Then here's the same graph since then: https://finance.yahoo.com/chart/VTSMX#e ... In19fX0%3D

Precious metals and energy dramatically outperformed in the 2001-2011 period, while utilities and healthcare underperformed. Since 2011, precious metals, energy, and utilities underperformed, while healthcare has outperformed. Hard to deduce that any of the sectors you suggest are safe. About the only conclusion I can make is that, more often than not, last decades best performers tend to be next decades worst performers (though utilities has underperformed the broad stock market for the past 2 decades, so there are some exceptions to the rule). What if healthcare, utilities, or consumer staples performs in the next decade like energy and/or precious metals did since 2011?

Your mistake is confusing recent (last 5-10 years) good returns with safer, when, in fact, generally the opposite is true. No stocks sectors or markets are safe in the short-term (as in will protect you from a 20%+ drop in a month or two), and in the longer term the sectors that have done the best in the last decade are more likely to be less safe (as in underperform in the coming decade), as reversion to the mean tends to be strong.

illumination
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Re: Why not invest in sector ETFs?

Post by illumination » Fri Aug 16, 2019 11:32 am

Picking the wrong one is the problem. Look at something like VDE. Vanguard's Energy ETF. You would have lost quite a bit compared to investing in a total index fund.

I dabble with these sector ETFs for a small part of my portfolio, and most have truthfully done well. It sort of gets "trading" out of my system and usually the downside is not nearly what it would be trading individual stocks. But I know it's not smart. And what's "hot" in one cycle of the economy can then be down in another cycle.

The other issue though with sector ETFs is you might not want to keep them forever. Let's say it looks like the US nationalizes healthcare, do you want to hold on on to a Health Care specific ETF? Whereas with a total market index, you can usually hold them indefinitely without these concerns making them more tax efficient.

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Re: Why not invest in sector ETFs?

Post by Dead Man Walking » Fri Aug 16, 2019 12:09 pm

I remember when Fidelity introduced sector mutual funds. Many gurus pointed out that the best performing mutual fund for the coming year would likely be one of Fidelity’s sector funds. The problem was picking which one. Good luck.

DMW

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Re: Why not invest in sector ETFs?

Post by mmcmonster » Fri Aug 16, 2019 12:26 pm

Dead Man Walking wrote:
Fri Aug 16, 2019 12:09 pm
I remember when Fidelity introduced sector mutual funds. Many gurus pointed out that the best performing mutual fund for the coming year would likely be one of Fidelity’s sector funds. The problem was picking which one. Good luck.

DMW
I bought some VHT (Vanguard's Health Care Index Fund) a few years ago.

I'm kinda glad that they don't have investor shares and that the admiral shares (VHCIX) have an initial buy-in of $100,000 :shock: . That prevented me from putting more in and forcing myself to tilt into the health care industry.

This is especially bad as I'm a physician and it's probably not a good idea to tilt into whichever sector you work in. At least in theory, any shock to the health care industry (ie: universal medicare) could not only affect the sector index but could also affect my job.

Now that I know better, I just leave my VHT shares and just let them ride. :sharebeer

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Re: Why not invest in sector ETFs?

Post by MoneyMarathon » Fri Aug 16, 2019 3:57 pm

One weird thing about sector ETFs is that the economy changes & the market changes allocation to sectors with it. However, if your investment policy statement is based on some old-timey view of the market, you can be significantly out of step.

For example, an investor starting at 20 years old in 1910 might have a hefty allocation to "railroad stocks." That would look more and more out of touch with the state of the economy at age 60, in the year 1950.

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Re: Why not invest in sector ETFs?

Post by Hector » Fri Aug 16, 2019 7:44 pm

I think overweighting in safer stocks means lower overall return. Also sector ETFs are probably more expensive than index ETFs.

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Re: Why not invest in sector ETFs?

Post by HEDGEFUNDIE » Sat Aug 17, 2019 9:21 am

Hector wrote:
Fri Aug 16, 2019 7:44 pm
I think overweighting in safer stocks means lower overall return.
Not necessarily:

https://www.portfoliovisualizer.com/fun ... chmark=VTI

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Re: Why not invest in sector ETFs?

Post by Hector » Sat Aug 17, 2019 2:01 pm

HEDGEFUNDIE wrote:
Sat Aug 17, 2019 9:21 am
Hector wrote:
Fri Aug 16, 2019 7:44 pm
I think overweighting in safer stocks means lower overall return.
Not necessarily:

https://www.portfoliovisualizer.com/fun ... chmark=VTI
I wouldn't have guess that even for last 15 years!

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Forester
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Re: Why not invest in sector ETFs?

Post by Forester » Sat Aug 17, 2019 2:18 pm

USMV would be a good fit for the topic author. It's a better version of the S&P 500 - US large cap without the lottery stocks.

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Re: Why not invest in sector ETFs?

Post by Northern Flicker » Sat Aug 17, 2019 2:24 pm

AO3 wrote:
Fri Aug 16, 2019 12:11 am
I have read and understand why you guys don't support investing in ETFs such as tech or REIT, but what's the worst that could happen with a healthcare, utilities, or consumer staples one? A possible recession doesn't really seem like a big enough reason to me since pretty much everything would be affected.

A portfolio of VOO/VTI with health/staples/utilities seems safer to me than pairing it with the international stock market. You'd be overweighting, but it'd be with safer stocks.

P.S. I'm new to this and still learning.
The reason I do not invest in particular sectors is that I do not like taking uncompensated risk. You are not compensated for taking risks that can be diversified away. The easiest way to see that is that the price at which you buy and sell an investment is the same whether or not you hold it in a diversified portfolio, so the return is the same whether or not you diversify away risks that are diversifiable.

This does not mean that the market weight for sectors is the optimal diversification, but since I don’t know the optimal diversification, I do not perceive a benefit in the extra cost and hassle associated with a sector tilt.

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Re: Why not invest in sector ETFs?

Post by nedsaid » Sat Aug 17, 2019 2:42 pm

AO3 wrote:
Fri Aug 16, 2019 12:11 am
I have read and understand why you guys don't support investing in ETFs such as tech or REIT, but what's the worst that could happen with a healthcare, utilities, or consumer staples one? A possible recession doesn't really seem like a big enough reason to me since pretty much everything would be affected.

A portfolio of VOO/VTI with health/staples/utilities seems safer to me than pairing it with the international stock market. You'd be overweighting, but it'd be with safer stocks.

P.S. I'm new to this and still learning.
Investing in sector funds is one thing you do when you get bored. You just cannot help noticing that different parts of the stock market perform differently from each other. So folks do this for diversification benefits or to reach for return. Healthcare stocks are a good example of a popular sector investment. Looking back over 30 years of stock picking I noticed that I had favorite sectors which included Forest Products, Oil, Telecom, Financial (Banks, Insurance), and Technology. My least productive sectors were Electric Utilities and Autos.

Trying to protect your portfolio with "safer" stocks is actually a pretty good idea but everyone and his brother are doing this, you will find that Consumer Staples are actually pretty expensive stocks to own. Stocks like Coke and PepsiCo are just never cheap.

For most folks, just owning the broad indexes is simpler, easier and over many years you will be pleased with your investment results.
A fool and his money are good for business.

retire2022
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Re: Why not invest in sector ETFs?

Post by retire2022 » Sat Aug 17, 2019 3:22 pm

Op it depends on your existing asset allocation and present portfolio

It would be helpful to break out your existing funds

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AO3
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Re: Why not invest in sector ETFs?

Post by AO3 » Sat Aug 17, 2019 7:58 pm

retire2022 wrote:
Sat Aug 17, 2019 3:22 pm
Op it depends on your existing asset allocation and present portfolio

It would be helpful to break out your existing funds
I just started. I put $2500 into VTI just last week, and I'm figuring out what to do with the $1K left in my account.

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.

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Re: Why not invest in sector ETFs?

Post by retire2022 » Sat Aug 17, 2019 8:22 pm

AO3 wrote:
Sat Aug 17, 2019 7:58 pm

I just started. I put $2500 into VTI just last week, and I'm figuring out what to do with the $1K left in my account.

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
What is your age? present age subtracts 67= future contributions, it will help to provide that.

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AO3
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Re: Why not invest in sector ETFs?

Post by AO3 » Sat Aug 17, 2019 8:30 pm

retire2022 wrote:
Sat Aug 17, 2019 8:22 pm
AO3 wrote:
Sat Aug 17, 2019 7:58 pm

I just started. I put $2500 into VTI just last week, and I'm figuring out what to do with the $1K left in my account.

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
What is your age? present age subtracts 67= future contributions, it will help to provide that.
I'm 25. I don't understand what you mean by that.

retire2022
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Re: Why not invest in sector ETFs?

Post by retire2022 » Sat Aug 17, 2019 8:39 pm

AO3 wrote:
Sat Aug 17, 2019 8:30 pm

I'm 25. I don't understand what you mean by that.
25(present age)-67=42 years of investing multiply by 19K (401, 403, 457 contributions)

$19,000x 42years= $800,500.00 contributions

http://www.moneychimp.com/calculator/co ... ulator.htm

with Vanguard Total Stock Market Index (VSTAX) you could possibly obtain 6% compound interest annualized for the next 42 years, which would be $3,572,536.55

Most BH recommend the lazy portfolio:

https://www.bogleheads.org/wiki/Lazy_portfolios

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Re: Why not invest in sector ETFs?

Post by Sandtrap » Sat Aug 17, 2019 8:45 pm

AO3 wrote:
Sat Aug 17, 2019 7:58 pm
retire2022 wrote:
Sat Aug 17, 2019 3:22 pm
Op it depends on your existing asset allocation and present portfolio

It would be helpful to break out your existing funds
I just started. I put $2500 into VTI just last week, and I'm figuring out what to do with the $1K left in my account.

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
Also, General Dynamics. All are benefiting from hefty defense funding.
OTOH: Total Stock Index has a much higher "sleep factor".
j
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MoneyMarathon
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Re: Why not invest in sector ETFs?

Post by MoneyMarathon » Sat Aug 17, 2019 8:58 pm

AO3 wrote:
Sat Aug 17, 2019 7:58 pm
I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
You'd be taking on unnecessary risk with individual stocks - you should expect an average outcome no better or worse, but you're accepting a much wider range of outcomes (much more risk) than you would get by buying a bunch of stocks. Since the risk of individual stocks is diversifiable, buying one or two is taking on uncompensated risk.

Take a look at the iShares Allocation ETFs:

iShares Core Growth Allocation ETF (60% stocks, 40% bonds)
https://www.ishares.com/us/products/239 ... cation-etf

iShares Core Aggressive Allocation ETF (80% stocks, 20% bonds)
https://www.ishares.com/us/products/239 ... cation-etf

Or one of the Vanguard LifeStrategy funds:

https://investor.vanguard.com/mutual-fu ... estrategy/#/

These combine stocks and bonds conveniently so that you get an investment that is safer than 100% stocks.

This is the default Boglehead approach to reducing risk (combining stocks and bonds). Maybe later you will decide to investigate the idea of choosing sectors or low volatility funds, but many sectors have sometimes done worse than the market in ways that are hard to bear looking at, and low volatility funds just haven't been around that long to see how they'll work under pressure when investors have now piled in. Combining stocks and bonds will definitely give you most of the rewards of holding stocks, with lower volatility and lower drawdowns. That's the same thing promised by these other ideas... but the idea of using a combo of stocks and bonds has stood the test of time, even though people have been doing it for over a hundred years and everybody knows about it. It works just as advertised: you'll get a little less exposure to the movement of stocks and a smoother, safer ride than being 100% stocks.

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Re: Why not invest in sector ETFs?

Post by MotoTrojan » Sat Aug 17, 2019 9:07 pm

AO3 wrote:
Sat Aug 17, 2019 7:58 pm
retire2022 wrote:
Sat Aug 17, 2019 3:22 pm
Op it depends on your existing asset allocation and present portfolio

It would be helpful to break out your existing funds
I just started. I put $2500 into VTI just last week, and I'm figuring out what to do with the $1K left in my account.

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
You need to understand that a stock doesn’t do better than the market only because a company does better than most... it has to do better than expected. Nobody denies it’s a sure thing that Amazon will do better than Best Buy over the next decade, but that says nothing about their stock performances. Amazon has a MUCH higher P/E and thus must do FAR better than BB to outperform; it’s expectation of dominance is already priced in.

Do you even know Lockheed or Raytheon’s P/E? What makes you think you know better than the market how they’ll do compared to the expectation?

$1000 is not much in the longterm but the bigger worry is the habits you’re making early on. Pick a broadly diversified allocation you can stick with and pile your money into that.

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AO3
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Re: Why not invest in sector ETFs?

Post by AO3 » Sat Aug 17, 2019 9:32 pm

MotoTrojan wrote:
Sat Aug 17, 2019 9:07 pm
AO3 wrote:
Sat Aug 17, 2019 7:58 pm
retire2022 wrote:
Sat Aug 17, 2019 3:22 pm
Op it depends on your existing asset allocation and present portfolio

It would be helpful to break out your existing funds
I just started. I put $2500 into VTI just last week, and I'm figuring out what to do with the $1K left in my account.

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
You need to understand that a stock doesn’t do better than the market only because a company does better than most... it has to do better than expected. Nobody denies it’s a sure thing that Amazon will do better than Best Buy over the next decade, but that says nothing about their stock performances. Amazon has a MUCH higher P/E and thus must do FAR better than BB to outperform; it’s expectation of dominance is already priced in.

Do you even know Lockheed or Raytheon’s P/E? What makes you think you know better than the market how they’ll do compared to the expectation?

$1000 is not much in the longterm but the bigger worry is the habits you’re making early on. Pick a broadly diversified allocation you can stick with and pile your money into that.
I'm not trying to beat the market. I want a safe backup investment in case the market underperforms, and I'm not really interested in bonds currently.

MoneyMarathon
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Re: Why not invest in sector ETFs?

Post by MoneyMarathon » Sat Aug 17, 2019 9:47 pm

AO3 wrote:
Sat Aug 17, 2019 9:32 pm
I'm not trying to beat the market. I want a safe backup investment in case the market underperforms, and I'm not really interested in bonds currently.
I understand not wanting to buy bonds. Bonds don't do as well as stocks in the long run. So why bonds?

Unfortunately, any investment that is a "stock" that gives you the blended behavior of 80% stocks / 20% bonds -- safer and not purely by chance -- is also expected to give you roughly the same lower long-term performance of 80% stocks / 20% bonds.

People will move their money into these safer assets, to the point where the safe stocks are priced to perfection to perform the way an investment should if it's moderately safer than just buying the whole stock market.

You can put all your money in stocks, but if you want it to be safer, your expected return is lower.

Do you want a safer, lower returning investment... or not?

If not, put everything in something like VTI (US stock market) or VT (total world).

If you do, there is a surefire way to get a portfolio that is safer (and therefore has lower expected average return in the long run).

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Re: Why not invest in sector ETFs?

Post by MotoTrojan » Sat Aug 17, 2019 10:13 pm

AO3 wrote:
Sat Aug 17, 2019 9:32 pm
MotoTrojan wrote:
Sat Aug 17, 2019 9:07 pm
AO3 wrote:
Sat Aug 17, 2019 7:58 pm
retire2022 wrote:
Sat Aug 17, 2019 3:22 pm
Op it depends on your existing asset allocation and present portfolio

It would be helpful to break out your existing funds
I just started. I put $2500 into VTI just last week, and I'm figuring out what to do with the $1K left in my account.

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
You need to understand that a stock doesn’t do better than the market only because a company does better than most... it has to do better than expected. Nobody denies it’s a sure thing that Amazon will do better than Best Buy over the next decade, but that says nothing about their stock performances. Amazon has a MUCH higher P/E and thus must do FAR better than BB to outperform; it’s expectation of dominance is already priced in.

Do you even know Lockheed or Raytheon’s P/E? What makes you think you know better than the market how they’ll do compared to the expectation?

$1000 is not much in the longterm but the bigger worry is the habits you’re making early on. Pick a broadly diversified allocation you can stick with and pile your money into that.
I'm not trying to beat the market. I want a safe backup investment in case the market underperforms, and I'm not really interested in bonds currently.
Understood but my logic still applies; why is a single company safer than the market? What do you know about these companies that others don’t?

You are looking to maintain equity returns but avoid equity risk; that doesn’t exist.

You’re 25 and have $3500 invested. Frankly you want a downturn so you can buy low with future contributions.

guyinlaw
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Re: Why not invest in sector ETFs?

Post by guyinlaw » Sun Aug 18, 2019 8:18 am

Buffett's advice to regular investor is 90/10 portfolio with " 10% of the cash in short-term government bonds"

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arcticpineapplecorp.
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Re: Why not invest in sector ETFs?

Post by arcticpineapplecorp. » Sun Aug 18, 2019 6:53 pm

"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Northern Flicker
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Re: Why not invest in sector ETFs?

Post by Northern Flicker » Mon Aug 19, 2019 4:28 pm

I didn't mention it in my OP, but I've been thinking about just putting the rest into a defense fund or just a single stock such as Lockheed Martin or Raytheon. I just can't imagine their price going down that much in this country.
Buying individual stocks is a really bad idea for most of us. Individuals need a net worth north of perhaps $10M in order to diversify a portfolio of individual stocks properly. When you buy an individual stock you are taking on uncompensated risk. This is the risk unique to that stock, referred to as security-specific risk. You can diversify this risk away by holding an index fund. The price for which you buy and sell an individual stock is not adjusted based on whether or not you diversify away security-specific risk (the person on the other side of the trade doesn’t care) so there is no extra compensation for taking this risk.

These are risks of future unpredictable events, like an oil stock tanking because the company is responsible for a major oil spill. So there is no analysis of the stock you can do at time of purchase to mitigate the risk.

You could either just hold VTI or diversify internationally by holding 20-40% of your stock in an international index fund like IXUS.

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