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

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

Post by secondopinion »

Apathizer wrote: Tue Jan 24, 2023 2:09 pm
secondopinion wrote: Tue Jan 24, 2023 1:40 pm
Apathizer wrote: Tue Jan 24, 2023 1:21 pm
secondopinion wrote: Tue Jan 24, 2023 1:12 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.
In this lies the reason for the disagreement.

You might not see the need of individual stocks, which is fine; nothing is wrong with that. But some do not agree with your assessment, which is also fine. If the complexity is too much for one and hardly anything for another, then that is also a factor to consider.

It is too wide to assume that the market portfolio held in a fund is suitable for every investor; you are clearly not holding it. Why? You have your reasons; they are probably reasonable. But I doubt every investor would benefit similarly, not in returns but in meeting expectations.

It is a matter of opinion at this point.
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.
secondopinion
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Joined: Wed Dec 02, 2020 1:18 pm

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

Post by secondopinion »

nedsaid wrote: Tue Jan 24, 2023 2:44 pm
secondopinion wrote: Tue Jan 24, 2023 1:12 pm
nedsaid wrote: Tue Jan 24, 2023 9:24 am
Hector wrote: Tue Jan 24, 2023 12:21 am
nedsaid wrote: Mon Jan 23, 2023 2:16 pm

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.
That is correct.

The entire point of investing is to have the highest likelihood of meeting goals while reducing risks that cannot be afforded (including risks to our own human capital). Speculation is about taking risks for profit; the affordance of speculation is debatable. However, like treasury bonds/TIPS are not enough returns for some investors to actually meet goals, many must take some speculative risks. Total stock funds are generally enough, but it is not always ideal for every investor. Most investors, maybe it is better.

I have learned over the years that my objectives are more important than the market's returns; I stopped tracking the market because it is pointless to this reality. Beat or lose to the market, I have had both. As long as my objectives are the forefront rather than the market, I do just fine.
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.
Topic Author
Kelly
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Re: What's worse, holding stocks or actively managed funds?

Post by Kelly »

Thanks all for the helpful replies. I'm going to recommend 1) that the all stocks with a loss are sold (the funds all have gains, 2) there are two funds with 1.9% ERs that have trailed their clones markedly-they go next, 2) the remaining losses are used to get rid of the highest beta stocks which are also LCG stocks. As expected the stocks are the typical LCG names. Here are the stocks vs a clone https://tinyurl.com/68rpnxn8

There won't be a tax bill at this point. The remaining stocks/funds with a MV of $240k have a $70k gain. It may be hard to swallow a $14,000 tax hit all at once. But, unless I'm missing something and assuming all will be eventually sold, it's safer to accelerate the tax bill and buy VTI and VXUS.
secondopinion
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Re: What's worse, holding stocks or actively managed funds?

Post by secondopinion »

Kelly wrote: Tue Jan 24, 2023 4:07 pm Thanks all for the helpful replies. I'm going to recommend 1) that the all stocks with a loss are sold (the funds all have gains, 2) there are two funds with 1.9% ERs that have trailed their clones markedly-they go next, 2) the remaining losses are used to get rid of the highest beta stocks which are also LCG stocks. As expected the stocks are the typical LCG names. Here are the stocks vs a clone https://tinyurl.com/68rpnxn8

There won't be a tax bill at this point. The remaining stocks/funds with a MV of $240k have a $70k gain. It may be hard to swallow a $14,000 tax hit all at once. But, unless I'm missing something and assuming all will be eventually sold, it's safer to accelerate the tax bill and buy VTI and VXUS.
Unless there is other tax considerations, it might be to your benefit; the gains are not massive enough in comparison to the actual holdings to warrant not selling if the goal is to be in VTI and VXUS. This would be especially true if this is a large portion of your portfolio (which I have not looked through the thread to tell).

At least, this is my opinion.
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.
Northern Flicker
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Re: What's worse, holding stocks or actively managed funds?

Post by Northern Flicker »

Apathizer wrote: Tue Jan 24, 2023 11:52 am
nedsaid wrote: Tue Jan 24, 2023 9:24 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.
Time spent aside, the concentrated portfolio took more idiosyncratic risk to achieve about the same return.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Apathizer
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Re: What's worse, holding stocks or actively managed funds?

Post by Apathizer »

Northern Flicker wrote: Tue Jan 24, 2023 10:24 pm
Apathizer wrote: Tue Jan 24, 2023 11:52 am
nedsaid wrote: Tue Jan 24, 2023 9:24 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.
Time spent aside, the concentrated portfolio took more idiosyncratic risk to achieve about the same return.
Exactly. I guess someone just wants to dabble with a small portion of their portfolio the risk is minimal, but I certainly wouldn't allocate a more than that.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
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nedsaid
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Re: What's worse, holding stocks or actively managed funds?

Post by nedsaid »

secondopinion wrote: Tue Jan 24, 2023 3:27 pm
nedsaid wrote: Tue Jan 24, 2023 2:44 pm
secondopinion wrote: Tue Jan 24, 2023 1:12 pm
nedsaid wrote: Tue Jan 24, 2023 9:24 am
Hector wrote: Tue Jan 24, 2023 12:21 am
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.
That is correct.

The entire point of investing is to have the highest likelihood of meeting goals while reducing risks that cannot be afforded (including risks to our own human capital). Speculation is about taking risks for profit; the affordance of speculation is debatable. However, like treasury bonds/TIPS are not enough returns for some investors to actually meet goals, many must take some speculative risks. Total stock funds are generally enough, but it is not always ideal for every investor. Most investors, maybe it is better.

I have learned over the years that my objectives are more important than the market's returns; I stopped tracking the market because it is pointless to this reality. Beat or lose to the market, I have had both. As long as my objectives are the forefront rather than the market, I do just fine.
Yes, an investor might choose to veer from a Total Stock Market Index to meet his or her objectives. For example, an older investor might choose to invest in higher dividend and lower volatility stocks for the dual purpose of income and lower portfolio in the portfolio. This investor wants to still participate in the Stock Market but with less volatility.

For me, individual stocks is mostly how I started equity investing though I had mutual fund investments before. When I started with the individual stocks in 1989, my equity investing really got rolling. So what I did was a dual track. By the year 2000, my equity investments were about 50% in individual stocks and 50% in stock mutual funds. After the 2000-2002 bear market, I made the conscious decision to emphasize mutual funds, particularly index funds, over individual stocks.

62% of the portfolio is in equities, almost 21% of my equities or 13% of my portfolio are in individual stocks. Why am I doing that? First, it is fun to own stocks individually. Second, it has been a terrific learning experience. It gives me insight to what portfolio managers face, or as the Wiki puts it, I see how sausages are made. Third, I haven't hurt myself doing this as the stocks have performed as one would expect. Fourth, I see this as a source of a growing income stream through the dividends. As I get closer to retirement, I value that income stream more and more. Fifth, I see this as a mostly passive investment, in keeping with the Boglehead philosophies.
A fool and his money are good for business.
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