Investment inertia--please give me a swift kick!

[plane2port]

I have not been following through on my carefully thought-out portfolio plan. Please pick one of the following 3 choices.

1. Give me a swift kick in the behind.
2. Shame me into taking action.
3. Tell me again why I should not be trying to time the market.

Many of you may recognize me as someone who is fairly active on the manufacturing spend thread. That is where the fun is, and frankly I would rather be over there discussing the value of a hard pull or churning credit cards. Travel and how to travel cheaply is my hobby. But to enjoy carefree travel, the financial house must be in order, and this is where I've been spending a lot of time lately.

I've had my IRA at Vanguard since I rolled it out of my 403b when I retired. I had a play money account that I moved in and out of Fidelity for the miles, and a small account at Tradeking that I used to dabble in options. I've always loved the stock market and bought stocks based on payout ratios, P/E's, etc. But over the past few years, I've realized that stock trading is a fool's game, and that indexing was really the way to go.

As you all know, Saverocity has some great forums, and I found this one on investing. It was here that some folks recommended bogleheads dot org for investors that like simple straightforward investing in index funds and ETFs. I saw a link to a wiki called Lazy Portfolios. (This sounded like my kind of investment already.) I was attracted to the 3-fund portfolio, which consisted of a total stock market fund, a total bond fund, and a REIT. I had it all figured out. I was going to use the bond fund and REIT in my IRA and put the taxable funds into the Total Stock Market. I sold some investments, moved all my funds to Vanguard, and prepared to move the money into the three funds (actually the plan is to buy the ETF versions of those funds.)

And I can't make myself make the purchases. Why? Because the market is so damn high right now! I know that I am being ridiculous. The market may go down 40% or this may be the lowest it will ever be. Who knows? I know I should get my money in there, stop worrying, and go travel.

So please, please pick option 1,2, 3 above and show no mercy.

 

[Annie H.]

I chose #1, did you feel it ?,but if I had more time I could do #2 or #3. You probably need a little more stimulation than a lazy portfolio? Designate a percentage, perhaps 5% that you want to use as "play money" and do just that, speculate.

 

[overclocked92]

#1... you said it you prefer to spend your time on MS and other more fun stuff. Based on that Lazy Investing is what you are in need of. Just do it.

 

[Annie H.]

Well... did you do it? Do you need another kick? How about this. Chose a Vgd Target Date Fund and when you get tired of MS-- or it gets too time consuming or difficult--implement your lazy strategy. Or DCA... or don't. Just DO something! Consider yourself kicked again...

 

[Joseph]

Maybe reading the stock series from Mr. Collins will persuade you to take action:

http://jlcollinsnh.com/2012/04/25/stocks-part-iii-most-people-lose-money-in-the-market/

 

[plane2port]

Well... did you do it? Do you need another kick? How about this. Chose a Vgd Target Date Fund and when you get tired of MS-- or it gets too time consuming or difficult--implement your lazy strategy. Or DCA... or don't. Just DO something! Consider yourself kicked again...

Maybe reading the stock series from Mr. Collins will persuade you to take action:

http://jlcollinsnh.com/2012/04/25/stocks-part-iii-most-people-lose-money-in-the-market/

Thanks for the kicks, folks!

Annie, I'm going to DCA into the Target Date Fund!

Joseph, there's a lot of wisdom in that article.

 

[Annie H.]

Annie, I'm going to DCA into the Target Date Fund!

I arranged Friday's drop just for you! You probably know this already but instead of just going for the Target Date Fund that corresponds to your age, take a look at the fixed/equity allocation and chose that way. Your age may dictate a 2030 fund but your allocation may mean a 2025 or a 2035 fund. Also look at and consider the Lifestyle funds. I believe Vanguard quite recently made a change to -- add more international? to their Target Date Funds? These days MF managers are tinkering more and more with Target Date Funds to up their returns, keep an eye out.

 

[Julian Brennan]

Annie, I'm going to DCA into the Target Date Fund!

TDF is better than nothing I suppose but I believe these are still a version of stuffing a variation of one size fits all down your throat. You said in the OP that stock picking is a fool's game. Well in that case I must be a fool. I follow the dividend growth investment (DGI) strategy. The dividend yield on our IRAs is growing by roughly 1 percentage point each year for money already invested there. There's new money going in each and every month at the initial yield of ~3% (or more like 2% right now due to the high pricing). It's a very simple strategy, requires only a little tool, almost no time and yet is so much more fruitful than simply stuffing money in an index fund which solely relies on price appreciation.

This is actually the biggest reason why I don't like the ETF/index fund way. You still have to sell assets when you need the money back. With focusing on income in form of dividends, there's a good chance that we won't have to sell a single stock come retirement time and instead just live off the dividends forever. Cost is another factor. Pay $8.95 or whatever your broker charges and you're set for life. No .5% here or 1% there in fees each and every year. The $9 commission equals 1% of my invested sum each month - but this is being paid only once - not recurringly.

Talking about the possibility that the market might take a hike 40% downhill? Yeah a great opportunity to snap up cheap shares of wonderful companies.

I understand this probably won't work for you as you're already retired and the initial dividend yields are low right now due to the high valuations. However, if already in retirement, what is a TDF good for? If you're concerned about a crash - which will inevitable come sooner or later - a total stock market fund is not the right answer. It all depends if you need the money or not. If you need money within the next 5 years, don't put it into the stock market at all. If you don't, why not just go for something with yield like a world stock dividend ETF? They are a little more expensive but the yield is in the 5% area.

 

[Matt]

The $9 commission equals 1% of my invested sum each month - but this is being paid only once - not recurringly.

Paying $9 each month=recurring payments... on a monthly basis. That's $108 per year. That level would equate to a 0.2% (which is on the higher side of ETFs) of a $54000 portfolio. As such you could say that if your assets are <$54K you would be better off on the fee side by using an ETF. If Assets are greater then paying the transaction cost seems superior.

You still have to sell assets when you need the money back. With focusing on income in form of dividends, there's a good chance that we won't have to sell a single stock come retirement time and instead just live off the dividends forever.

I don't really understand the distinction. If you track dividend paying stocks you will see that the value of the stock declines by the amount of the dividend at time of assignment. That is no different from 'selling' the amount equal to the dividend.

I'm not against dividend paying stocks, just pointing out that it seems the same concept to me. I do agree there comes a point when people should shift some funds into single stocks. However, for the most part that comes too early on in the wealth generation roadmap of many people. Overall, I think people expect too much of the heavy lifting in their wealth to come from the market, rather than good ole hard work (or at least self generated income).

 

[Joseph]

Receiving dividends in a taxable account is a taxable event, so you will you will give up a portion of dividend earnings per year. Do you think that DGI strategy works better in tax advantaged accounts such as IRA and 401k?

 

[Matt]

Receiving dividends in a taxable account is a taxable event, so you will you will give up a portion of dividend earnings per year. Do you think that DGI strategy works better in tax advantaged accounts such as IRA and 401k?

Well, taxes work in your favor too. If you do cherry pick stocks the impact of a single company within your selection failing is more of an overall shock to your portfolio. If you push your stocks into tax advantaged accounts you lose out on the lot of the Cap Loss harvesting possibilities... so it isn't a clear choice.

I like to put risky plays into taxable for that reason, but also dislike paying any tax at all, so will often put dividend paying things into advantaged accounts.

 

[plane2port]

Any good links to the DGI strategy?

 

[Julian Brennan]

Paying $9 each month=recurring payments... on a monthly basis. That's $108 per year. That level would equate to a 0.2% (which is on the higher side of ETFs) of a $54000 portfolio. As such you could say that if your assets are <$54K you would be better off on the fee side by using an ETF. If Assets are greater then paying the transaction cost seems superior.

First off .2% is not on the higher end of the ETF fee spectrum, it's actually pretty median, especially when you consider the yield. Yes, simple index ETF charge anywhere .05-.25% or so but there's no yield on them. Higher yielding ETFs charge around .4-.6%. Second as you already pointed out the fee is assessed on new money only. Since my portfolio values are near the break even point already, I'm happily paying the $8.95 to Mr. Schwab.

 

[Matt]

First off .2% is not on the higher end of the ETF fee spectrum, it's actually pretty median, especially when you consider the yield. Yes, simple index ETF charge anywhere .05-.25% or so but there's no yield on them. Higher yielding ETFs charge around .4-.6%. Second as you already pointed out the fee is assessed on new money only. Since my portfolio values are near the break even point already, I'm happily paying the $8.95 to Mr. Schwab.

Alright sure.. there are ETFs with expense ratios up to 8%, but you can easily find 100 or more that are under .20 and cover most allocations with that.

As I mentioned, not against stocks, but at the right time, and for the right people. When generalizing I'd much rather say that ETFs are 'safer' and the returns are 'adequate'. A compounded problem is people that are drawn to exceptional returns are often very emotional with their losses, whereas people who just plow into ETFs in a boring fashion care less.

It's all very broad strokes here, but this is why I lean towards the ETF route at first, before refining sophistication and getting into stock picking at later stages when more wealth and maturity is built in.

And I'm not saying you are wrong to be in single stocks.

 

[Julian Brennan]

I don't really understand the distinction. If you track dividend paying stocks you will see that the value of the stock declines by the amount of the dividend at time of assignment. That is no different from 'selling' the amount equal to the dividend.

I guess the distinction is mainly between owning a regular stock portfolio and dividend paying stocks. The former you have to liquidate in order to produce income, the latter you don't. Of course you can use the proceeds from your ETF portfolio to generate income. IMO the price for this higher diversification and less effort in selecting the right investment is a) higher fees (talking about at least a $1m portfolio) and b) a lower yield. To each his own I suppose ;-)

 

[Julian Brennan]

Any good links to the DGI strategy?

I guess there's no such thing as a Wiki or circles and arrows (pun intended for our MS-friend the bow tie) but you can start by reading a couple of articles on Seeking Alpha. I personally follow these folks:

http://seekingalpha.com/author/chuck-carnevale
http://seekingalpha.com/author/david-fish
http://seekingalpha.com/author/david-crosetti
http://seekingalpha.com/author/robert-allan-schwartz
http://seekingalpha.com/author/eddie-herring
http://seekingalpha.com/author/chowder
http://seekingalpha.com/author/david-van-knapp

And of course it never hurts to follow Morgan Housel over @ the Motley Fool

http://www.fool.com/author/1611/index.aspx?source=iapsitlnk0000003

 

[Matt]

The other thing I don't get from people who think indexing is inferior is why they aren't making 8 figure salaries in finance?

Surely if you can consistently beat the index strategy you'd be snapped up by the top 1% of hedgefunds?

 

[Julian Brennan]

On the other hand, if indexing is so superior, why are folks piling billions in hedge funds? It's all a matter of personal opinion. Doesn't matter if an index ETF, a hedge fund or hand-picked stocks perform better. It has to do with personal preference and what makes ME/YOU sleep well at night and what helps to achieve any individual's investing goal.

 

[Matt]

On the other hand, if indexing is so superior, why are folks piling billions in hedge funds? It's all a matter of personal opinion. Doesn't matter if an index ETF, a hedge fund or hand-picked stocks perform better. It has to do with personal preference and what makes ME/YOU sleep well at night and what helps to achieve any individual's investing goal.

I think that there are many people pile money into hedgefunds. I don't think there is any evidence it is a superior decision. In fact, the majority seems to say that they aren't really a good bet at all.

I think the sleeping well at night argument is valid, providing it stands the test of time. Which means beyond the current bull market.

 

[Julian Brennan]

I don't think there is any evidence it is a superior decision. In fact, the majority seems to say that they aren't really a good bet at all.

At least we agree on that one, ey
HFs are by a wide margin the losers of the last decade and probably of any decade. And yet people stuff money into them big time. So there must definitely be more to it than sheer performance: they are hip, they are cool, and they are a nice topic to talk about at parties I'd think (can't say from own experience).

 

[Annie H.]

I think the sleeping well at night argument is valid, providing it stands the test of time. Which means beyond the current bull market.

Bingo! But then the market goes up, the market goes down, all fine and dandy until decumulation. Give me a good 'ol 7% CD-- I'm not greedy-- and let.me.sleep.at.night.