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  • 30-40 stock portfolio or index fund

    pros/cons of either approach?

  • #2
    VTI

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    • #3
      right but that also eliminates the possibility of owning a tesla,amazon,apple, fb etc that outperforms the market. I understand that stockpicking is risky but I want to know how worse off buying a bunch of individual stocks that is pretty diversified in terms of sector, in comparison to an index fund. I understand most here will favor the index fund but can you explain the reason why

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      • #4
        many books on the subject- JL Collins A simple path to wealth, pretty much any book by bogle or his bogleheads followers, The only investment guide youll ever need by Andrew Tobias, etc...

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        • #5
          to think you’re going to outperform long term requires you to believe you’re somehow smarter than everyone else. Data proves that it’s really really really hard to do

          plus, why? You’ll be just fine with average. Don’t lose your job, don’t go to jail, don’t get divorced. You’ll be rich.

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          • #6
            Originally posted by Mindwarp86 View Post
            right but that also eliminates the possibility of owning a tesla,amazon,apple, fb etc that outperforms the market. I understand that stockpicking is risky but I want to know how worse off buying a bunch of individual stocks that is pretty diversified in terms of sector, in comparison to an index fund. I understand most here will favor the index fund but can you explain the reason why
            Most on the board will tell you to just index. It's decent but the biggest benefit is that it requires near zero effort and, if you make a plan and stick to it, results in zero stress. It's putting your retirement vehicle on autopilot (in the colloquial sense, not the Tesla version that still requires you to do stuff) -- easy and it'll get you there. I'm in total agreement with that.

            But you'll also hear that it's impossible to do better than the index, which I disagree with. I think there are many ways to beat the index, but you have to put in some work. Most doctors, I believe, have plenty of work ethic and intelligence to do so; the only question is whether they care enough to do it and aren't one of the huge technophobic, arithmophobic doctors that you'll sometimes come across.

            The basic arguments are (with my rebuttals):
            1. No proven data showing it's possible to beat the index
            -- this usually has to do with fund managers who have very different requirements and limitations from an individual. Not a fair comparison. And I'm fully aware that the regular investor is going to underperform an index, either by listening to an advisor who is giving bad information, by investing using limited knowledge/research, or by being too emotional.
            2. Any success someone has is just luck or variance. Prove it over several decades.
            -- this is an unrefutable argument. Someone who had good success for 10 or 20 years probably doesn't need to keep investing, and any one person saying they've done so will be dismissed as just an outlier. If that's your mindset, just index.
            3. It's too risky.
            -- this depends on your strategy. Mine is a focused portfolio of high growth stocks. I follow them closely and I know enough about the companies to know that there is very little risk of complete collapse absent Enron or Luckin Coffee style fraud. The risk of these companies disappearing with no warning are vanishingly low. And even if one did, it would mean a 5-15% drop in my portfolio value. The risk of some kind of massive global event that drastically impacts the whole market (like say a global pandemic and associated economic shutdown) are higher than the risk of 2 of my companies turning out to be total frauds. But I don't invest unless I believe there is a potentially 300-500% rise in 3-5 years. Being right just 20% of the time can mean huge profits, even if the other 80% end up going nowhere.
            4. It takes too much work
            -- this can be true if any work is too much; if that's the case, indexing is the way to go. I can get away with 2-3 hours of research a week, a bit more during busy earnings season. Some strategies require more attention. Again, you need to find your style.
            5. You can't beat a professional as a part time investor
            -- the fund manager comparison applies here as well, plus you don't need to beat a professional, just an average indexing investor. Professional investors can beat the market at the same time as a small individual. This is nonsense.
            6. Some kind of theoretical reason for the average investor not being able to beat the market. Like for every winner there's a loser.
            -- you don't have to be average. Few on this board are. If you picked a random person off the street, I'm not sure one is more likely to pick someone who could make it through med school and residency and fellowship than an above average investor. Most investors buying stocks are buying based on a tip or some article in Forbes or name recognition. You can do better than that.

            Now, as to your suggestion of 30-40 stocks, personally I think that's too many unless it's a small set of high conviction stocks with a long tail of small positions that essentially don't impact the portfolio much. I don't think a non-professional has any chance of knowing enough about 30 different companies to make it worth investing a substantial portion of one's portfolio. I have 5-10 companies and loosely follow 3-5 more. I don't want to invest more in my 21st or 40th best idea. Buffet said "diversification is protection against ignorance... it makes little sense if you know what you are doing" and I agree. Owning equal positions in 20 stocks limits downside from any individual stock to 5%. Owning 30 stocks lowers that to 3.3%. At the same time, a huge rise in one out of 30 stocks might mean a 15% bump overall, but you'll have several other 2-3% holdings that don't do anything (unless you are so good that they all rise in which case you don't need to be listening to me). Mathematically it can work but only if you're willing to let your winners keep running. Most people owning 30 stocks will rebalance when one reaches 10% of their portfolio. But selling the one that triples to buy more of the ones that don't is probably the worst thing you can do. If you actually buy $10k starter positions and simply never sell, the few AAPLs, AMZNs, HANSs and PCLNs could drive your portfolio to the moon but you'd have the aforementioned concentrated core with long tail of dead money.

            You can also successfully buy value stocks, or turnarounds stories, or trade options, sector ETFs, commodities, leveraged ETFs, or high frequency day trade your way to success, you just need to learn enough to have conviction in what you're doing. And keep learning. Another reason most mutual funds fail to beat an index long term is that they usually have a core strategy that doesn't change. They have success for 5-10 years and it convinces them to stick with it even when the business environment changes. What worked in the 70s didn't work in the 90s and what worked in the 90s won't work now. The world evolves and the investing world changes with it. Keep Running: http://www.collaborativefund.com/blog/keep-running/

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            • #7
              "Before we invest, we should first ask, “Who is on the other side of the trade?” Who are the entities that dominate trading in that particular asset category? For the U.S. stock market, the answer is institutional investors including hedge funds, high-speed quantitative traders, and large portfolio management teams. This group of investors who collectively determine the price of individual stocks have far more knowledge, capacity, and resources than we have as individual investors to determine a stock’s intrinsic value.

              Of course, the consensus is often wrong. Individual stock prices are not always correct. The price of a security does not always reflect its intrinsic value. But do we have the skill to identify those mispriced securities? Are we smarter than other investors? Most professional investors fail to outperform the market, as measured by benchmark indexes such as the S&P 500 index SPX, +0.76% or the Dow Jones Industrial Average DJIA, +0.43%. Still, some professional investors do outperform, as do some individuals."

              "I have 5-10 companies and loosely follow 3-5 more. I don't want to invest more in my 21st or 40th best idea. Buffet said "diversification is protection against ignorance". Your stock picking methodology is not necessarily a 10 year shelf life. Likely, a ton shorter. Be wise, and know when to change. It's going to be hard to be nimble for 10 years let alone 30 years. You could do a lot of things. They all might work or fail or stay even. Which one do you think is best?
              Mr. Market is very tough. I hope you pick the right 5-10 stocks and cut your losses and let your winners run.
              https://fs.blog/2013/11/mr-market/

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              • #8
                Index funds are a lot easier and gives you average returns (which is still good and Can compound well)

                stock picking takes more time and can underperform or beat the indexers. I think there’s data out there saying that picking more than 15-20 diversified stocks Isn’t that different than indexing.

                There’s also nothing saying you have to do one or the other and stay that way forever. Index 90% and pick stocks 10% for fun. I started with 80% index and had 20% picking stocks. That slowly turned into 50% index and 50% picking. I’ve now gone 100% picking in my Roth/taxable. My 401k is still all index funds.

                its done well for me and I still see growth and success in the companies I picked while the indexes hold companies I don’t see doing well for the next few months or year. So once I don’t see the growth in my companies anymore and the indexed companies/industries come back I might go back to indexing.

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                • #9
                  Uncompensated risk

                  https://www.whitecoatinvestor.com/uncompensated-risk/

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                  • #10
                    Originally posted by Lordosis View Post
                    That's only valid if you accept the premise that stock picking is no better than indexing. Since I started fully investing in stocks where available about 4 years ago, the compensation for the risks I've taken has been +350% in overall portfolio value when compared to the forced indexing in some retirement accounts (+470% vs +110% for the mostly S&P 500 index accounts). All 9 of my stocks could drop 50% and the S&P could rise another 30% simultaneously and the stock portfolio would still be ahead.

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                    • #11
                      I tried both index and managed funds and over time have almost fully transitioned away from indexing which routinely under-performed for me, even factoring in expenses. Found this out objectively, although WCI does not agree with this position. My funds have outperformed indexing considerably for over a decade. Found them easy to find, and easy to predict the best sectors. This year especially shows you how easy it has been to outperform the beloved S&P indexing. I would have lost a lot of return had I been mainly indexing.

                      However, I think choosing individual stocks can be very tricky but I know a few who have done so quite successfully focusing in on the most promising companies in each sector, such as Apple for tech play, Amazon for consumer cyclicals, Google/Facebook for internet, Nvidia for semiconductors, United Healthcare in the healthcare sector, Dexcom for medical devices, Home Depot in the real estate market, etc. as long term buy and holds.

                      Individual stocks are a bit too aggressive for me, the most risk I've taken was leveraging the Nasdaq 100 (essentially a composite of the top 100 companies) with great 38% annualized long term returns. That's crazy, but those are the objective numbers. I really don't care who writes what book about indexing, which is essentially flat for the year. No one can argue with real numbers, but people do so here all the time! I just laugh when people refuse to be resilient and open-minded to real numbers instead opting to believe in theoretical arguments, to their financial detriment.

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                      • #12
                        Originally posted by mgchan View Post

                        That's only valid if you accept the premise that stock picking is no better than indexing. Since I started fully investing in stocks where available about 4 years ago, the compensation for the risks I've taken has been +350% in overall portfolio value when compared to the forced indexing in some retirement accounts (+470% vs +110% for the mostly S&P 500 index accounts). All 9 of my stocks could drop 50% and the S&P could rise another 30% simultaneously and the stock portfolio would still be ahead.
                        You could be as good as you think, or you could just be lucky. If your +470% is from Google, Facebook, Tesla, Apple, and Netflix I’d guess a little of both. (Hey you deserve credit for making the decisions and then buying.) But four years is not much history. If your 5-10 stocks fall out of favor, will your system notify you in advance so you can sell them and buy the next 5 winners, or are you holding forever a la Buffett/Munger?

                        I wish you all the best. Yet I am politely skeptical you can do this consistently. I had many friends, mostly smart engineers, who thought they could pick stocks right up until they lost their shirts in the dot com bust. My favorite was a friend who explained to me that his system of investing in IPOs was a winning strategy (it wasn’t). On the other hand, by definition there will be statistical outliers. Might be you. It is unlikely to be the average doc who reads your results and decides to try it.

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                        • #13
                          Appreciate the lively discussion. I have another random question. If I invest in a bond fund such as TIPS or VBD, is it OK to do so in a taxable account or is this only a smart idea in a tax deferred account

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                          • #14
                            Originally posted by Mindwarp86 View Post
                            Appreciate the lively discussion. I have another random question. If I invest in a bond fund such as TIPS or VBD, is it OK to do so in a taxable account or is this only a smart idea in a tax deferred account
                            Well, more a rule of thumb, but many argue bond funds belong in tax deferred accounts to avoid taxes on the interest income. The corollary is that if you buy bond funds outside of tax deferred accounts you should buy a municipal bond fund (I use Vanguard intermediate term). All that said, it doesn’t make that much difference at today’s interest rates.

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                            • #15
                              Originally posted by Larry Ragman View Post

                              You could be as good as you think, or you could just be lucky. If your +470% is from Google, Facebook, Tesla, Apple, and Netflix I’d guess a little of both. (Hey you deserve credit for making the decisions and then buying.) But four years is not much history. If your 5-10 stocks fall out of favor, will your system notify you in advance so you can sell them and buy the next 5 winners, or are you holding forever a la Buffett/Munger?

                              I wish you all the best. Yet I am politely skeptical you can do this consistently. I had many friends, mostly smart engineers, who thought they could pick stocks right up until they lost their shirts in the dot com bust. My favorite was a friend who explained to me that his system of investing in IPOs was a winning strategy (it wasn’t). On the other hand, by definition there will be statistical outliers. Might be you. It is unlikely to be the average doc who reads your results and decides to try it.
                              Well, I simply didn't have any money before 4-5 years ago, but I did pretty well with the limited amounts I had from jobs I took as a high schooler. I did own Apple mostly from 2003 until a few years ago but again it was very little initial capital and I made the mistake of "diversifying" by selling it whenever it doubled or tripled to buy other stocks. Some were successes and others were not. And apart from a few short stints in Tesla and Facebook, I've stayed away from buying simply because I like or use the products.

                              My strategy is based on buying and holding growth stocks as long as they continue growing. Those were my most successful investments since I've been an adult, though the definition of growth has changed (as discussed in the "Keep Running" link). It was more focused on earnings growth in the late '90s (when I was too young to invest) and early 2000s, but Amazon changed the game, and companies now invest more in themselves rather than focusing on earnings. So now it's more about revenue growth and profit margins. The stocks you mentioned fit that description though I look for even faster growers that are usually less well known and have less market cap. The "system" notifies me to sell when the company reports slowing growth. It's not in advance of the slowing growth and I'll often take a hit after earnings when that happens but if that comes after a long run of success (several quarters if not more) then it's not a big deal. My investing style requires being willing to accept volatility and having conviction in one's decisions while not being emotional, but it's worked so far and from what I've studied the concept has succeeded for long periods of time.

                              I understand it's not for most people, I just like to throw it out as a consideration. I don't think there is any way to convince many on the board because they seemingly want a 30-40 year randomized control trial showing success which just isn't possible; and even if it was, by the time it completed it would be irrelevant to those needing convincing. Truthfully, if I have the same success for just 10 years (i.e. 6 more years), I'll be ready to retire anyway and would probably move a lot of my portfolio into less volatile investments. At that point, I'd have enough for a standard retirement with some extra funds with which I can continue investing.

                              As I said before, I recommend indexing to most colleagues or friends who ask about investing, and only go further into how I pick stocks if they actually show an interest in the method. Even then, I never make outright buy or sell recommendations. While I don't have a problem sharing my portfolio and have done so on this site, I think the simple fact of having someone else relying on your decisions can drastically affect decision making. I didn't even manage my wife's accounts until a few years into our marriage (she has absolutely zero knowledge or interest in it), but the huge difference in results essentially forced me to call off the trial of stocks vs. indexing and switch it over. I fully accept that I might be wrong but as I mentioned at this point I feel I've built up enough of a lead in the stocks that even if I am wrong, I don't think we'll be worse off than if I had stuck with indexing.

                              Maybe I'm wrong, and/or maybe I'm just lucky. I just never bought the concept that it's so extraordinarily difficult or impossible to beat an index. I enjoy learning and have personally tried various strategies with varying degrees of success (indexing, value, turnarounds, market timing, dividends, stories/themes, etc), and looking back at my long term successes, those have all been growth stories. A good growing company can grow during both the good times and the bad, and many of the companies I've mentioned on the board before are examples of that.

                              With regard to the dot com bubble, the people who lost their shirts are those who only started investing during the bubble. I don't consider it a disaster if you invested in 1995, saw your portfolio rise 10x, then had it fall back to 3x all within 7-8 years. Instead of seeing it as a loss of 70%, I see it as a 20% compounded growth rate.

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