Worried I am getting addicted to individual stocks.

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Darth Vanguard
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Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

Greetings,

I'm a long time lurker who has spent many a night perusing this site. I finally signed up as a member, and 7 months later, I am making my first post.

I'd like to get the group's opinion on my investment strategy and whether or not I am embarking on a slippery slope (or if I'm already sliding).

I am currently maxing out my 401k, HSA, and backdooring a non deductible IRA (all accounts are VG funds - mostly indexed with a few active funds). No debt.

At the end of the month, I still have some additional cash flow, and for the last year or so, I have been buying individual stocks. By no means do I have an exhaustive screening process which is somewhat worrisome. I have be adding primarily blue chip companies when they have a bad day/week/month - which was pretty easy to do in 4Q 2018. I am currently at approximately 30 stocks across many industries. My intent is to hold these stocks for the long term - 10+ years, and I am comfortable with the volatility that can come with individual stocks - even the "safer" ones.

My concern is this: The individual stock positions are approaching 35% of my investable assets and that percentage will increase if I continue on this path. How risky is this? Does the benefit of buying a stock "on sale" compensate for the additional risk of owning individual stocks? How much does the 10+ year time horizon help to mitigate the additional risk? Overall, my total equity exposure is about 75%, which I am fine with.

Trying to get a handle on if I should continue, freeze, or start to undo this strategy.

Thanks for any input,
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Darth Xanadu
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Xanadu »

Hi Darth,

Fellow Sith Lord, here. I'll let others comment on the risk factor, but I wanted to share two thoughts that may be relevant for you.

1) 35% feels like too much. The common advice espoused here is to keep this below 5% or 10% of total portfolio. I was in a similar boat to you a few years ago. In January of this year I was able to sell some individual positions and purchase total market / 500 index mutual funds to replace them, and thus take advantage of TLH tactics that will pay off for several years. I admit I do occasionally check those companies, but then I remind myself that a) my mutual fund purchase has done just fine, and b) see point 2 below

2)I'm still holding these companies, in a way! One way to break this habit is to constantly tell yourself that you still own these companies in a relevant total market mutual fund. It really reduces the Fear of Missing Out syndrome.
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sf_tech_saver
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Re: Worried I am getting addicted to individual stocks.

Post by sf_tech_saver »

Most of the studies I see on here say that Savings Rate dominates portfolio growth esp later in life. Perhaps one contrarian way of looking at this dynamic is that your 'addiction' here may have resulted in a higher overall savings rate.

Personally, whenever I see a stock I like I encourage myself to save more and buy more 'VTI'. As the other poster said--with VTI you are still buying that stock--just with a few hundred friends coming along for the ride.

I love VTI, but high savings rate, buckets of blue-chips, and buy and hold doesn't seem too scary to me vs. lifestyle creep.

Keep saving and holding I say.
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Re: Worried I am getting addicted to individual stocks.

Post by Grt2bOutdoors »

Darth Vanguard wrote: Thu Oct 31, 2019 12:22 pm Greetings,

I'm a long time lurker who has spent many a night perusing this site. I finally signed up as a member, and 7 months later, I am making my first post.

I'd like to get the group's opinion on my investment strategy and whether or not I am embarking on a slippery slope (or if I'm already sliding).

I am currently maxing out my 401k, HSA, and backdooring a non deductible IRA (all accounts are VG funds - mostly indexed with a few active funds). No debt.

At the end of the month, I still have some additional cash flow, and for the last year or so, I have been buying individual stocks. By no means do I have an exhaustive screening process which is somewhat worrisome. I have be adding primarily blue chip companies when they have a bad day/week/month - which was pretty easy to do in 4Q 2018. I am currently at approximately 30 stocks across many industries. My intent is to hold these stocks for the long term - 10+ years, and I am comfortable with the volatility that can come with individual stocks - even the "safer" ones.

My concern is this: The individual stock positions are approaching 35% of my investable assets and that percentage will increase if I continue on this path. How risky is this? Does the benefit of buying a stock "on sale" compensate for the additional risk of owning individual stocks? How much does the 10+ year time horizon help to mitigate the additional risk? Overall, my total equity exposure is about 75%, which I am fine with.

Trying to get a handle on if I should continue, freeze, or start to undo this strategy.

Thanks for any input,
No the benefit of buying a stock "on sale" does not compensate the additional risk of owning individual equity. Let's say you quote un quote buy a stock on sale, 'let's say GE, GE is trading at a depressed price and for good reason. Now let's say GE doubles from where you bought it, but then does nothing but pay you dividends over the next 10 years - meanwhile the general market as a whole has gone up 120%, you are now falling behind. You also run the risk that your bargain continues to get cheaper in price from where you bought it, do you hold, bail or buy more? I mean, if it was cheap at $10, it's an absolute bargain at $6 or isn't it?

Of the 35 equities you own, how many of them represent 1% or 5%+ of total equity owned? Is a 1% holding going to move the needle for your portfolio any more than say a total market index or a sector fund might?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

In January of this year I was able to sell some individual positions and purchase total market / 500 index mutual funds to replace them, and thus take advantage of TLH tactics that will pay off for several years.
If I could rewind the clock about 18 months, I would probably allocate some if not all to S&P or TSM. Since many of these were bought in 4Q, most positions are showing a gain, much of it short term - so undoing it becomes a bit tricky.

There is also something that feels good about buying a beaten up stock at a discount vs TSM or S&P at all time highs (talking about future personal investments).

Beware of hubris, I guess.

Thanks for the reply.
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Re: Worried I am getting addicted to individual stocks.

Post by Grt2bOutdoors »

sf_tech_saver wrote: Thu Oct 31, 2019 1:10 pm Most of the studies I see on here say that Savings Rate dominates portfolio growth esp later in life. Perhaps one contrarian way of looking at this dynamic is that your 'addiction' here may have resulted in a higher overall savings rate.

Personally, whenever I see a stock I like I encourage myself to save more and buy more 'VTI'. As the other poster said--with VTI you are still buying that stock--just with a few hundred thousand friends coming along for the ride.

I love VTI, but high savings rate, buckets of blue-chips, and buy and hold doesn't seem too scary to me vs. lifestyle creep.

Keep saving and holding I say.
There, fixed it for you! :happy
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averagedude
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Re: Worried I am getting addicted to individual stocks.

Post by averagedude »

If you must buy stocks, i would set a maximum percentage in your explore portfolio, like for instance 20%. If you get over 5% of this band, you sell some holding and buy passive etf's. Pay the taxes and consider it as a sucess tax. It does appear you are doing a good job of not concentrating in any one industry. If you were, I would recommend no more than 10% of your stock holdings in individual stocks. I do want to say though, that having short term sucess with this, could be the worst thing that can happen. It could make you think you are really smart, and that you can always beat the market.
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Re: Worried I am getting addicted to individual stocks.

Post by retired@50 »

Darth Vanguard wrote: Thu Oct 31, 2019 12:22 pm Greetings,
By no means do I have an exhaustive screening process which is somewhat worrisome.

Does the benefit of buying a stock "on sale" compensate for the additional risk of owning individual stocks?
The first statement goes against the Benjamin Graham "Intelligent Investor" approach.

The second statement is showing that you're trying to use the "margin of safety" recommended by Graham.

Either you believe in value investing and scouring the market for bargains, or you don't...???

I think you don't, but are using your portfolio for entertainment. I'd suggest you shrink the entertainment part of your portfolio to under 10%. In other words, for every $100 you invest, put $90 into VTSAX. Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Worried I am getting addicted to individual stocks.

Post by surfstar »

Just put new contributions into an index fund. That 35% will go down soon enough. No need to undo anything.

Congrats on an apparently awesome savings rate.
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Re: Worried I am getting addicted to individual stocks.

Post by HomeStretch »

Going forward, buy TSM with your monthly excess cash flow. You can stop buying more of the individual stock you hold by turning off reinvestment of dividends/capital gains distributions and buying TSM with the settlement fund proceeds.
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Re: Worried I am getting addicted to individual stocks.

Post by Hector »

I prefer individual stocks. Most of my US equity is from individual stocks. There is a section in wiki about passively managing individual stocks.
I think danger is in buying "on sale". Companies generally goes "on sale" before going bankrupt.
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

You also run the risk that your bargain continues to get cheaper in price from where you bought it, do you hold, bail or buy more? I mean, if it was cheap at $10, it's an absolute bargain at $6 or isn't it?
This has happened with several positions, and I have added to them. GE was one example :D
Of the 35 equities you own, how many of them represent 1% or 5%+ of total equity owned? Is a 1% holding going to move the needle for your portfolio any more than say a total market index or a sector fund might?
This is a good point. 4 of them are in the 4%-5% range of total equities. Most of them are in the 1%-3% range, so no single position can move the needle much.
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

averagedude wrote: Thu Oct 31, 2019 1:20 pm I do want to say though, that having short term success with this, could be the worst thing that can happen. It could make you think you are really smart, and that you can always beat the market.
While thinking of my response to this, I kind of had the "aha moment".

The initial response was: Yes, I have had success with this, but nothing spectacular - only ahead of the S&P by about 250 bps - probably not enough to compensate for the additional risk. And that 250 bps could vanish in a week. Also, I don't know how smart I am, but I am smart enough to know I can't beat the market with anything other than good luck/timing.

So now, I am reflecting on why am I trying?
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Re: Worried I am getting addicted to individual stocks.

Post by bgf »

30+ stocks? if you are actually capable of holding all of them for 10+ years, then id say keep them and add all new money to VT or VTI.

if you are going to mess around with them, trim here, buy more there, etc then you'll probably underperform substantially.

you've bought them, now just let them do their thing.
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Re: Worried I am getting addicted to individual stocks.

Post by Watty »

Darth Vanguard wrote: Thu Oct 31, 2019 12:22 pm I'd like to get the group's opinion on my investment strategy and whether or not I am embarking on a slippery slope (or if I'm already sliding).
.....
By no means do I have an exhaustive screening process which is somewhat worrisome.
You need to be careful.

One huge risk is that you are using individual stocks to gamble and some people can have a big problem with that. Even if you are doing well that could just because the stock market is at an all time high and you were taking more risks.

There can be disagreements about if successfully picking stocks is possible but even the people that think it is possible would not suggest that it is easy to do.
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

bgf wrote: Thu Oct 31, 2019 2:34 pm 30+ stocks? if you are actually capable of holding all of them for 10+ years, then id say keep them and add all new money to VT or VTI.

if you are going to mess around with them, trim here, buy more there, etc then you'll probably underperform substantially.

you've bought them, now just let them do their thing.
I have no intentions of selling any of them. The only messing around I have done is added to positions that have fallen from the original purchase price.
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Re: Worried I am getting addicted to individual stocks.

Post by gideon trumpet »

Given the title of your inquiry -- "Worried I am getting addicted to individual stocks" -- I wonder if you are fully accounting for the cost of time, distraction or "worry" associated with this approach. If you enjoy managing a sizable fund in your portfolio, then it may be worth the entertainment value, but if you're putting in work because you believe buying blue chip stocks at a perceived discount and holding for the long term will beat the market, you might obtain similar results (with less work) by holding BRK-B.
Last edited by Gideon on Fri Nov 08, 2019 3:28 pm, edited 1 time in total.
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You should be worried about getting addicted to individual stocks.

Post by Taylor Larimore »

I have no intentions of selling any of them. The only messing around I have done is added to positions that have fallen from the original purchase price.
Darth Vanguard:

Sorry, this was probably a big mistake. You should take the tax-loss and sell when positions have fallen.

Please read this LINK about investing in individual stocks vs. mutual funds.

Best wishes.
Taylor
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Re: Worried I am getting addicted to individual stocks.

Post by David Jay »

How old are you? I fear your perspective on “blue chip” companies suffers from your short investing history.

There was a strategy called the “Nifty Fifty” about 40 years ago. Buy these 50 blue chip stocks and hold forever. Google the strategy and look at some of the names of these “hold forever” stocks:
Burroughs
Digital Equipment
Eastman Kodak
Polaroid
Sears Roebuck
SS Kresge
Xerox
...and so on.

GE has been mentioned as a modern example. Buy-and-Hold individual blue chips is not a productive strategy over a lifetime.
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Re: Worried I am getting addicted to individual stocks.

Post by 1789 »

Dear Darth Vanguard,

Are you worried about performance of your 30 stocks? Why do you want/need to spend time following how those companies are doing? Time is the most valuable asset and i would not want to use it to track performance of some companies. Picking wrong individual stocks can easily destroy your wealth. There was a discussion about Boeing here. In the last 3-4 months, stock was going up 8%, the next day it was coming down 6%, etc... I find it hard to understand why anyone has to go thru that swings for a particular company. I recommend holding 0% of your total assets in individual stocks. Failure in this game is guaranteed. Good luck
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

David Jay wrote: Thu Oct 31, 2019 2:54 pm How old are you? I fear your perspective on “blue chip” companies suffers from your short investing history.

There was a strategy called the “Nifty Fifty” about 40 years ago. Buy these 50 blue chip stocks and hold forever. Google the strategy and look at some of the names of these “hold forever” stocks:
Burroughs
Digital Equipment
Eastman Kodak
Polaroid
Sears Roebuck
SS Kresge
Xerox
...and so on.

GE has been mentioned as a modern example. Buy-and-Hold individual blue chips is not a productive strategy over a lifetime.
Early 40's.

I have certainly thought about the issue you bring up. On a couple of the stocks, I have wondered if I am trying to catch the proverbial falling knife.

I think I still have some Kodak film containers in my tackle box.
Last edited by Darth Vanguard on Thu Oct 31, 2019 8:22 pm, edited 1 time in total.
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Re: Worried I am getting addicted to individual stocks.

Post by KlangFool »

OP,

If you believe active management can win the game, why settle for anything but the best. Just hire Warren Buffett to do the job for you. Aka, invest in BRK.A or BRK.B and you are done. Or, to a lesser degree, invest your money in the Wellington Fund or Wellesley Fund.

Please explain to me why do you think you could do a better job than either alternative.

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Re: Worried I am getting addicted to individual stocks.

Post by David Jay »

Darth Vanguard wrote: Thu Oct 31, 2019 3:01 pm
David Jay wrote: Thu Oct 31, 2019 2:54 pm How old are you? I fear your perspective on “blue chip” companies suffers from your short investing history.

There was a strategy called the “Nifty Fifty” about 40 years ago. Buy these 50 blue chip stocks and hold forever. Google the strategy and look at some of the names of these “hold forever” stocks:
Burroughs
Digital Equipment
Eastman Kodak
Polaroid
Sears Roebuck
SS Kresge
Xerox
...and so on.

GE has been mentioned as a modern example. Buy-and-Hold individual blue chips is not a productive strategy over a lifetime.
Early 40's.

I have certainly thought about the issue you bring up. On a couple of the stocks, I have wondered if I am trying to catch the proverbial knife.

I think I still have some Kodak film containers in my tackle box.
And I have a Digital MicroVax in the basement.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

1789 wrote: Thu Oct 31, 2019 2:56 pm Dear Darth Vanguard,

Are you worried about performance of your 30 stocks?
I am not worried about the performance. I am just trying to ascertain if I'm tap dancing on a landmine with this strategy. So far this thread is reinforcing my concern that I am.
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Re: Worried I am getting addicted to individual stocks.

Post by KlangFool »

Darth Vanguard wrote: Thu Oct 31, 2019 3:12 pm
1789 wrote: Thu Oct 31, 2019 2:56 pm Dear Darth Vanguard,

Are you worried about performance of your 30 stocks?
I am not worried about the performance. I am just trying to ascertain if I'm tap dancing on a landmine with this strategy. So far this thread is reinforcing my concern that I am.
Darth Vanguard,

You should be. If you cannot beat the total stock market index fund by a wide margin, why are you doing this? Don't you have better thing to do with your time/life? Are you addicted to gambling? If not, why do it when it is not profitable for you?

Get a hobby.

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Re: Worried I am getting addicted to individual stocks.

Post by NearlyRetired »

Okay, I apologise in advance for this.....
Darth Xanadu wrote: Thu Oct 31, 2019 12:50 pm Hi Darth,

Fellow Sith Lord, here. I'll let others comment on the risk factor, but I wanted to share two thoughts that may be relevant for you.

1) I was in a similar boat to you a few years ago. In January of this year
or.... death star :D
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

KlangFool wrote: Thu Oct 31, 2019 3:05 pm OP,

If you believe active management can win the game, why settle for anything but the best. Just hire Warren Buffett to do the job for you. Aka, invest in BRK.A or BRK.B and you are done. Or, to a lesser degree, invest your money in the Wellington Fund or Wellesley Fund.

Please explain to me why do you think you could do a better job than either alternative.

KlangFool
I'm not making the claim that I can do better. I just started this as a way to compliment a largely passive approach, and it is now getting to the point where it could have a more meaningful impact.

Thanks to all for the helpful insights so far!
May the Force be with you.
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Re: Worried I am getting addicted to individual stocks.

Post by KlangFool »

Darth Vanguard wrote: Thu Oct 31, 2019 3:17 pm
KlangFool wrote: Thu Oct 31, 2019 3:05 pm OP,

If you believe active management can win the game, why settle for anything but the best. Just hire Warren Buffett to do the job for you. Aka, invest in BRK.A or BRK.B and you are done. Or, to a lesser degree, invest your money in the Wellington Fund or Wellesley Fund.

Please explain to me why do you think you could do a better job than either alternative.

KlangFool
I'm not making the claim that I can do better. I just started this as a way to compliment a largely passive approach, and it is now getting to the point where it could have a more meaningful impact.

Thanks to all for the helpful insights so far!
I lost 50% of my whole life savings up to the point by gambling on Telecom stocks during the Telecom bust. Please do not repeat my mistake. It is hard to notice when you go down that slope. Then, it is too late to get out.

Lucent Technologies was a blue-chip stock too.

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Re: Worried I am getting addicted to individual stocks.

Post by bgf »

Darth Vanguard wrote: Thu Oct 31, 2019 2:40 pm
bgf wrote: Thu Oct 31, 2019 2:34 pm 30+ stocks? if you are actually capable of holding all of them for 10+ years, then id say keep them and add all new money to VT or VTI.

if you are going to mess around with them, trim here, buy more there, etc then you'll probably underperform substantially.

you've bought them, now just let them do their thing.
I have no intentions of selling any of them. The only messing around I have done is added to positions that have fallen from the original purchase price.
thats good. i can tell you from experience though, its very hard to not do anything. in fact, id call it a constant struggle to simply do nothing. im not saying you cant do it, just that it sounds easy but is actually very difficult. i only hold 3 stocks, maybe it'll be easier holding so many more. good luck either way.
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

I lost 50% of my whole life savings up to the point by gambling on Telecom stocks during the Telecom bust. Please do not repeat my mistake. It is hard to notice when you go down that slope. Then, it is too late to get out.

Lucent Technologies was a blue-chip stock too.

KlangFool
I appreciate the bluntness of your posts.

While I know it is no foolproof method, I have tried to mitigate this risk by diversifying the stocks I hold and limiting their overall concentration. I am not heavy in any one stock or any one sector.
May the Force be with you.
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Re: Worried I am getting addicted to individual stocks.

Post by KlangFool »

Darth Vanguard wrote: Thu Oct 31, 2019 3:31 pm
I lost 50% of my whole life savings up to the point by gambling on Telecom stocks during the Telecom bust. Please do not repeat my mistake. It is hard to notice when you go down that slope. Then, it is too late to get out.

Lucent Technologies was a blue-chip stock too.

KlangFool
I appreciate the bluntness of your posts.

While I know it is no foolproof method, I have tried to mitigate this risk by diversifying the stocks I hold and limiting their overall concentration. I am not heavy in any one stock or any one sector.
Darth Vanguard,

Then, you are trying to imitate indexing by individual stock. Why are you doing it? Or, you could achieve the same goal by using a value index fund.

If your goal is not to beat the index, you are doing this for fun. Aka, you are addicted to gambling.

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Re: Worried I am getting addicted to individual stocks.

Post by boomer_techie »

Darth Vanguard wrote: Thu Oct 31, 2019 12:22 pm At the end of the month, I still have some additional cash flow, and for the last year or so, I have been buying individual stocks. ... I am currently at approximately 30 stocks across many industries. My intent is to hold these stocks for the long term - 10+ years, and I am comfortable with the volatility that can come with individual stocks - even the "safer" ones.
If you keep this up, you'll eventually end up with your own "fund" - call it VDARTH. (1 year, 30 stocks. 10 years, 300 stocks?) VDARTH will start to behave like any other fund. If you put some effort into making it balanced and diversified, then what's true of a commercial fund will also be true of your fund.

An advantage is that VDARTH does not charge you a management fee. A downside is that it will take lots of effort (but little expense in today's zero commission era) to get out of VDARTH. Similarly, it will be hard to add to VDARTH - the only easy thing is to keep broadening the fund.
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Re: Worried I am getting addicted to individual stocks.

Post by KlangFool »

OP,

I gambled on less than 5% of my portfolio on all individual stocks. They either go down to zero or they could go up by 10X to 30X. With less than 5% of my portfolio, I could lose it all and it won't matter. If I win, with 10X to 30X return, it is significant.

In your case, if you lose, it is a big deal at 35%. If you win, you only increase your portfolio by one or two percent. It won't matter. It is a lousy bet. You can only lose in your bet. Why are you doing it?

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RAchip
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Re: Worried I am getting addicted to individual stocks.

Post by RAchip »

I have a lot of money (8 figures) in an individual buy-and-hold stock portfolio (21 blue chip dividend paying stocks). All I can say is that this strategy has worked for me.
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Re: Worried I am getting addicted to individual stocks.

Post by niceguy7376 »

Darth Vanguard wrote: Thu Oct 31, 2019 12:22 pm I am currently maxing out my 401k, HSA, and backdooring a non deductible IRA (all accounts are VG funds - mostly indexed with a few active funds). No debt.
I am not answering your main question but would love to get clarified on the above line.

Is a backdoor Roth IRA a "non deductible" IRA?
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Darth Vanguard
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

If your goal is not to beat the index, you are doing this for fun. Aka, you are addicted to gambling.
Yes, the goal would be to beat the index. If it will or not would only be determined in 5-10 years. The idea is not necessarily to mimic an index, but to buy mostly quality companies that are down in share price - call it a concentrated index. But, as boomer_techie said, I realize that as time goes on, this strategy may transform from a concentrated index fund to a regular index fund. So I may be taking a bumpy road to get to the same destination.
In your case, if you lose, it is a big deal at 35%.
Just to clarify, the 35% is not one stock.
They either go down to zero or they could go up by 10X to 30X. With less than 5% of my portfolio, I could lose it all and it won't matter. If I win, with 10X to 30X return, it is significant.
In your case, if you lose, it is a big deal at 35%. If you win, you only increase your portfolio by one or two percent. It won't matter. It is a lousy bet. You can only lose in your bet.
Agree on the downside piece, but if a 5% position going up by 10X to 30X is significant, why would 10x to 30x not matter at 35%?
May the Force be with you.
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Darth Vanguard
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Re: Worried I am getting addicted to individual stocks.

Post by Darth Vanguard »

niceguy7376 wrote: Thu Oct 31, 2019 4:10 pm
Darth Vanguard wrote: Thu Oct 31, 2019 12:22 pm I am currently maxing out my 401k, HSA, and backdooring a non deductible IRA (all accounts are VG funds - mostly indexed with a few active funds). No debt.
I am not answering your main question but would love to get clarified on the above line.

Is a backdoor Roth IRA a "non deductible" IRA?
I guess that is my version. I can only contribute to a non deductible IRA, which I do, and then immediately convert it to a Roth.
May the Force be with you.
Northern Flicker
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Re: Worried I am getting addicted to individual stocks.

Post by Northern Flicker »

The problem is that you are taking on uncompensated risk. Do some reading about non-systematic or idiosyncratic or security-specific risk. Uncompensated risk lowers your risk-adjusted return.

ETFs and Vanguard index mutual funds are so tax efficient that there is no need to hold individual stocks in a taxable account.
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Re: Worried I am getting addicted to individual stocks.

Post by gideon trumpet »

Darth Vanguard wrote: Thu Oct 31, 2019 3:12 pm
1789 wrote: Thu Oct 31, 2019 2:56 pm Dear Darth Vanguard,

Are you worried about performance of your 30 stocks?
I am not worried about the performance. I am just trying to ascertain if I'm tap dancing on a landmine with this strategy. So far this thread is reinforcing my concern that I am.
My read is that you are not "dancing on a landmine" with this strategy. You have acknowledged that you don't expect to beat the market, absent sheer luck, and you don't seem to have an issue excessively trading your positions. You're buying and holding a diverse set of individual stocks. On top of that, you're maxing out other retirement accounts with index funds. None of this sounds like a financial landmine to me. It just doesn't sound like a goldmine either.
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Re: Worried I am getting addicted to individual stocks.

Post by KlangFool »

Darth Vanguard wrote: Thu Oct 31, 2019 4:14 pm
Agree on the downside piece, but if a 5% position going up by 10X to 30X is significant, why would 10x to 30x not matter at 35%?
Darth Vanguard,

1) You are not buying/gambling on the stock that could go up 1,000% to 3,000% in less than 5 years.

2) Your stock at best could go up 20% to 30%. At 30+ stocks of 1% to 5% each, it is insignificant. For each stock that you gamble right, you only get 1.5% max. So, why bother?

You need to ask yourself honestly. If I guess correctly, how much more can I make? Is it significant enough to worth my effort? As far as I can tell, even if you win, your winning is so insignificant that it won't matter.

My 60/40 portfolio return about 7% per year. It is up about 15% this year. How much better can you beat this? Is it significant enough?

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Re: Worried I am getting addicted to individual stocks.

Post by inbox788 »

David Jay wrote: Thu Oct 31, 2019 2:54 pmThere was a strategy called the “Nifty Fifty” about 40 years ago. Buy these 50 blue chip stocks and hold forever. Google the strategy and look at some of the names of these “hold forever” stocks:
Burroughs
Digital Equipment
Eastman Kodak
Polaroid
Sears Roebuck
SS Kresge
Xerox
...and so on.

GE has been mentioned as a modern example. Buy-and-Hold individual blue chips is not a productive strategy over a lifetime.
OP, I loathe the accounting and doing taxes, so that's the biggest deterrent for me. And I've become impatient about my picks, so I can't wait years to find out if I was right or not. As far as your strategy, it's 50/50 whether it will beat the market; it either will or will not. Another 30 stock index is the DJIA. As long as you maintain sufficient diversification, you'll more or less track the market depending on your luck or skill. How do you prove which one it was? A likely outcome is that you will match the market (but accurately measuring and comparing is unreasonably hard), so is the effort worthwhile? If it's wasted time, then no. If it was educational and entertaining, then yes.

A long time ago, I had about a dozen individual stocks, that I liquidated, but more than a decade later, I went back and looked at what might have been, and if I had held my position in Apple alone it would have been a winning strategy. The rest were like your list including United Airlines and Motorola. Eventually most companies die, so taken to forever, you've got to be very luck to pick the ones that out live you or your heirs. If you reinvest dividends back into the company that paid them, you won't increase your diversification and as companies go bankrupt or taken over, you actually increase concentration. How you handle the cash and corporate decision, as well as diversification efforts can help make this strategy a reasonable and even rational one, and having 50 holdings is essentially a personalized index fund.

What got me interested was your list, and as sorry a list it is, it's not a totally worthless lot. The ones listed probably don't beat the SP500, but does it beat cash under the mattress? I probably received some dividends from United Airlines before it went bankrupt around 2000. I suspect equity was wiped out and there wasn't a little compensation coming out of bankruptcy, but sometimes, there can be. But those little dividends invested over 2 decades might be worth something. If I had invested $1000 in United Airlines and got 2% dividends for 10 year before it went under, that's $200 and if I doubled it every decade, $200 becomes $400 becomes $800. Motorola is more complicated and I couldn't tell you what $1000 could have been today. They split into Motorola Solutions and Motorola Mobility (later purchased by Google). I don't think Motorola stockholders got any stake in the Iridium or Freescale (now NXP) spinoffs, but sometimes these spinoffs do provide shares that grow faster than the parent company.

If you bought the list, here's what you would still hold:
  • Burroughs - still lives on as Unisys, down but not out
  • Digital Equipment - Compaq, HP, now HP Inc and HP Enterprise; I suspect $1000 invested 30-40 years might have turned out ok
  • Eastman Kodak - looks like stockholders were wiped out on this one, but significant parts of the business live on as Eastman Chemical and Carestream Health; if only management doled out shares instead of wasting the cash on trying to save the dying business
  • Polaroid - another loser
  • Sears Roebuck - yet another loser for stockholders, but the company survives longer than expected
  • SS Kresge - SS who?
  • Xerox - this one still plodding along paying a dividend; other than Y2k peak/dip, was there a significant corporate action? unless you bought near that peak, you're probably in the green
These are some of the bigger losers, but if you kept Philip Morris and some other winners, you'd done alright. And if updated and rebalanced every year or so, you'd basically have a large cap fund, which is not the worst thing you could do.

https://en.wikipedia.org/wiki/Nifty_Fif ... nstituents
https://www.aaii.com/investor-update/ar ... till-Nifty
https://seekingalpha.com/article/252217 ... -investing
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Re: Worried I am getting addicted to individual stocks.

Post by Grt2bOutdoors »

David Jay wrote: Thu Oct 31, 2019 2:54 pm How old are you? I fear your perspective on “blue chip” companies suffers from your short investing history.

There was a strategy called the “Nifty Fifty” about 40 years ago. Buy these 50 blue chip stocks and hold forever. Google the strategy and look at some of the names of these “hold forever” stocks:
Burroughs
Digital Equipment
Eastman Kodak
Polaroid
Sears Roebuck
SS Kresge
Xerox
...and so on.

GE has been mentioned as a modern example. Buy-and-Hold individual blue chips is not a productive strategy over a lifetime.
For those who don't recognize the name, SS Kresge - is also known as K-Mart!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Worried I am getting addicted to individual stocks.

Post by PDX_Traveler »

Darth Vanguard wrote: Thu Oct 31, 2019 4:14 pm

Agree on the downside piece, but if a 5% position going up by 10X to 30X is significant, why would 10x to 30x not matter at 35%?
The overall portfolio variance is much larger if the volatile portion is 35% vs. 5% - is my take. I'd add, from your description, that if you are primarily buying 'blue chips', you are almost certainly not getting 10x-30x returns (at least, not in a reasonable term, I think).

One note from my own experience - I've been making the journey in the opposite direction, whittling down individual stock holdings and other mutual funds in favor of a 3-fund portfolio over the past few years. Almost done with that with a few (<4) individual holdings and employer stock remaining. I'll give the example of one long term holding that has returned especially well over the past 5 years vs. VTSAX/VTI. While congratulating myself on my sagacity on holding on to this I start reading articles about how financial engineering (perfectly legal) may be the real reason behind the relative outperformance vs. even industry peers. So, now I have to question - is this sustainable, will performance revert to the mean, will management run out of financeering ideas, etc. etc. These are thoughts I wouldn't have to deal with in a simplified index-based portfolio. Fear/greed driven behavior is much less muted by taking individual stocks out of the equation (for the most part, at least) - and I buy into the argument that this leads to better 'real' investor returns over time.
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Re: Worried I am getting addicted to individual stocks.

Post by guwop »

Perhaps you don't need THAT many individual stocks. Why not just stick to five or so and buy aggressively when opportunity strikes? You are limiting your gains, and increasing chances of losses by holding so many, albeit blue chips.
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Re: Worried I am getting addicted to individual stocks.

Post by Jags4186 »

Grt2bOutdoors wrote: Thu Oct 31, 2019 4:52 pm
David Jay wrote: Thu Oct 31, 2019 2:54 pm How old are you? I fear your perspective on “blue chip” companies suffers from your short investing history.

There was a strategy called the “Nifty Fifty” about 40 years ago. Buy these 50 blue chip stocks and hold forever. Google the strategy and look at some of the names of these “hold forever” stocks:
Burroughs
Digital Equipment
Eastman Kodak
Polaroid
Sears Roebuck
SS Kresge
Xerox
...and so on.

GE has been mentioned as a modern example. Buy-and-Hold individual blue chips is not a productive strategy over a lifetime.
For those who don't recognize the name, SS Kresge - is also known as K-Mart!
While I can’t speak for the others, you made out fine with Eastman Kodak even riding it into bankruptcy. Here’s how a $100k investment in 1986 would have faired.

Image
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Re: Worried I am getting addicted to individual stocks.

Post by StormShadow »

Darth Vanguard wrote: Thu Oct 31, 2019 12:22 pm My concern is this: The individual stock positions are approaching 35% of my investable assets and that percentage will increase if I continue on this path. How risky is this? Does the benefit of buying a stock "on sale" compensate for the additional risk of owning individual stocks? How much does the 10+ year time horizon help to mitigate the additional risk? Overall, my total equity exposure is about 75%, which I am fine with.

Trying to get a handle on if I should continue, freeze, or start to undo this strategy.

Thanks for any input,
My advice: its not a big deal.

Find a plan you feel comfortable with and stick with it. The Down Jones is only 30 stocks too. If I were playing the individual stock-game, I'd try keep the individual stocks distributed across industries in a similar ratio to a broad stock market index (e.g. SP500 or DJIA). Personally, I'm just too lazy and prefer straight up indexing.
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Re: Worried I am getting addicted to individual stocks.

Post by clammyhands »

I'm not sure what to say other than that I'd advise you not to.

My evolution went like this:

1) Read a ton of books on investing, including books by Bogle
2) Become a Boglehead and commit to index investing
3) Disregard what I learned from steps 1 and 2 and chase out-performance by investing in individual stocks
4) Lose a ton of money with said individual stocks when I would have made money being in index funds
5) Revert back to index investing
6) Chase out-performance by investing in leveraged ETFs. Make some money, but agonize over the safety of this strategy
7) Go back to index investing, but spend days of my life grappling and stressing myself out with the appropriate AA and whether I should chase performance with factor investing and utilizing small cap stocks
8) Finally reached Eden and surrendered to dumping everything in VT. It's completely liberating.
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Re: Worried I am getting addicted to individual stocks.

Post by inbox788 »

Jags4186 wrote: Thu Oct 31, 2019 5:36 pmWhile I can’t speak for the others, you made out fine with Eastman Kodak even riding it into bankruptcy. Here’s how a $100k investment in 1986 would have faired.
Thanks for providing the graphic. Looks like it came from here. https://www.joshuakennon.com/eastman-kodak-example/

I was mistaken about management misspending all the cash, just most of it; they did dole out a few shares (1:4). A very fortunate event for shareholders who held on.
On January 4th, 1994, Kodak spun off its Eastman Chemical division, mailing 1 share to stockholders for every 4 shares of Kodak owned.
The trouble with all these corporate actions is that it forces active decisions upon the investor that can greatly alter the outcomes depending on the decisions made. Hold on to the spinoff or sell the spinoff? Use cash like dividends or buy more of the parent stock? What about somewhat equal sized splits like HP or Motorola?

Similarly, how you reinvest dividends is also something you'd need to control as well as any type of re-balancing or re-indexing measures. I don't think buy and hold forever is taken literally where you can't buy or sell anything and all dividends must be reinvested in the company that issued them, because sooner or later, a company will get taken over for cash or go bankrupt, causing a decrease in the number of holdings. You can hope spinoffs like these will outpace removals, but I don't think you can count on it.

So, is a $100k investment in 1986 for 25 years that returns $425,318.58 a good investment? Was it luck or a skillful selection? Did it beat the SP500 including dividends reinvested? FWIW SP500 index went from 200 January 1986 to 1300 January 2012 to 1400 December 2012. [BTW, the time value of the dividend streams aren't fully accounted and neither are how they're reinvested, so not an identical or complete comparison.]
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Re: Worried I am getting addicted to individual stocks.

Post by Grt2bOutdoors »

Jags4186 wrote: Thu Oct 31, 2019 5:36 pm
Grt2bOutdoors wrote: Thu Oct 31, 2019 4:52 pm
David Jay wrote: Thu Oct 31, 2019 2:54 pm How old are you? I fear your perspective on “blue chip” companies suffers from your short investing history.

There was a strategy called the “Nifty Fifty” about 40 years ago. Buy these 50 blue chip stocks and hold forever. Google the strategy and look at some of the names of these “hold forever” stocks:
Burroughs
Digital Equipment
Eastman Kodak
Polaroid
Sears Roebuck
SS Kresge
Xerox
...and so on.

GE has been mentioned as a modern example. Buy-and-Hold individual blue chips is not a productive strategy over a lifetime.
For those who don't recognize the name, SS Kresge - is also known as K-Mart!
While I can’t speak for the others, you made out fine with Eastman Kodak even riding it into bankruptcy. Here’s how a $100k investment in 1986 would have faired.

Image
Yah! Eastman Chemical was a big winner, they started out as a plastic bottle recycler and now have a broad chemical portfolio. If it wasn't for the spin off, the EK shareholders would have gotten hosed.
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Re: Worried I am getting addicted to individual stocks.

Post by bluquark »

At 30 large-cap stocks well-diversified across sectors, you are taking a medium amount of uncompensated risk. The most likely outcome by far is a lackluster return that outperforms treasuries but underperforms a stock index fund. Cases of individual large-caps totally collapsing are much, much rarer than cases of individual large-caps wildly outperforming the market. The top 4% of stocks have driven most of historical returns. So the real risk you are running is that your 30-stock portfolio does not happen include the next Apple or Amazon, so you will miss out on most of future market gains and barely outperform bonds with this portfolio. (Conversely, if it does include them, you will outperform, but the odds are against you.)

Really though, cap-weighted index funds are financial miracles, and you should ask yourself why are you using an investing strategy from the 1960s and ignoring the miraculous funds right in front of you. Thousands of stocks at practically zero expense ratio, it sounds too good to be true right? So in your shoes I would immediately sell all of them and put everything into index funds, not because of spooky Halloween stories that you might be holding the next Enron, but just because it's the better way to invest: simpler, more relaxing and more profitable.
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