Individual stocks Portfolio

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Topic Author
Larry Wildman
Posts: 4
Joined: Sat Feb 04, 2023 9:45 am

Individual stocks Portfolio

Post by Larry Wildman »

Hi! I am an indexing foundamentalist. However, for a big tax advangage in my country (nearly tax free vs. a 26% tax rate for capital gain on ETF/index fund) I need to create a single stocks portfolio and I would share my ideas with you for a feedback.

I was thinking to "mimic" the MSCI world index with this process:

1 - Buy at least one stock for every industry of the index (10 industries). I try to represent industries in the same % of the index.
2 - For small industries of the index, I buy only one stock, the bigger of the industry. For example, right now Energy weights 5,45%, I buy XOM (Exxon) for 5,45% of my portfolio
3 - For large industries (over 7-10% of the total weight) I buy the 2 big stocks of the industries.
4 - For the top industry (right now IT) I buy 3 stocks (the 2 biggest of the industry + one random)
5 - Some minor adjustment on the stock selection from every industry to get at least 10-20% of no-US stocks

With this process, I can get a portfolio of 18-20 stocks and
1 - I have the same industries of the index, in the same %.
2 - I have nearly all of 10 top holding of the index, more or less in the same % of the index

Once a year, I check the portfolio to do the adjustment for industries and stocks. I am in accumulation stage

I am not sure, but I should avoid 80-90% of deviation from the index, but with a big tax advantage when I start to withdraw.

Am I completly wrong or it makes sense?

My simulation got this portfolio now:

Apple 9,17%
Microsoft 8,00%
Paypal 3,00%
UNH 7,30%
J&J 7,25%
Wells Fargo 4,75%
JPM 9,57%
Raytheon 5,68%
Caterpillar 5,00%
LVMH 3,97%
Amazon 6,00%
Nestlé 3,95%
Procter 3,96%
Comcast 2,39%
Google 4,00%
Exxon 5,66%
BHP 4,49%
ENEL 3,32%
AMT 2,67%
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Individual stocks Portfolio

Post by TedSwippet »

Welcome.
Larry Wildman wrote: Sat Feb 04, 2023 10:03 am Hi! I am an indexing foundamentalist. However, for a big tax advangage in my country (nearly tax free vs. a 26% tax rate for capital gain on ETF/index fund) I need to create a single stocks portfolio and I would share my ideas with you for a feedback.
We have a lengthy wiki article on this topic:

Passively managing individual stocks - Bogleheads

Some of it is rather US-centric, in particular the parts on tax, but you might be able to gain something useful from it. A tax incentive of close to 26% seems to me like a reasonable motivation for doing this. As long as you can get at least that close to the index, you have won. Quite a bit more work than using a fund, but potentially worthwhile.
tubaleiter
Posts: 247
Joined: Tue Mar 09, 2021 11:58 am

Re: Individual stocks Portfolio

Post by tubaleiter »

TedSwippet's already posted the Wiki for ideas - definitely worth a read.

I did this for a time with my UK ISA (due to silly US tax rules, I can't practically have any funds in an ISA, but the UK tax benefits are excellent - similar motivation as you). With 20 stocks, roughly industry-matching like you, I was able to match the FTSE 100 quite well. In my wife's ISA, I used 20 other stocks - mostly smaller than in mine, because I'd already "used up" most of the biggest. Hers had much more deviation from the index, which makes sense. When I did the maths, I realised my 20 stocks represented 40% of the market cap of the index, hers only 8%.

Depending how taxes work in your country, reporting the dividends and, eventually, capital gains may be more of a hassle, but with some diligence and keeping up with an Excel sheet, I expect nothing too terrible.

Since you're trying to duplicate a much bigger index with the same number of stocks, I would anticipate some significant tracking error (but that could be higher or lower, no way of predicting that). You do run the risk of missing out on the next Tesla/Facebook/Google/Apple - you won't be buying small(ish) stocks that then grow into giants.

I only stopped because our financial situation changed and we needed the money earlier than I'd anticipated. Otherwise, it was a viable approach and I may do it again.
pennywiser
Posts: 177
Joined: Sat Jul 16, 2022 1:54 pm
Location: UK

Re: Individual stocks Portfolio

Post by pennywiser »

I think you should consider building your portfolio around Warren Buffet's company stock Berkshire Hathaway.
It could be argued that buying this one stock you are actually buying a actively managed fund with a very extremely small turnover that is pretty diversified.

See what it holds, compare with your desired index and buy what it is missing.
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Individual stocks Portfolio

Post by TedSwippet »

Larry Wildman wrote: Sat Feb 04, 2023 10:03 am I was thinking to "mimic" the MSCI world index with this process: ...
Something I should perhaps have mentioned earlier. If your plan means that you end up holding more than $60,000 in total in US stocks, and you do not have cover from a US estate tax treaty, you risk losing 26-40% of your balance above that $60,000 if you die while holding them.

You don't say which country you are in, but there are only a few countries with US estate tax treaties, so it seems likely you don't live in one of them. Also, you might want to look closely at your US dividend tax withholding rate. Non-treaty countries have a 30% rate, but if you live in a country with an average US income tax treaty, or if you do not, but hold your US stocks through an Ireland domiciled ETF (and I understand these can be locally tax-suboptimal), you lose only 15% of your dividends to US tax.

Holding Berkshire Hathaway, for example, would mean you avoid US dividend withholding taxes (because it doesn't currently pay dividends), but still leaves you potentially exposed to US estate tax. To remove the US estate tax risk, you might need to hold your US stocks through an intermediate holding company, and perhaps more than one, and this (of course) adds costs.

More in the wiki: Nonresident alien taxation
Topic Author
Larry Wildman
Posts: 4
Joined: Sat Feb 04, 2023 9:45 am

Re: Individual stocks Portfolio

Post by Larry Wildman »

:D
TedSwippet wrote: Sun Feb 05, 2023 4:41 am
Larry Wildman wrote: Sat Feb 04, 2023 10:03 am I was thinking to "mimic" the MSCI world index with this process: ...
Something I should perhaps have mentioned earlier. If your plan means that you end up holding more than $60,000 in total in US stocks, and you do not have cover from a US estate tax treaty, you risk losing 26-40% of your balance above that $60,000 if you die while holding them.

You don't say which country you are in, but there are only a few countries with US estate tax treaties, so it seems likely you don't live in one of them. Also, you might want to look closely at your US dividend tax withholding rate. Non-treaty countries have a 30% rate, but if you live in a country with an average US income tax treaty, or if you do not, but hold your US stocks through an Ireland domiciled ETF (and I understand these can be locally tax-suboptimal), you lose only 15% of your dividends to US tax.

Holding Berkshire Hathaway, for example, would mean you avoid US dividend withholding taxes (because it doesn't currently pay dividends), but still leaves you potentially exposed to US estate tax. To remove the US estate tax risk, you might need to hold your US stocks through an intermediate holding company, and perhaps more than one, and this (of course) adds costs.

More in the wiki: Nonresident alien taxation
I am Italian citizen, no problem with US taxes
Topic Author
Larry Wildman
Posts: 4
Joined: Sat Feb 04, 2023 9:45 am

Re: Individual stocks Portfolio

Post by Larry Wildman »

pennywiser wrote: Sun Feb 05, 2023 3:55 am I think you should consider building your portfolio around Warren Buffet's company stock Berkshire Hathaway.
It could be argued that buying this one stock you are actually buying a actively managed fund with a very extremely small turnover that is pretty diversified.

See what it holds, compare with your desired index and buy what it is missing.
It may be an idea. Problem Is that I am worried for the time after Warren...
markus75
Posts: 78
Joined: Mon Aug 15, 2022 7:45 am

Re: Individual stocks Portfolio

Post by markus75 »

Larry Wildman wrote: Sat Feb 04, 2023 10:03 am Hi! I am an indexing foundamentalist. However, for a big tax advangage in my country (nearly tax free vs. a 26% tax rate for capital gain on ETF/index fund) I need to create a single stocks portfolio and I would share my ideas with you for a feedback.
How can you have less then 26% taxes on capital gains for individual stocks in Italy?
I found here nothing which confirms that:
https://taxsummaries.pwc.com/italy/indi ... ermination
Topic Author
Larry Wildman
Posts: 4
Joined: Sat Feb 04, 2023 9:45 am

Re: Individual stocks Portfolio

Post by Larry Wildman »

I have to set up my own holding Company that have no 26% on dividend and capital gains until funds remain on the holding. I have 26 only if I do distribution to myself
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