If it was as easy as you say, people would open funds like that and beat VTSMX and the like. It simply doesn't happen. The current knowledge of a company is already priced into the stock price. A consensus is worthless. It is not as simple as you suggest it is. You very well may beat the DOW in your scenario, but it is because of luck. You are just as likely to lose as you are to win.
Question for Banker and others who control their IRA
- Thread starter herdfan06
- Start date
I don't know if I would go as far as to call it "a bad approach."
If it is so easy to beat, then why do so many mutual funds (even subtracting expense ratios) fail to beat an index fund?
Though there are caveats - if you yourself (without use a broker/advisor, or mutual fund manager) can manage a diversified portfolio of individually selected stocks like in your example above, then by eliminating exorbitant expense ratios you very well may be able to beat the index. But given those of us (ie most very day investors with a simple IRA or 401k) that don't have the time or expertise to do that, I still think index funding is the way to go and you can do a lot worse than a 3 fund portfolio.
From this USNews article:
"The authors have illustrated the likelihood of an investor choosing an outperforming portfolio of active funds versus building a portfolio of index funds to replicate the respective benchmarks. Their research came to the conclusion that between 60 percent and 90 percent of the time, an investor would fail to select an outperforming portfolio of actively managed funds when compared with an all-index fund portfolio over the same time frame. These odds are staggering in the investment management world."
...and speaking of that monkey...
There you go sounding like one of those brokers you supposedly think so little of Penn. Oh... the irony.
More incorrect assumptions. You are proving to be just as lazy as you are wrong. So yes. I will break it down for you. Someone else referred to "a stock split" on GE. This is absolutely essential in calculating the actual value of an account and the "return" correctly for buying and holding during this period. Both GE and MSFT split their stock during the period of time you established in your original hypotheticals. GE actually split twice and MSFT 3 times.
Again for the purposes of simplicity I will NOT even consider the potential for dividends which are sometimes received between, before, or after the splits happening. In other words....assume the stock doesn't even pay one. You believed them to be "bad for your taxes" anyway so lets assume neither of my examples below pay them. The power of compounding when these stocks announce such an occurrence vs a stock (or Index fund) which simply relies on appreciation like your VTSMX suggestion can be staggering long term.
I will also use easy to follow conservative round numbers to illustrate. This will in no way alter the fact how stocks that split actually behave or perform typically. The fact is, many stocks appreciate over 100% before announcing another split (just like GE and MSFT both did at one point in their history) especially if they remain fundamentally strong. We will also use the most frequent split ratio seen in the market (2 for 1) for this example. But be aware, returns and appreciation may be even greater over time when stocks perform 3 for 1, 3 for 2, 5 for 4, 4 for 1, or the occasion (glorious) 7 for 1's or 10 for 1s I've seen in the last couple years. Here goes.
Company A splits 3 times over a 18year period of owning their shares (just like my MSFT analysis
Own 100 shares of Company A priced at $100/share= $10k account value
2 for 1 split = 200 shares owned @$50/share= $10k account value
stock appreciates back up to $100 share ..........
200 shares @ $100 share= $20k account value
splits again....2 for 1= 400 shares owned @$50/share= $20k account value
stock appreciates again back up to $100 share....
400 shares @ $100 share= $40k account value
splits again 2 for 1= 800 shares owned @$50/share= $40k
stock appreciates only $10 from this point...becoming "dead money"
800 shares owned @ $60 share....yielding an account valued at $48K (480% "growth" in value)
vs.
Index Fund B "0" splits over an 18 yr period of owning it's shares (just like your VTSMX suggestion) and relying solely on appreciation for determining its value.
Own 100 shares of Index Fund B priced at $100/share= $10k account value
tic tock, tic tock, tic tock, tic tock..............Never splits.....18 years passes
Fund's shares appreciate to $210/share
100 shares owned @$210/share = account value $21k (110% "growth" in value)
$48k or $21K?? Which is more $$$?
Stock splits= one of the best kept secrets (by the big boys) at compounding wealth for long term holdings or finding potential trade (income) opportunities for shorter periods. My experience has shown stocks typically (not always) revisit their pre split share price within 18 months - 2 years following their split occurrence. In roaring bull markets, fundamentally sound companies and/or growth companies may see that appreciation happen within 3-12 months. I've seen some companies appreciate so quickly they announced additional stock splits within 18 months of their first split. Its my single best strategy for finding $$$ making opportunities in the market. The information is public and easily found by the avg guy.
I share this knowing 99% of those that read this wont believe it, study it, practice it, or seek it out because it requires some time for experience, wont make you rich over night, or choose to simply listen to others (like brokers) that say "cant be done". Too bad. But if 1% of you seek to practice this strategy out and use it in some way, IMO, it will be well worth it and I wish you the best.
And as usual. I am endorsing no specific stock. You invest at your own risk. Seek out your own financial advisor to determine what is right for you. Have a good weekend.
99% won't believe it because it is completely false.
You just made up numbers out of thin air. Use real numbers and you will see how wrong you are. The numbers I posted earlier account for stock splitting. All websites that allow you to look at a stock's performance over time accounts for this. If they didn't, the graphs would look crazy with huge drops in price on split days.
So now you are not only wrong about dividends but also about stock splitting. This is amazing.
April of 1998, GE sold for 89.00 a share. With $10,000, you would have 112 shares. There was one 3 for 1 split in 1999. That would give you 336 shares. Today the share price is 28.51. That yields $9,579 today. GE is remained flat like I said forever ago in this thread.
This doesn't account for dividends.
Go home, you lost.
You just made up numbers out of thin air. Use real numbers and you will see how wrong you are. The numbers I posted earlier account for stock splitting. All websites that allow you to look at a stock's performance over time accounts for this. If they didn't, the graphs would look crazy with huge drops in price on split days.
So now you are not only wrong about dividends but also about stock splitting. This is amazing.
April of 1998, GE sold for 89.00 a share. With $10,000, you would have 112 shares. There was one 3 for 1 split in 1999. That would give you 336 shares. Today the share price is 28.51. That yields $9,579 today. GE is remained flat like I said forever ago in this thread.
This doesn't account for dividends.
Go home, you lost.
Here's how you make money in the market, also proof that dividend stocks are a great play. In July 2010 I took a position in MO at $21.30 a share. Although tobacco is a,dying industry in the US, it's still pretty viable internationally, especially in developing economies. Anyway, I bought it because it was fundamentally sound, had absolutely no need for major capital investment (it's not like cigarette manufacturing is an evolving science), and I liked the 5% plus yield and plenty of earnings to keep paying it. Also, let's face it, cigarettes are highly addictive, which means they don't suffer during recessions like other consumables.
Well, it's 5 years later, the stock is trading at $52 and the dividend is now $2.08 a share annually. That payout rate gives me a 10% annual return on my initial investment and the 150% increase in the value is really just gravy.
That's the thing people seem to forget when talking about dividend stocks. It's easy to find the companies that have a sustained history of consistently raising dividends. In the case of MO, their quarterly dividend has increased almost 100% since 2008. The prices of these stocks tend to track to their yield. In the case of MO, people won't really pay more than what will get them a 4.5% yield. Every time the dividend is increased the stock price will bid up. If the yield gets to 6% you can guarantee that the price is going up until the yield gets back down to the 4.5% to 5% range. Five years from now MO will have a dividend around $3 a share and the stock will be trading in the $65 range.
You just can't get that kind of performance out of any fund. I understand that not everyone has the desire to learn about the market and not everyone has the ability. What I don't buy is that people say they don't have the time. If you aren't willing to invest 4-5 hours a week on building wealth then you just might as well get used to the fact that you'll never have wealth. If you just make the commitment to spend 1 hour a day for a year to learn the market you will achieve a greater return from that than anything else you would do in that hour. I wasted a lot of money on brokers before I finally decided to educate myself and it was the best thing I've done financially. I've handled my own investments for 15 years now and I've outperformed the market in 13 of those years. I probably won't do that 13 of the next 15 because I am shifting more to preservation now that I'm 50, but I'll still outperform "safe" investment vehicles.
The whole "you can't beat the pros" thing is simply propaganda so that your pay the "pros" to manage your money.
Well, it's 5 years later, the stock is trading at $52 and the dividend is now $2.08 a share annually. That payout rate gives me a 10% annual return on my initial investment and the 150% increase in the value is really just gravy.
That's the thing people seem to forget when talking about dividend stocks. It's easy to find the companies that have a sustained history of consistently raising dividends. In the case of MO, their quarterly dividend has increased almost 100% since 2008. The prices of these stocks tend to track to their yield. In the case of MO, people won't really pay more than what will get them a 4.5% yield. Every time the dividend is increased the stock price will bid up. If the yield gets to 6% you can guarantee that the price is going up until the yield gets back down to the 4.5% to 5% range. Five years from now MO will have a dividend around $3 a share and the stock will be trading in the $65 range.
You just can't get that kind of performance out of any fund. I understand that not everyone has the desire to learn about the market and not everyone has the ability. What I don't buy is that people say they don't have the time. If you aren't willing to invest 4-5 hours a week on building wealth then you just might as well get used to the fact that you'll never have wealth. If you just make the commitment to spend 1 hour a day for a year to learn the market you will achieve a greater return from that than anything else you would do in that hour. I wasted a lot of money on brokers before I finally decided to educate myself and it was the best thing I've done financially. I've handled my own investments for 15 years now and I've outperformed the market in 13 of those years. I probably won't do that 13 of the next 15 because I am shifting more to preservation now that I'm 50, but I'll still outperform "safe" investment vehicles.
The whole "you can't beat the pros" thing is simply propaganda so that your pay the "pros" to manage your money.
Actually penn. GE split 3 for 1 in May of 2000. Not '98. Split 2 for 1 in '97. My original estimate included both splits dates which equates to owning about 527 shares plus cash collected ( without using the dividends collected to buy more stock). Typing on my phone, it's the weekend, you really can't refute the "dividend play" aspect of investing vs index funds, you cant refute my example of stock splits as a strategy for compounding vs sitting and waiting for index fund growth and I am officially bored here.
I believe it was Henry Ford who once said, "those that say they can and those that say they can't are both usually right."
I believe it was Henry Ford who once said, "those that say they can and those that say they can't are both usually right."
I can assure you that adding one more year won't make a huge difference when the stock had no appreciation for 17 years.
You are dead wrong on this one. No shame in it. Be a man and admit it.
I can't refute your example because it is ridiculous and made up.
I know this thread has ran its course but I'll leave this last thought by Warren Buffet.
"We never recommend buying or selling Berkshire. Among the various propositions offered to you, if you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."
"If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things."
"Just pick a broad index like the S&P 500. Don't put your money in all at once; do it over a period of time. I recommend John Bogle's books -- any investor in funds should read them. They have all you need to know. Vanguard. Reliable, low cost. If you're not professional, you are thus an amateur. [F]orget it and go back to work."
Can people like Banker beat the market? Probably some can. He works in finance and has the time to devote to company evaluation. And for many, the time wouldn't be worth it if they could beat the market.
Consider a man that invests 5k a year for 30 years. 7% return gives 500,000. 9% return gives 740,000.
If he devotes 5 hours a week to get that extra 2%, let's consider how much he would have if he works 5 extra hours a week at $30 an hour. If he invests the extra income, he would have nearly 1.3 million after 30 years (at 7%).
Consider guys like Hungus. Idk his specialty but many physicians can moonlight for about $100 an hour. It just becomes silly to not index and focus on increasing income at that point.
"We never recommend buying or selling Berkshire. Among the various propositions offered to you, if you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."
"If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things."
"Just pick a broad index like the S&P 500. Don't put your money in all at once; do it over a period of time. I recommend John Bogle's books -- any investor in funds should read them. They have all you need to know. Vanguard. Reliable, low cost. If you're not professional, you are thus an amateur. [F]orget it and go back to work."
Can people like Banker beat the market? Probably some can. He works in finance and has the time to devote to company evaluation. And for many, the time wouldn't be worth it if they could beat the market.
Consider a man that invests 5k a year for 30 years. 7% return gives 500,000. 9% return gives 740,000.
If he devotes 5 hours a week to get that extra 2%, let's consider how much he would have if he works 5 extra hours a week at $30 an hour. If he invests the extra income, he would have nearly 1.3 million after 30 years (at 7%).
Consider guys like Hungus. Idk his specialty but many physicians can moonlight for about $100 an hour. It just becomes silly to not index and focus on increasing income at that point.
If my split example is ridiculous it should be easy to refute. The fact is. The very split technique I described is the main reason I was able to quit a job and do my own thing several years ago.
You choose to do what an average investor is told to do by Warren Buffett. That's fine if it works for you. I have chosen to do a little more work in the market like a Warren Buffett, in order to earn the ability to do what I want to do, when I want to do it. That works fine for me.
You choose to do what an average investor is told to do by Warren Buffett. That's fine if it works for you. I have chosen to do a little more work in the market like a Warren Buffett, in order to earn the ability to do what I want to do, when I want to do it. That works fine for me.
