The point of yesterday's post was misconstrued by many so must have been poorly conveyed by me. For the do-it-yourselfer;
1) Focus on the real goal which for most is having enough money when you need it, not necessarily beating any index. Having enough when you need it comes from a combination of savings and growth.
2) Someone who wants to use individual stocks but not make a full time job out of it could probably pick ten household megacap domestic names, combine that with an adequate savings rate for the next 20 years and have a decent shot of having enough money when they need it.
3) If over the next 20 years the S&P 500 goes up 400% then in my opinion picking ten stocks from the current top 40 in that index and spreading it out sector wise might give a result of up 300% or maybe up 500% (or any other number) but get the investor pretty close to having enough for retirement provided they also have an adequate savings rate. They will not be up 1000% in an up 400% 20 year period nor will they be up 50% in an up 400% 20 year period.
4) More specifically, of the ten it is likely that one company would go bust, at least one would be a huge home run and the rest would be a little ahead or a little behind the market but again, provide a reasonable chance of having enough even if the ten did not beat any index.
The reader question that prompted the post said winning with stocks was very difficult to which I replied that it depends on how you define winning. A reasonable definition of winning is having enough when you need it and that was what yesterday's post tried to explore.
I should also again point out this is not a recommendation for a strategy. It is an attempt to demystify the use of individual stocks.
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7 comments:
As I look back on it, this was essentially what I was doing in the 90s. The differences?
1. I obviously had MUCH less to invest.
2. I didn't have enough stocks - I had, say, 3 or 5 instead of 10 or 20, mostly due to #1
3. I didn't use all megacaps; I had several smaller stocks
I.e. I didn't really understand what I was doing. There are several elements of risk here and I didn't understand that.
The ironic thing here is that the 2000s - the lost decade - are where my portfolio really grew. why?
SAVINGS RATE!
Other than starting a decade earlier my opening moves (and state of investing ignorance) were pretty similar to Stephen's: A few smaller companies mixed with a few larger with only dividend growth (not high dividends, just growing) and a full service investor relations dept w/ DRiP to unite them. Didn't pay any attention to sectors at all but then I didn't know better.
By the 90's I had a decent savings rate but the big difference was I got much better at investing; e.g., study and acting as a sysop back in the old CompuServe Investor Forum days helped me develop the first version of my global asset allocation model; it's been the core of the 'permanent portfolio' segment of my combined portfolio ever since.
Might be something in the air: Barry Ritholtz has a nice series of graphics of the S&P top 10 by decade beginning 1980 that helps make your point; http://tinyurl.com/aj3l7d2
"If over the next 20 years the S&P 500 goes up 400% then in my opinion picking ten stocks from the current top 40 in that index and spreading it out sector wise might give a result of up 300% or maybe up 500%..." Guess it comes down to personal preference, but given the foregoing, my inclination and actual strategy is to take the Total Market Index for the market return.
You still don't seem to make sense. Why allow yourself the possibility of lagging an index when it isn't necessary.
Also, once you age and are not capable of managing an individual stock portfolio, who will do it for you? If family can't then you have to hire someone.
You tell everyone to buy RRGR or an index fund.
Helloooooo.....
I was answering a reader's question.
I am very sorry. My English is not very good. I do not mean to offend you.
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