What's worse, holding stocks or actively managed funds?

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Kelly
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What's worse, holding stocks or actively managed funds?

Post by Kelly »

Hi All

I friend asked me to look at his holdings. In his taxable account he holds both actively managed funds and stocks. There's 20 stocks. We'd like to net gains and losses and get rid of both in favor of index funds. Here's the issue: we can't get rid of all of them without accelerating a large tax bill. He'll retire in a couple of years so both the stocks and actively managed funds will be sold first. In the meantime, for example, should he sell this fund with a 0.99% ER and a beta of 1.16. It's slightly bettered its clone (less after tax) https://tinyurl.com/wfyvcvd4. Or should a high beta (1.4) stock go. We know the fund starts with a 0.99% loss but the stock is likely to loose more in a down market. Of course the stock can go to zero, while unlikely the fund will.

Any insight is appreciated!

Kelly
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retired@50
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Re: What's worse, holding stocks or actively managed funds?

Post by retired@50 »

What's the most important goal?

1. Risk reduction.
2. Fee reduction.
3. Minimizing income taxes.

Regards,
This is one person's opinion. Nothing more.
CletusCaddy
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Re: What's worse, holding stocks or actively managed funds?

Post by CletusCaddy »

retired@50 wrote: Fri Jan 20, 2023 10:07 am What's the most important goal?

1. Risk reduction.
2. Fee reduction.
3. Minimizing income taxes.

Regards,
Love this framing! I’ll add one more

4. Simplicity
MarkRoulo
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Re: What's worse, holding stocks or actively managed funds?

Post by MarkRoulo »

Kelly wrote: Fri Jan 20, 2023 9:28 am Hi All

I friend asked me to look at his holdings. In his taxable account he holds both actively managed funds and stocks. There's 20 stocks. We'd like to net gains and losses and get rid of both in favor of index funds. Here's the issue: we can't get rid of all of them without accelerating a large tax bill. He'll retire in a couple of years so both the stocks and actively managed funds will be sold first. In the meantime, for example, should he sell this fund with a 0.99% ER and a beta of 1.16. It's slightly bettered its clone (less after tax) https://tinyurl.com/wfyvcvd4. Or should a high beta (1.4) stock go. We know the fund starts with a 0.99% loss but the stock is likely to loose more in a down market. Of course the stock can go to zero, while unlikely the fund will.

Any insight is appreciated!

Kelly
Your friend will have to decide between:
  • Increasing the expected returns
  • Reducing the variability in his returns, or
The problem with the actively managed funds is that you expect them to under perform their appropriate benchmark by about the management fee (maybe a bit more if there is a lot of turnover).

The problem with individual stocks is that while any given stock has no expectation of under performing, the spread on expected returns is much higher than for a collection of stocks such as is held in a mutual fund.

The "right" thing to do probably depends on how the 20 stocks are distributed. If they cover the broad market (as the 30 stocks in the Dow 30 do) then I'd favor replacing the active funds with index funds first. If the 20 stocks are concentrated in one or two industries then I'd probably want to address this first (with the danger, of course, that the stocks get sold and then the sector soars!).

I'll note that one option is to sell of *some* of the active funds (or some shares in each of them) AND sell off some shares in each of the 20 holdings.

Alternately, if the tax bill is high enough then it might make sense to hold on until he is retired. This would be a spreadsheet question.
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Kelly
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Re: What's worse, holding stocks or actively managed funds?

Post by Kelly »

retired@50 wrote: Fri Jan 20, 2023 10:07 am What's the most important goal?

1. Risk reduction.
2. Fee reduction.
3. Minimizing income taxes.

Regards,
Excellent! I like to think I've thought of these things but haven't prioritized them.
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nedsaid
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

Kelly wrote: Fri Jan 20, 2023 9:28 am Hi All

I friend asked me to look at his holdings. In his taxable account he holds both actively managed funds and stocks. There's 20 stocks. We'd like to net gains and losses and get rid of both in favor of index funds. Here's the issue: we can't get rid of all of them without accelerating a large tax bill. He'll retire in a couple of years so both the stocks and actively managed funds will be sold first. In the meantime, for example, should he sell this fund with a 0.99% ER and a beta of 1.16. It's slightly bettered its clone (less after tax) https://tinyurl.com/wfyvcvd4. Or should a high beta (1.4) stock go. We know the fund starts with a 0.99% loss but the stock is likely to loose more in a down market. Of course the stock can go to zero, while unlikely the fund will.

Any insight is appreciated!

Kelly
Kelly, I suspect your friend has an Advisory account. Doing some educated guessing here.

Your analysis has shown that the mutual fund mentioned, Undiscovered Managers Behavioral Value I has performed fairly well in its Small Value category. Morningstar rates it as 4 star. It also is in an Institutional Share Class which implies that he has an Advisor and is likely paying additional Advisory fees.

My guess is that the twenty stocks are from a Separately Managed Account run by a 3rd Party manager. If I had to guess, the SMA would have a cost of 30 to 40 basis fees but seeing that the SMA, if that is what this is, was picked by the Advisor then of course Advisory fees are paid on top of this. Typically SMA's will have 20 to 30 stocks picked by the manager.

So I think what will happen is that you may find that this fund won't transfer to another broker seeing that they are Institutional Shares. I wonder if there would be a forced sale, triggering the realized capital gains and the tax. The stocks would just transfer, the 3rd Party manager could be fired, I am fairly sure the stocks would remain but I am not sure of that.

What raised my suspicions were the Institutional shares of the fund you mentioned. Pretty unlikely your friend would have access to this share class on his own. Again, I think a Financial Advisor is involved and there is another layer of complication here. Also don't know if you can continue holding that class of shares after firing the Advisor, Not sure exactly what happens if the Advisor is fired. You don't want a big tax bill from forced sales.

He might want to call a Brokerage to where he might want all this transferred to see what will transfer and what will not. Then he could unwind the fund and the 20 Stocks at his leisure. The fund may not transfer.

Good news, if my suspicions are correct, the account probably has had acceptable performance except that there has been a drag from Advisory fees. My guess is that the 20 stocks are properly diversified across several sectors. So no disaster here but it might be a bit harder to unwind than first thought, that is without triggering a larger than desired tax bill.

I might be 100% wrong here, I just don't see how your friend could have gotten into an Institutional share class without an Advisor. Please let me know if my suspicions are correct. Find out if this is an Advisory account and check to see who the 3rd Party manager for the SMA is, that is if there is an SMA involved. If there is an SMA and the Advisor and the SMA manager are fired, find out what happens: does he get to keep the stocks? Which is what I think will happen. We need a bit more information.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

Individual stocks are much riskier than actively managed funds. The main problem with actively managed funds is costs and tax inefficiency. Many perform comparabley to index funds otherwise.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
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Kelly
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Re: What's worse, holding stocks or actively managed funds?

Post by Kelly »

nedsaid wrote: Fri Jan 20, 2023 11:27 am
Kelly wrote: Fri Jan 20, 2023 9:28 am Hi All

I friend asked me to look at his holdings. In his taxable account he holds both actively managed funds and stocks. There's 20 stocks. We'd like to net gains and losses and get rid of both in favor of index funds. Here's the issue: we can't get rid of all of them without accelerating a large tax bill. He'll retire in a couple of years so both the stocks and actively managed funds will be sold first. In the meantime, for example, should he sell this fund with a 0.99% ER and a beta of 1.16. It's slightly bettered its clone (less after tax) https://tinyurl.com/wfyvcvd4. Or should a high beta (1.4) stock go. We know the fund starts with a 0.99% loss but the stock is likely to loose more in a down market. Of course the stock can go to zero, while unlikely the fund will.

Any insight is appreciated!

Kelly
Kelly, I suspect your friend has an Advisory account. Doing some educated guessing here.

Your analysis has shown that the mutual fund mentioned, Undiscovered Managers Behavioral Value I has performed fairly well in its Small Value category. Morningstar rates it as 4 star. It also is in an Institutional Share Class which implies that he has an Advisor and is likely paying additional Advisory fees.

My guess is that the twenty stocks are from a Separately Managed Account run by a 3rd Party manager. If I had to guess, the SMA would have a cost of 30 to 40 basis fees but seeing that the SMA, if that is what this is, was picked by the Advisor then of course Advisory fees are paid on top of this. Typically SMA's will have 20 to 30 stocks picked by the manager.

So I think what will happen is that you may find that this fund won't transfer to another broker seeing that they are Institutional Shares. I wonder if there would be a forced sale, triggering the realized capital gains and the tax. The stocks would just transfer, the 3rd Party manager could be fired, I am fairly sure the stocks would remain but I am not sure of that.

What raised my suspicions were the Institutional shares of the fund you mentioned. Pretty unlikely your friend would have access to this share class on his own. Again, I think a Financial Advisor is involved and there is another layer of complication here. Also don't know if you can continue holding that class of shares after firing the Advisor, Not sure exactly what happens if the Advisor is fired. You don't want a big tax bill from forced sales.

He might want to call a Brokerage to where he might want all this transferred to see what will transfer and what will not. Then he could unwind the fund and the 20 Stocks at his leisure. The fund may not transfer.

Good news, if my suspicions are correct, the account probably has had acceptable performance except that there has been a drag from Advisory fees. My guess is that the 20 stocks are properly diversified across several sectors. So no disaster here but it might be a bit harder to unwind than first thought, that is without triggering a larger than desired tax bill.

I might be 100% wrong here, I just don't see how your friend could have gotten into an Institutional share class without an Advisor. Please let me know if my suspicions are correct. Find out if this is an Advisory account and check to see who the 3rd Party manager for the SMA is, that is if there is an SMA involved. If there is an SMA and the Advisor and the SMA manager are fired, find out what happens: does he get to keep the stocks? Which is what I think will happen. We need a bit more information.
I should have mentioned that the funds are in a Morgan Stanley account with 1% AUM. The stocks are her picks in a TD Ameritrade account (no AUM). I just confirmed that the TD Ameritrade will take the institutional shares. Thanks, I hadn't considered that.
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

Kelly wrote: Fri Jan 20, 2023 12:55 pm
nedsaid wrote: Fri Jan 20, 2023 11:27 am
Kelly wrote: Fri Jan 20, 2023 9:28 am Hi All

I friend asked me to look at his holdings. In his taxable account he holds both actively managed funds and stocks. There's 20 stocks. We'd like to net gains and losses and get rid of both in favor of index funds. Here's the issue: we can't get rid of all of them without accelerating a large tax bill. He'll retire in a couple of years so both the stocks and actively managed funds will be sold first. In the meantime, for example, should he sell this fund with a 0.99% ER and a beta of 1.16. It's slightly bettered its clone (less after tax) https://tinyurl.com/wfyvcvd4. Or should a high beta (1.4) stock go. We know the fund starts with a 0.99% loss but the stock is likely to loose more in a down market. Of course the stock can go to zero, while unlikely the fund will.

Any insight is appreciated!

Kelly
Kelly, I suspect your friend has an Advisory account. Doing some educated guessing here.

Your analysis has shown that the mutual fund mentioned, Undiscovered Managers Behavioral Value I has performed fairly well in its Small Value category. Morningstar rates it as 4 star. It also is in an Institutional Share Class which implies that he has an Advisor and is likely paying additional Advisory fees.

My guess is that the twenty stocks are from a Separately Managed Account run by a 3rd Party manager. If I had to guess, the SMA would have a cost of 30 to 40 basis fees but seeing that the SMA, if that is what this is, was picked by the Advisor then of course Advisory fees are paid on top of this. Typically SMA's will have 20 to 30 stocks picked by the manager.

So I think what will happen is that you may find that this fund won't transfer to another broker seeing that they are Institutional Shares. I wonder if there would be a forced sale, triggering the realized capital gains and the tax. The stocks would just transfer, the 3rd Party manager could be fired, I am fairly sure the stocks would remain but I am not sure of that.

What raised my suspicions were the Institutional shares of the fund you mentioned. Pretty unlikely your friend would have access to this share class on his own. Again, I think a Financial Advisor is involved and there is another layer of complication here. Also don't know if you can continue holding that class of shares after firing the Advisor, Not sure exactly what happens if the Advisor is fired. You don't want a big tax bill from forced sales.

He might want to call a Brokerage to where he might want all this transferred to see what will transfer and what will not. Then he could unwind the fund and the 20 Stocks at his leisure. The fund may not transfer.

Good news, if my suspicions are correct, the account probably has had acceptable performance except that there has been a drag from Advisory fees. My guess is that the 20 stocks are properly diversified across several sectors. So no disaster here but it might be a bit harder to unwind than first thought, that is without triggering a larger than desired tax bill.

I might be 100% wrong here, I just don't see how your friend could have gotten into an Institutional share class without an Advisor. Please let me know if my suspicions are correct. Find out if this is an Advisory account and check to see who the 3rd Party manager for the SMA is, that is if there is an SMA involved. If there is an SMA and the Advisor and the SMA manager are fired, find out what happens: does he get to keep the stocks? Which is what I think will happen. We need a bit more information.
I should have mentioned that the funds are in a Morgan Stanley account with 1% AUM. The stocks are her picks in a TD Ameritrade account (no AUM). I just confirmed that the TD Ameritrade will take the institutional shares. Thanks, I hadn't considered that.
Okay, I was half right. Advisor but no SMA. In that case, the Stocks will transfer over, no problem. If the institutional shares of the mutual fund will transfer over, problem solved.

Just remember to get cost basis information before you move the securities over. Does your friend keep his statements? If not, I would have your friend get all of the statements he can downloaded from the Morgan Stanley website before firing the Advisor. You need the cost basis information to know what your gains will be when the securities are sold. The cost basis information SHOULD transfer over to the new brokerage but it is no sure thing. There might be a spot on the Morgan Stanley website where you can get the cost basis information for the holdings, if so, I would screenshot it and keep the information for tax purposes.

I am a bit confused, you referred to her, I assumed that is the Advisor. You referred to your friend as a him and then later you referred to a her. Not sure what is going on here. Or is her your friend's spouse? A Morgan Stanley Advisor would have the account at Morgan Stanley for the Stocks and not at TD Ameritrade. Could you clarify please?
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Re: What's worse, holding stocks or actively managed funds?

Post by km91 »

I'd probably just rip the band aid and take the tax hit all at once in favor of moving the portfolio to low cost index funds. For me, the big issue is the 20 stocks. If the gains are large enough that your friend is worried about the tax consequences, I'd guess this is a sizeable portion of their portfolio. There is a lot of concentration risk in holding 20 stocks especially if the positions overlap with positions held in the funds. If your friend's goal is to de-risk their portfolio, they'll probably have to sell at least some of the stocks
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

km91 wrote: Fri Jan 20, 2023 1:25 pm I'd probably just rip the band aid and take the tax hit all at once in favor of moving the portfolio to low cost index funds. For me, the big issue is the 20 stocks. If the gains are large enough that your friend is worried about the tax consequences, I'd guess this is a sizeable portion of their portfolio. There is a lot of concentration risk in holding 20 stocks especially if the positions overlap with positions held in the funds. If your friend's goal is to de-risk their portfolio, they'll probably have to sell at least some of the stocks
My standard advice would be to take the tax hit over time, maybe over 3-5 years. But seeing that the market is down from all-time highs by 15-18%, this might not be a bad time to do it all at once. Another standard piece of advice I give is to model this with tax software so that you get an idea of what the tax hit will be. There will not only be Federal Tax but also State Tax for those States that have an income tax. You might get bit with local income taxes as well.
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Re: What's worse, holding stocks or actively managed funds?

Post by km91 »

nedsaid wrote: Fri Jan 20, 2023 2:46 pm My standard advice would be to take the tax hit over time, maybe over 3-5 years. But seeing that the market is down from all-time highs by 15-18%, this might not be a bad time to do it all at once. Another standard piece of advice I give is to model this with tax software so that you get an idea of what the tax hit will be. There will not only be Federal Tax but also State Tax for those States that have an income tax. You might get bit with local income taxes as well.
This is reasonable advice for most situations. OP did note that their friend would be entering retirement in a few years. It's tough to give specific advice without knowing the entire portfolio, but whether or not they want to enter retirement with sizable single stock concentrations is something to be considered
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

km91 wrote: Fri Jan 20, 2023 3:37 pm
nedsaid wrote: Fri Jan 20, 2023 2:46 pm My standard advice would be to take the tax hit over time, maybe over 3-5 years. But seeing that the market is down from all-time highs by 15-18%, this might not be a bad time to do it all at once. Another standard piece of advice I give is to model this with tax software so that you get an idea of what the tax hit will be. There will not only be Federal Tax but also State Tax for those States that have an income tax. You might get bit with local income taxes as well.
This is reasonable advice for most situations. OP did note that their friend would be entering retirement in a few years. It's tough to give specific advice without knowing the entire portfolio, but whether or not they want to enter retirement with sizable single stock concentrations is something to be considered
Yes, we are providing guidance on very limited information.
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Re: What's worse, holding stocks or actively managed funds?

Post by grabiner »

Is your friend charitably inclined? If so, the donations could be made from the most highly appreciated stocks or funds, avoiding the capital gain that would be due on sale. (This shouldn't be the reason to make the donation, but if you are going to make a large donation to charity, you might as well take advantage of the appreciated stock.)
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Re: What's worse, holding stocks or actively managed funds?

Post by Hector »

I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
That doesn't make sense. While active management is riskier than an an index fund, at least active managers are financial professional, so will likely out-perform those of us who aren't. The level of risk in descending order is stock-picking, active management, indexing. Before fees, many active funds perform about as well as an index.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
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Re: What's worse, holding stocks or actively managed funds?

Post by Calvert »

Apathizer wrote: Mon Jan 23, 2023 1:37 am The level of risk in descending order is stock-picking, active management, indexing. Before fees, many active funds perform about as well as an index.
That seems to be a reasonable generalization, but I would think it depends upon the particular stocks and funds.

My take is that the OP should get the details, make a plan, adjust for what the account holder thinks is important 1st.

Taking on the role and responsibilities of a financial advisor is not a light task. Especially for someone entering retirement with a good chunk of money. Portfolio change results are probabilities not certainties.
just tryin' to understand the obvious
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Re: What's worse, holding stocks or actively managed funds?

Post by Hector »

Apathizer wrote: Mon Jan 23, 2023 1:37 am
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
That doesn't make sense. While active management is riskier than an an index fund, at least active managers are financial professional, so will likely out-perform those of us who aren't. The level of risk in descending order is stock-picking, active management, indexing. Before fees, many active funds perform about as well as an index.
We have a wiki page called passively managing individual stocks. Please read it.
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Re: What's worse, holding stocks or actively managed funds?

Post by Tamalak »

In my opinion,

Felonies:
-Not investing
-Investing with unreasonable fees

Misdemeanors:
-Insufficient diversity
-Inappropriate AA

IMO holding individual stocks (with an expense ratio of ZERO!) is better than buying yachts for clowns.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

Hector wrote: Mon Jan 23, 2023 10:15 am
Apathizer wrote: Mon Jan 23, 2023 1:37 am
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
That doesn't make sense. While active management is riskier than an an index fund, at least active managers are financial professional, so will likely out-perform those of us who aren't. The level of risk in descending order is stock-picking, active management, indexing. Before fees, many active funds perform about as well as an index.
We have a wiki page called passively managing individual stocks. Please read it.
Many people have pages advocating for crypto; that doesn't mean either it nor picking/passively managing individual stocks is prudent.

If you're going to manage individual stocks 'passively' you might well just hold an index fund.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

Tamalak wrote: Mon Jan 23, 2023 10:42 am IMO holding individual stocks (with an expense ratio of ZERO!) is better than buying yachts for clowns.
+1. I do not buy active funds because I could do it myself if I wanted.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

Apathizer wrote: Mon Jan 23, 2023 11:10 am
Hector wrote: Mon Jan 23, 2023 10:15 am
Apathizer wrote: Mon Jan 23, 2023 1:37 am
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
That doesn't make sense. While active management is riskier than an an index fund, at least active managers are financial professional, so will likely out-perform those of us who aren't. The level of risk in descending order is stock-picking, active management, indexing. Before fees, many active funds perform about as well as an index.
We have a wiki page called passively managing individual stocks. Please read it.
Many people have pages advocating for crypto; that doesn't mean either it nor picking/passively managing individual stocks is prudent.

If you're going to manage individual stocks 'passively' you might well just hold an index fund.
If the criteria is not popular in the market, then there will be no index fund for it. One can have a portfolio with low turnover and is fairly robust for years, and yet still not have an index fund equivalent.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: What's worse, holding stocks or actively managed funds?

Post by Watty »

Kelly wrote: Fri Jan 20, 2023 9:28 am Here's the issue: we can't get rid of all of them without accelerating a large tax bill. He'll retire in a couple of years so both the stocks and actively managed funds will be sold first.
A big question is if he delays selling the investments for a few years then is there a clear reason to think that he would pay less in taxes then? For example if he is in a state now which taxes capital gains, but he might retire in a state which does not tax capital gains.

If he will pay more or less the same taxes if he waits then the taxes are pretty much a non-issue since he will pay them sooner or later.

If he will be getting an affordable care act healthcare subsidy after he retires, but before he starts Medicare, then delaying the taxes until them would be a problem since the subsidy is based on his income including capital gains.
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Re: What's worse, holding stocks or actively managed funds?

Post by vanuber »

I have been selling off individual stocks over the past 3 years or so, all with large long-term gains. I actually just sold the last +$200K to fund a real estate investment and I expect about $30K in CGT's for 2023.

The tax bill is tough to swallow, but hard to avoid. I would do it as quickly as possible while watching tax thresholds - income tax brackets, IRA contribution income limits (if applicable), NIIT (net investment income tax = 3.8%). They should also work with a CPA to lower their income if possible - retirement investing, HSA, 529, charitable giving, business spending (if an owner), etc. If they have children, grandchildren, etc. they and their spouse could each gift $17,000 without introducing taxes. Also, a good thought already mentioned... wait until retirement when income is much lower to sell the bulk, taking small swings until then.

The best advice - do not try to time the market. Make a plan for selling and stick with it.
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
The risks of individual stocks to an individual investor are several.

1) First, you get expected to the unique risks of particular companies. A good reason that more stocks are better
than fewer.
2) Behavioral errors. Too often people will chase what is popular and what has already performed very well. This leads
to overpaying for stocks. Also people who performance chase are also emotionally vulnerable to selling when markets are down. Buying high and selling low is not a prescription for wealth building but it is a route that people often take nevertheless.
3) Sector concentration. You want to be diversified across industry groups. People often concentrate in too few sectors.
4) Lack of research. People often will chase a hot stock tip and won't do much in the way of research. You want to learn about the company and about the industry in which it operates. With lack of research, people can pay too much for their stocks. People can also be naive to the risks they are taking.
5) Lack of patience. Behind every a stock purchase, there is a story behind that or there should be. Sometimes it takes a while for the story or the narrative behind the stock purchase to play out. One should look for holding periods of at least five years in their stocks.
6) Greater volatility. A portfolio of 5 stocks will most likely be more volatile than a portfolio of 15 stocks, a portfolio of 25 stocks will most likely be less volatile than a portfolio of 15 stocks. You will also see more uneven returns than in an index.
7) Tracking error risk. You run the risk of trailing your benchmark index. Memory recalls that most individuals who pick stocks trail the broad indexes by about 4% a year. Much of this is due to bad investor behavior.
8) On the other hand, an individual can hold too many stocks individually. Probably 15-25 stocks are the most that individuals can reasonably follow, I think 30 is probably the maximum.

But yes, I agree. Holding individual stocks in itself isn't bad. It takes effort and homework but it can be done. The thing is, your odds of outperforming the broad indexes aren't huge. I know such things from real life experience.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

secondopinion wrote: Mon Jan 23, 2023 12:32 pm
Apathizer wrote: Mon Jan 23, 2023 11:10 am
Hector wrote: Mon Jan 23, 2023 10:15 am
Apathizer wrote: Mon Jan 23, 2023 1:37 am
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
That doesn't make sense. While active management is riskier than an an index fund, at least active managers are financial professional, so will likely out-perform those of us who aren't. The level of risk in descending order is stock-picking, active management, indexing. Before fees, many active funds perform about as well as an index.
We have a wiki page called passively managing individual stocks. Please read it.
Many people have pages advocating for crypto; that doesn't mean either it nor picking/passively managing individual stocks is prudent.

If you're going to manage individual stocks 'passively' you might well just hold an index fund.
If the criteria is not popular in the market, then there will be no index fund for it. One can have a portfolio with low turnover and is fairly robust for years, and yet still not have an index fund equivalent.
There are funds available that Target just about any specific market segment, sector, or interest. I don't know why you might want to do that, but if you do it's still simpler and less risky than picking individual stocks yourself.
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

Apathizer wrote: Mon Jan 23, 2023 2:59 pm
secondopinion wrote: Mon Jan 23, 2023 12:32 pm
Apathizer wrote: Mon Jan 23, 2023 11:10 am
Hector wrote: Mon Jan 23, 2023 10:15 am
Apathizer wrote: Mon Jan 23, 2023 1:37 am
That doesn't make sense. While active management is riskier than an an index fund, at least active managers are financial professional, so will likely out-perform those of us who aren't. The level of risk in descending order is stock-picking, active management, indexing. Before fees, many active funds perform about as well as an index.
We have a wiki page called passively managing individual stocks. Please read it.
Many people have pages advocating for crypto; that doesn't mean either it nor picking/passively managing individual stocks is prudent.

If you're going to manage individual stocks 'passively' you might well just hold an index fund.
If the criteria is not popular in the market, then there will be no index fund for it. One can have a portfolio with low turnover and is fairly robust for years, and yet still not have an index fund equivalent.
There are funds available that Target just about any specific market segment, sector, or interest. I don't know why you might want to do that, but if you do it's still simpler and less risky than picking individual stocks yourself.
It would seem that way, but it is not the case. They only exist if they become popular, and they cost usually quite a bit anyway if they are very specific. No, there are some cases where it is better to do it directly.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

secondopinion wrote: Mon Jan 23, 2023 3:05 pm
Apathizer wrote: Mon Jan 23, 2023 2:59 pm
secondopinion wrote: Mon Jan 23, 2023 12:32 pm
Apathizer wrote: Mon Jan 23, 2023 11:10 am
Hector wrote: Mon Jan 23, 2023 10:15 am
We have a wiki page called passively managing individual stocks. Please read it.
Many people have pages advocating for crypto; that doesn't mean either it nor picking/passively managing individual stocks is prudent.

If you're going to manage individual stocks 'passively' you might well just hold an index fund.
If the criteria is not popular in the market, then there will be no index fund for it. One can have a portfolio with low turnover and is fairly robust for years, and yet still not have an index fund equivalent.
There are funds available that Target just about any specific market segment, sector, or interest. I don't know why you might want to do that, but if you do it's still simpler and less risky than picking individual stocks yourself.
It would seem that way, but it is not the case. They only exist if they become popular, and they cost usually quite a bit anyway if they are very specific. No, there are some cases where it is better to do it directly.
You have me curious. What exactly are you targeting by stock picking that's not available as a fund?
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

Apathizer wrote: Mon Jan 23, 2023 4:44 pm
secondopinion wrote: Mon Jan 23, 2023 3:05 pm
Apathizer wrote: Mon Jan 23, 2023 2:59 pm
secondopinion wrote: Mon Jan 23, 2023 12:32 pm
Apathizer wrote: Mon Jan 23, 2023 11:10 am
Many people have pages advocating for crypto; that doesn't mean either it nor picking/passively managing individual stocks is prudent.

If you're going to manage individual stocks 'passively' you might well just hold an index fund.
If the criteria is not popular in the market, then there will be no index fund for it. One can have a portfolio with low turnover and is fairly robust for years, and yet still not have an index fund equivalent.
There are funds available that Target just about any specific market segment, sector, or interest. I don't know why you might want to do that, but if you do it's still simpler and less risky than picking individual stocks yourself.
It would seem that way, but it is not the case. They only exist if they become popular, and they cost usually quite a bit anyway if they are very specific. No, there are some cases where it is better to do it directly.
You have me curious. What exactly are you targeting by stock picking that's not available as a fund?
Long-term low beta and standard deviation; the typical low volatility funds are more volatile than what can be achieved otherwise under stress. It behaves like a defensive sector tilt with a couple of other stocks from other sectors. This is a sample of the companies to get an idea (I purposely cut to show after determination returns, not survivorship bias). I did not hold this portfolio, however; I have not really done much with singleton stocks and this is digging up a filter I had.

https://www.portfoliovisualizer.com/bac ... tion25_1=4
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

secondopinion wrote: Mon Jan 23, 2023 5:07 pm
Apathizer wrote: Mon Jan 23, 2023 4:44 pm
secondopinion wrote: Mon Jan 23, 2023 3:05 pm
Apathizer wrote: Mon Jan 23, 2023 2:59 pm
secondopinion wrote: Mon Jan 23, 2023 12:32 pm

If the criteria is not popular in the market, then there will be no index fund for it. One can have a portfolio with low turnover and is fairly robust for years, and yet still not have an index fund equivalent.
There are funds available that Target just about any specific market segment, sector, or interest. I don't know why you might want to do that, but if you do it's still simpler and less risky than picking individual stocks yourself.
It would seem that way, but it is not the case. They only exist if they become popular, and they cost usually quite a bit anyway if they are very specific. No, there are some cases where it is better to do it directly.
You have me curious. What exactly are you targeting by stock picking that's not available as a fund?
Long-term low beta and standard deviation; the typical low volatility funds are more volatile than what can be achieved otherwise under stress. It behaves like a defensive sector tilt with a couple of other stocks from other sectors. This is a sample of the companies to get an idea (I purposely cut to show after determination returns, not survivorship bias). I did not hold this portfolio, however; I have not really done much with singleton stocks and this is digging up a filter I had.

https://www.portfoliovisualizer.com/bac ... tion25_1=4
That seems pointlessly complex and risky to me. Just staying well diversified seems more prudent and much simpler.
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

Apathizer wrote: Mon Jan 23, 2023 5:22 pm
secondopinion wrote: Mon Jan 23, 2023 5:07 pm
Apathizer wrote: Mon Jan 23, 2023 4:44 pm
secondopinion wrote: Mon Jan 23, 2023 3:05 pm
Apathizer wrote: Mon Jan 23, 2023 2:59 pm
There are funds available that Target just about any specific market segment, sector, or interest. I don't know why you might want to do that, but if you do it's still simpler and less risky than picking individual stocks yourself.
It would seem that way, but it is not the case. They only exist if they become popular, and they cost usually quite a bit anyway if they are very specific. No, there are some cases where it is better to do it directly.
You have me curious. What exactly are you targeting by stock picking that's not available as a fund?
Long-term low beta and standard deviation; the typical low volatility funds are more volatile than what can be achieved otherwise under stress. It behaves like a defensive sector tilt with a couple of other stocks from other sectors. This is a sample of the companies to get an idea (I purposely cut to show after determination returns, not survivorship bias). I did not hold this portfolio, however; I have not really done much with singleton stocks and this is digging up a filter I had.

https://www.portfoliovisualizer.com/bac ... tion25_1=4
That seems pointlessly complex and risky to me. Just staying well diversified seems more prudent and much simpler.
Given that MGC contains the top 70% of the market cap in merely 230 companies and the top 10 companies contain 20% of the market cap, picking 20-50 or so companies from MGC is not a highly risky proposition (especially when one is selecting those stocks with a long track record of not having as much risk).

But yes, it is complex (not complicated unless one is talking about taxes).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: What's worse, holding stocks or actively managed funds?

Post by White Coat Investor »

retired@50 wrote: Fri Jan 20, 2023 10:07 am What's the most important goal?

1. Risk reduction.
2. Fee reduction.
3. Minimizing income taxes.

Regards,
Not sure 2 and 3 are in the right place. Gotta quantify it. A big tax bill in order to reduce fees just a little? Especially if that tax bill can be not only delayed but eliminated completely?
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Re: What's worse, holding stocks or actively managed funds?

Post by retired@50 »

White Coat Investor wrote: Mon Jan 23, 2023 5:40 pm
retired@50 wrote: Fri Jan 20, 2023 10:07 am What's the most important goal?

1. Risk reduction.
2. Fee reduction.
3. Minimizing income taxes.

Regards,
Not sure 2 and 3 are in the right place. Gotta quantify it. A big tax bill in order to reduce fees just a little? Especially if that tax bill can be not only delayed but eliminated completely?
I wasn't trying to put them in any particular order, I just saw all three as distinct (and possibly competing) goals.

I really couldn't say what goal is most important to the OP's "friend". Incidentally, I don't think I've received an answer to my question. I wasn't intending my question to be rhetorical. Oh well, horse to water...

Regards,
This is one person's opinion. Nothing more.
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Re: What's worse, holding stocks or actively managed funds?

Post by Taylor Larimore »

Kelly:

Your question is an easy one to answer:

* Holding individual stocks is much worse than owning actively managed funds (I wouldn't hold either):

* Individual stocks have little or no diversification resulting in much more risk of loss.

* Actively managed funds, on average, have significantly lower returns than index funds:

https://www.spglobal.com/spdji/en/resea ... hts/spiva/

Best wishes.
Taylor
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Re: What's worse, holding stocks or actively managed funds?

Post by Calvert »

Taylor Larimore wrote: Mon Jan 23, 2023 6:50 pm
* Holding individual stocks is much worse than owning actively managed funds (I wouldn't hold either):
BRK-A is an individual stock.
ARKK is a Cathie Wood actively managed fund.

Sorry but I couldn't resist. :wink:
just tryin' to understand the obvious
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

Calvert wrote: Mon Jan 23, 2023 8:30 pm
Taylor Larimore wrote: Mon Jan 23, 2023 6:50 pm
* Holding individual stocks is much worse than owning actively managed funds (I wouldn't hold either):
BRK-A is an individual stock.
ARKK is a Cathie Wood actively managed fund.

Sorry but I couldn't resist. :wink:
But we only know that in hindsight. There will always be actively managed funds and individual stocks that outperform, but the vast majority underperform.
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Re: What's worse, holding stocks or actively managed funds?

Post by Calvert »

Apathizer wrote: Mon Jan 23, 2023 8:56 pm But we only know that in hindsight. There will always be actively managed funds and individual stocks that outperform, but the vast majority underperform.
I was trying to point out that some funds are more risky than some stocks. I don't think this is hindsight, and doesn't depend upon the actual returns.

So saying that funds are better than stocks without knowing anything about the fund or the stock just doesn't ring true to me.

I think we're all in agreement that low cost index funds are a great place to be. My favorite is VTI. :happy

I'm even ok if people want to take absolute stands for simplicity. I'm just a depends type of guy I guess. :beer
just tryin' to understand the obvious
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

Calvert wrote: Mon Jan 23, 2023 9:35 pm
Apathizer wrote: Mon Jan 23, 2023 8:56 pm But we only know that in hindsight. There will always be actively managed funds and individual stocks that outperform, but the vast majority underperform.
I was trying to point out that some funds are more risky than some stocks. I don't think this is hindsight, and doesn't depend upon the actual returns.

So saying that funds are better than stocks without knowing anything about the fund or the stock just doesn't ring true to me.

I think we're all in agreement that low cost index funds are a great place to be. My favorite is VTI. :happy

I'm even ok if people want to take absolute stands for simplicity. I'm just a depends type of guy I guess. :beer
OK I think that's fair, and I was generalizing. Holding funds that target highly speculative investments like crypto or cannabis is almost certainly riskier than holding say 20 well established large companies, though yes using VTI is simpler and safer than the latter.
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Re: What's worse, holding stocks or actively managed funds?

Post by Northern Flicker »

Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
It isn't inherently bad, but most individual investors who do so end up with a portfolio that does not diversify away uncompensated security-specific risk adequately.
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Re: What's worse, holding stocks or actively managed funds?

Post by Northern Flicker »

Kelly wrote: Fri Jan 20, 2023 9:28 am Hi All

I friend asked me to look at his holdings. In his taxable account he holds both actively managed funds and stocks. There's 20 stocks. We'd like to net gains and losses and get rid of both in favor of index funds. Here's the issue: we can't get rid of all of them without accelerating a large tax bill. He'll retire in a couple of years so both the stocks and actively managed funds will be sold first. In the meantime, for example, should he sell this fund with a 0.99% ER and a beta of 1.16. It's slightly bettered its clone (less after tax) https://tinyurl.com/wfyvcvd4. Or should a high beta (1.4) stock go. We know the fund starts with a 0.99% loss but the stock is likely to loose more in a down market. Of course the stock can go to zero, while unlikely the fund will.

Any insight is appreciated!

Kelly
The answer depends on the particular holdings, their costs, and the amount of embedded gain in each.
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Re: What's worse, holding stocks or actively managed funds?

Post by Hector »

nedsaid wrote: Mon Jan 23, 2023 1:16 pm
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
The risks of individual stocks to an individual investor are several.

1) First, you get expected to the unique risks of particular companies. A good reason that more stocks are better
than fewer.
2) Behavioral errors. Too often people will chase what is popular and what has already performed very well. This leads
to overpaying for stocks. Also people who performance chase are also emotionally vulnerable to selling when markets are down. Buying high and selling low is not a prescription for wealth building but it is a route that people often take nevertheless.
3) Sector concentration. You want to be diversified across industry groups. People often concentrate in too few sectors.
4) Lack of research. People often will chase a hot stock tip and won't do much in the way of research. You want to learn about the company and about the industry in which it operates. With lack of research, people can pay too much for their stocks. People can also be naive to the risks they are taking.
5) Lack of patience. Behind every a stock purchase, there is a story behind that or there should be. Sometimes it takes a while for the story or the narrative behind the stock purchase to play out. One should look for holding periods of at least five years in their stocks.
6) Greater volatility. A portfolio of 5 stocks will most likely be more volatile than a portfolio of 15 stocks, a portfolio of 25 stocks will most likely be less volatile than a portfolio of 15 stocks. You will also see more uneven returns than in an index.
7) Tracking error risk. You run the risk of trailing your benchmark index. Memory recalls that most individuals who pick stocks trail the broad indexes by about 4% a year. Much of this is due to bad investor behavior.
8) On the other hand, an individual can hold too many stocks individually. Probably 15-25 stocks are the most that individuals can reasonably follow, I think 30 is probably the maximum.

But yes, I agree. Holding individual stocks in itself isn't bad. It takes effort and homework but it can be done. The thing is, your odds of outperforming the broad indexes aren't huge. I know such things from real life experience.
Holding individual stocks does not mean one tries to outperform the board index; https://www.bogleheads.org/wiki/Passive ... ual_stocks
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Re: What's worse, holding stocks or actively managed funds?

Post by comeinvest »

Hector wrote: Mon Jan 23, 2023 11:21 pm
nedsaid wrote: Mon Jan 23, 2023 1:16 pm
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
The risks of individual stocks to an individual investor are several.

1) First, you get expected to the unique risks of particular companies. A good reason that more stocks are better
than fewer.
2) Behavioral errors. Too often people will chase what is popular and what has already performed very well. This leads
to overpaying for stocks. Also people who performance chase are also emotionally vulnerable to selling when markets are down. Buying high and selling low is not a prescription for wealth building but it is a route that people often take nevertheless.
3) Sector concentration. You want to be diversified across industry groups. People often concentrate in too few sectors.
4) Lack of research. People often will chase a hot stock tip and won't do much in the way of research. You want to learn about the company and about the industry in which it operates. With lack of research, people can pay too much for their stocks. People can also be naive to the risks they are taking.
5) Lack of patience. Behind every a stock purchase, there is a story behind that or there should be. Sometimes it takes a while for the story or the narrative behind the stock purchase to play out. One should look for holding periods of at least five years in their stocks.
6) Greater volatility. A portfolio of 5 stocks will most likely be more volatile than a portfolio of 15 stocks, a portfolio of 25 stocks will most likely be less volatile than a portfolio of 15 stocks. You will also see more uneven returns than in an index.
7) Tracking error risk. You run the risk of trailing your benchmark index. Memory recalls that most individuals who pick stocks trail the broad indexes by about 4% a year. Much of this is due to bad investor behavior.
8) On the other hand, an individual can hold too many stocks individually. Probably 15-25 stocks are the most that individuals can reasonably follow, I think 30 is probably the maximum.

But yes, I agree. Holding individual stocks in itself isn't bad. It takes effort and homework but it can be done. The thing is, your odds of outperforming the broad indexes aren't huge. I know such things from real life experience.
Holding individual stocks does not mean one tries to outperform the board index; https://www.bogleheads.org/wiki/Passive ... ual_stocks
Correct. Educate yourself and don't just listen to the echo chamber. I would sell the active funds and add 10 or so more stocks to the passive, randomly sampled individual stock portfolio, or whatever is needed to diversify. Also supplement with some international stocks for additional diversification. Tax loss harvest existing and future losses, reinvest the proceeds into existing or new positions. Will likely perform better after tax than the index funds in the long run. That's what I do in my taxable account.

What has been rarely mentioned in this forum: If there is a chance that you ever live or retire abroad, the approach with a passive individual stock portfolio has invaluable benefits. In many cases funds and ETFs from regions in the world other than where you reside are "blacklisted" (particularly U.S./Europe and vice versa) and/or punished with extremely unfavorable taxation; you may be forced to realize lifetime gains and/or incur gigantic tax bills, whether you sell or not. Be smart and think ahead.
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

Hector wrote: Mon Jan 23, 2023 11:21 pm
nedsaid wrote: Mon Jan 23, 2023 1:16 pm
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
The risks of individual stocks to an individual investor are several.

1) First, you get expected to the unique risks of particular companies. A good reason that more stocks are better
than fewer.
2) Behavioral errors. Too often people will chase what is popular and what has already performed very well. This leads
to overpaying for stocks. Also people who performance chase are also emotionally vulnerable to selling when markets are down. Buying high and selling low is not a prescription for wealth building but it is a route that people often take nevertheless.
3) Sector concentration. You want to be diversified across industry groups. People often concentrate in too few sectors.
4) Lack of research. People often will chase a hot stock tip and won't do much in the way of research. You want to learn about the company and about the industry in which it operates. With lack of research, people can pay too much for their stocks. People can also be naive to the risks they are taking.
5) Lack of patience. Behind every a stock purchase, there is a story behind that or there should be. Sometimes it takes a while for the story or the narrative behind the stock purchase to play out. One should look for holding periods of at least five years in their stocks.
6) Greater volatility. A portfolio of 5 stocks will most likely be more volatile than a portfolio of 15 stocks, a portfolio of 25 stocks will most likely be less volatile than a portfolio of 15 stocks. You will also see more uneven returns than in an index.
7) Tracking error risk. You run the risk of trailing your benchmark index. Memory recalls that most individuals who pick stocks trail the broad indexes by about 4% a year. Much of this is due to bad investor behavior.
8) On the other hand, an individual can hold too many stocks individually. Probably 15-25 stocks are the most that individuals can reasonably follow, I think 30 is probably the maximum.

But yes, I agree. Holding individual stocks in itself isn't bad. It takes effort and homework but it can be done. The thing is, your odds of outperforming the broad indexes aren't huge. I know such things from real life experience.
Holding individual stocks does not mean one tries to outperform the board index; https://www.bogleheads.org/wiki/Passive ... ual_stocks
Amazing. I would not have thought that Bogleheads would have such an article in its Wiki. There has been a lot of discussion here about tax loss harvesting with individual stocks. Folks will attempt to more or less replicate an index with individual stocks, Bogle talked about this. What is described in the article is very similar to what I have done myself except that most of my stocks are within an IRA so I am unconcerned about tax loss harvesting.

I would actually try to beat the indexes a bit, one reason my stocks tend to have a Value orientation. I realized after a while what I was really doing was sampling. Last I checked, my 15 year performance was about the same as the Vanguard Value Index. It is actually not a bad accomplishment.

The Wiki article is sort of a vindication, it echoes things I have said here many times. I guess I really do know a thing or two.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

nedsaid wrote: Tue Jan 24, 2023 8:24 am I would actually try to beat the indexes a bit, one reason my stocks tend to have a Value orientation. I realized after a while what I was really doing was sampling. Last I checked, my 15 year performance was about the same as the Vanguard Value Index. It is actually not a bad accomplishment.
So you had essentially the same return as holding an index that requires much less time, effort, and complexity. How exactly is that a worthwhile accomplishment over just holding the index? That doesn't seem even remotely worthwhile.
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

nedsaid wrote: Tue Jan 24, 2023 8:24 am
Hector wrote: Mon Jan 23, 2023 11:21 pm
nedsaid wrote: Mon Jan 23, 2023 1:16 pm
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
The risks of individual stocks to an individual investor are several.

1) First, you get expected to the unique risks of particular companies. A good reason that more stocks are better
than fewer.
2) Behavioral errors. Too often people will chase what is popular and what has already performed very well. This leads
to overpaying for stocks. Also people who performance chase are also emotionally vulnerable to selling when markets are down. Buying high and selling low is not a prescription for wealth building but it is a route that people often take nevertheless.
3) Sector concentration. You want to be diversified across industry groups. People often concentrate in too few sectors.
4) Lack of research. People often will chase a hot stock tip and won't do much in the way of research. You want to learn about the company and about the industry in which it operates. With lack of research, people can pay too much for their stocks. People can also be naive to the risks they are taking.
5) Lack of patience. Behind every a stock purchase, there is a story behind that or there should be. Sometimes it takes a while for the story or the narrative behind the stock purchase to play out. One should look for holding periods of at least five years in their stocks.
6) Greater volatility. A portfolio of 5 stocks will most likely be more volatile than a portfolio of 15 stocks, a portfolio of 25 stocks will most likely be less volatile than a portfolio of 15 stocks. You will also see more uneven returns than in an index.
7) Tracking error risk. You run the risk of trailing your benchmark index. Memory recalls that most individuals who pick stocks trail the broad indexes by about 4% a year. Much of this is due to bad investor behavior.
8) On the other hand, an individual can hold too many stocks individually. Probably 15-25 stocks are the most that individuals can reasonably follow, I think 30 is probably the maximum.

But yes, I agree. Holding individual stocks in itself isn't bad. It takes effort and homework but it can be done. The thing is, your odds of outperforming the broad indexes aren't huge. I know such things from real life experience.
Holding individual stocks does not mean one tries to outperform the board index; https://www.bogleheads.org/wiki/Passive ... ual_stocks
Amazing. I would not have thought that Bogleheads would have such an article in its Wiki. There has been a lot of discussion here about tax loss harvesting with individual stocks. Folks will attempt to more or less replicate an index with individual stocks, Bogle talked about this. What is described in the article is very similar to what I have done myself except that most of my stocks are within an IRA so I am unconcerned about tax loss harvesting.

I would actually try to beat the indexes a bit, one reason my stocks tend to have a Value orientation. I realized after a while what I was really doing was sampling. Last I checked, my 15 year performance was about the same as the Vanguard Value Index. It is actually not a bad accomplishment.

The Wiki article is sort of a vindication, it echoes things I have said here many times. I guess I really do know a thing or two.
I think the standard investor should not do this (the page does say "This article is intended for experienced investors."). However, I am pretty sure that many market veterans can make a reasonable portfolio. I have always said that active investing is "not about beating the market but meeting goals". Some can do it by buying passive funds, some use active funds, some do it themselves with direct selection.

There is a lot to gain and learn from the market from doing stuff yourself. But most people do not have the ability to handle it properly.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

secondopinion wrote: Tue Jan 24, 2023 12:12 pm There is a lot to gain and learn from the market from doing stuff yourself. But most people do not have the ability to handle it properly.
I take that a step further and say almost no one has ability. You're basically talking about amateur active investors trying to beat the market. If 80% of professional active managers fail to beat the market, what chance do amateurs? So low it's almost impossible.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

Apathizer wrote: Tue Jan 24, 2023 12:21 pm
secondopinion wrote: Tue Jan 24, 2023 12:12 pm There is a lot to gain and learn from the market from doing stuff yourself. But most people do not have the ability to handle it properly.
I take that a step further and say almost no one has ability. You're basically talking about amateur active investors trying to beat the market. If 80% of professional active managers fail to beat the market, what chance do amateurs? So low it's almost impossible.
If all one cares about is the market returns, then go with the market index; they will have essentially no deviation. But I just said it is not about beating the market. It seems like you are getting stuck on the concept that active management = trying to beat the market. When one sees the details, they start to see that each stock, like bonds, have their own flavor and is suitable for a different audience. It is like trying to convince the bond index fund is better when talking to individual bond investors; the research is favorable, but likely the seasoned individual bond investors have a better idea of what they need.

I think a lot is missed if one is ignoring the details.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

secondopinion wrote: Tue Jan 24, 2023 12:40 pm
Apathizer wrote: Tue Jan 24, 2023 12:21 pm
secondopinion wrote: Tue Jan 24, 2023 12:12 pm There is a lot to gain and learn from the market from doing stuff yourself. But most people do not have the ability to handle it properly.
I take that a step further and say almost no one has ability. You're basically talking about amateur active investors trying to beat the market. If 80% of professional active managers fail to beat the market, what chance do amateurs? So low it's almost impossible.
If all one cares about is the market returns, then go with the market index; they will have essentially no deviation. But I just said it is not about beating the market. It seems like you are getting stuck on the concept that active management = trying to beat the market. When one sees the details, they start to see that each stock, like bonds, have their own flavor and is suitable for a different audience. It is like trying to convince the bond index fund is better when talking to individual bond investors; the research is favorable, but likely the seasoned individual bond investors have a better idea of what they need.

I think a lot is missed if one is ignoring the details.
It seems like you're talking about investor tastes, which I'm not interested in. Investing isn't like food preferences for me. While I do try to maintain a relatively healthy diet, if I did that I wouldn't enjoy all my meals.

Investing is different for me in that I try to keep it simple and practical. I don't see the need to make things unnecessarily complicated by holding individual stocks.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

Apathizer wrote: Tue Jan 24, 2023 10:52 am
nedsaid wrote: Tue Jan 24, 2023 8:24 am I would actually try to beat the indexes a bit, one reason my stocks tend to have a Value orientation. I realized after a while what I was really doing was sampling. Last I checked, my 15 year performance was about the same as the Vanguard Value Index. It is actually not a bad accomplishment.
So you had essentially the same return as holding an index that requires much less time, effort, and complexity. How exactly is that a worthwhile accomplishment over just holding the index? That doesn't seem even remotely worthwhile.
It is a worthwhile accomplishment because the research says that most people who do this trail the indexes by 4% a year, mainly because of bad investor behavior. I started doing this in 1989 before I knew what I know today.

This is also how I learned so much about companies, industries, the economy, the markets. It was like receiving a second degree in Business. So yes, that is an accomplishment.
Last edited by nedsaid on Tue Jan 24, 2023 1:46 pm, edited 1 time in total.
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

secondopinion wrote: Tue Jan 24, 2023 12:12 pm
nedsaid wrote: Tue Jan 24, 2023 8:24 am
Hector wrote: Mon Jan 23, 2023 11:21 pm
nedsaid wrote: Mon Jan 23, 2023 1:16 pm
Hector wrote: Sun Jan 22, 2023 9:35 pm I would sell actively managed funds as longs as I don’t pay capital gain tax.
I don’t think holding individual stocks is bad.
The risks of individual stocks to an individual investor are several.

1) First, you get expected to the unique risks of particular companies. A good reason that more stocks are better
than fewer.
2) Behavioral errors. Too often people will chase what is popular and what has already performed very well. This leads
to overpaying for stocks. Also people who performance chase are also emotionally vulnerable to selling when markets are down. Buying high and selling low is not a prescription for wealth building but it is a route that people often take nevertheless.
3) Sector concentration. You want to be diversified across industry groups. People often concentrate in too few sectors.
4) Lack of research. People often will chase a hot stock tip and won't do much in the way of research. You want to learn about the company and about the industry in which it operates. With lack of research, people can pay too much for their stocks. People can also be naive to the risks they are taking.
5) Lack of patience. Behind every a stock purchase, there is a story behind that or there should be. Sometimes it takes a while for the story or the narrative behind the stock purchase to play out. One should look for holding periods of at least five years in their stocks.
6) Greater volatility. A portfolio of 5 stocks will most likely be more volatile than a portfolio of 15 stocks, a portfolio of 25 stocks will most likely be less volatile than a portfolio of 15 stocks. You will also see more uneven returns than in an index.
7) Tracking error risk. You run the risk of trailing your benchmark index. Memory recalls that most individuals who pick stocks trail the broad indexes by about 4% a year. Much of this is due to bad investor behavior.
8) On the other hand, an individual can hold too many stocks individually. Probably 15-25 stocks are the most that individuals can reasonably follow, I think 30 is probably the maximum.

But yes, I agree. Holding individual stocks in itself isn't bad. It takes effort and homework but it can be done. The thing is, your odds of outperforming the broad indexes aren't huge. I know such things from real life experience.
Holding individual stocks does not mean one tries to outperform the board index; https://www.bogleheads.org/wiki/Passive ... ual_stocks
Amazing. I would not have thought that Bogleheads would have such an article in its Wiki. There has been a lot of discussion here about tax loss harvesting with individual stocks. Folks will attempt to more or less replicate an index with individual stocks, Bogle talked about this. What is described in the article is very similar to what I have done myself except that most of my stocks are within an IRA so I am unconcerned about tax loss harvesting.

I would actually try to beat the indexes a bit, one reason my stocks tend to have a Value orientation. I realized after a while what I was really doing was sampling. Last I checked, my 15 year performance was about the same as the Vanguard Value Index. It is actually not a bad accomplishment.

The Wiki article is sort of a vindication, it echoes things I have said here many times. I guess I really do know a thing or two.
I think the standard investor should not do this (the page does say "This article is intended for experienced investors."). However, I am pretty sure that many market veterans can make a reasonable portfolio. I have always said that active investing is "not about beating the market but meeting goals". Some can do it by buying passive funds, some use active funds, some do it themselves with direct selection.

There is a lot to gain and learn from the market from doing stuff yourself. But most people do not have the ability to handle it properly.
I have told people to invest with the broad indexes. If they want to try some some of active management use the factor funds at DFA or Avantis. The low cost active funds at Vanguard would also be acceptable. I don't tell average investors to pick stocks. What I will do, if they have that itch to do individual stocks, is how to do it in a way that minimizes their risk.
A fool and his money are good for business.
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