Posted: 5/30/2007 8:15:26 PM EDT
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Some Background: I've had a custodial account with my dad since around 2000, but I haven't actually been actively doing anything with it until last summer (about 1 year ago). Before that my dad would make suggestions and I would make a decision. Anyway, I've been trying to learn more about it and do my best to grow my money since I'll be "Cut loose" soon. (I'm doing ok so far, but I feel it's mostly luck, though that could be from a lack of confidence) I read parts of AR-Jedi's guide to long term investing and started thinking more about risk/ risk reduction. This is mostly because I got burned on a stock (or 2) as a result of my own indecision. My dad tells me that I'm young and thus I should invest in more risky things since I have a long time to make up for any losses. Anyway, in some sort of weird coincidence, I'm taking a summer class at the moment that ended up being on investing and the stock market. And today the Prof put up an interesting chart that makes me want to ignore Ar-Jedi  , well at least until I've got more invested. He also somewhat echoed my dad's thought that younger people can assume more risk since they have a long time to recover any losses. Here's the chart. By "Large Stocks" and "Small Stocks" it is referring to market cap. 
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first off, yes, you should ignore me. in fact, ignore almost everything you read online which is financial related. most of it is sensationalism, aka financial porn. headlines such as "6 Long-Term Mutual Funds To Buy Now!", "China Gold Demand Decreasing", "Richard Timer says Market Top Reached", etc etc etc. if you invest consistently and simply, over the long term you will make much more money than if you try to outwit the market by following random ideas. so, formulate a plan and stick with it -- through thick and thin.
ok, you are on the right track. but "more risk" doesn't necessarily mean riskier stocks. what it means is a larger percentage of your overall portfolio devoted to equities (i.e., common stocks). in other words, you don't need income-producing bonds when you are 25 -- you are making a good wage at a regular job, so holding bonds mainly just drives up your taxes. hence the rule of thumb that you should own 120-(your age) in stocks, with the rest in bonds or bond-like instruments (e.g., CDs or even a money market account). for example, a 40 year old would then sit at about 80% stocks, 20% bonds. and so on for other ages. within those 80% stocks, one can swing towards more small and mid cap, giving a more volatile (but hopefully better returning) portfolio -- or one can swing towards a more large cap portfolio which will have fewer gyrations. a good portion should be in international stocks as well. take a look at the "four fund" portfolio i constructed in the second post in this thread: ar15.com/forums/topic.html?b=1&f=133&t=531982 inspect the M* Xray report that i did for that portfolio in april, see losdos.dyndns.org:8080/public/stocks/arfcom-4funds-10apr2007-instantxray.jpg as you can see from the M* Xray, the composition of the "four fund" portfolio is quite aggressive, but it is very diversified (across capitalization, across sectors, across countries, and across currencies). next january, when i "add" to this hypothetical portfolio, you'll see a small cap fund show up which will further round out the diversification. remember though: "uncompensated risk" is a bad thing. don't take investment risks that are not proportional to the potential gains. as you gain financial experience you'll start to recognize the warning signs of this problem.
you will note from the chart that stocks, in contrast to bonds, give generally higher returns but with much more yearly variation. when you are young, you can take on more risk as there is no immediate effect to losing 25% of one's portfolio due to a market downswing. ps: in the post above the Callan periodic chart was linked to -- study it. as you can see, you simply never know what security type (stocks/bonds) and/or capitalization (large/mid/small) is going to land on top of the heap. it is impossible to call -- for anyone. do not try to optimize your portfolio -- when it is "good enough", leave it alone. KISS. ar-jedi ps: at a minimum, get this book: www.efficientfrontier.com/t4poi/t4poi.htm  |
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Interesting enough he showed us the Callan Chart today, among others (like a similar one from Russell) to emphasize you can't predict the market. I think maybe when I cash out of my current stock (I keep saying it will be soon, but it keeps going up!), I may put some of it towards a mutual fund. I have some money in a non-diversified ETF, but its not enough to buy into any funds. His "rule of thumb" for the bond-equity ratio was your age should be the % of your portfolio in bonds. Today was the last lecture day, our final is tomorrow, this certainly has been one of the more interesting classes I've taken. |
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Nlinc, AR-Jedi gave you some great advice. A portfolio analyzer/optimizer like Morningstar's X-ray is a great way to check hypothetical portfolios you are building. Being relatively young and new to pulling the trigger on investing, I would stay away from individual stocks. It is very hard to be disciplined when it is your own decision and own money involved. Human nature! Remember Money Magazine, Forbes, CNBC, etc are not in the business of giving great investment advice. They are in the business of making money! (Selling more magazines, increasing viewers to increase ad rates, etc.) As one of my co-workers likes to say, "You would never see Tiger Woods reading Golf Digest to improve his golf game." Look for good quality mutual fund managers and fund families and you should be ok. There are 2 schools of thought on mutual funds. You have actively managed funds. The portfolio manager(s) try and beat a benchmark (S&P 500, Russell 1000, etc). Here the skills of the manager(s) are key. They usually look at performance attribution and analysis to see how much value (Alpha) they are adding. They look at things like sector over or under weight, stock selection, etc. Very few active managers beat their benchmarks over the long-term (10 years). You tend to get what is called regression to the norm (mean). If you look at most actively managed large cap growth funds 10 year track record the vast majority are within 1.5% of each other. Certain asset categories like small cap stocks and international tend to exhibit less of the regression to the norm. In those asset categories the markets are not as open and efficient so active managers can add real value. Most active managers track themselves against their Lipper peer group. Most fund families incorporate a large portion of their fund managers compensation based upon their Lipper ranking. When you evaluate an actively managed fund make sure the manager(s) that built the track record are still at the helm. You should also check for style drift. There is a company called Zephry that has special software for this. This is very important when your are building a portfolio and trying to do correct asset allocation. A lot of actively managed funds in the late 90's became closet tech funds as a result of style drift due to pressure on active managers to reach for performance. The other school is Indexing or passive investing. Here a manager(s) is trying to replicate an index like the S&P500, Dow30, or Wilshire 5000. Vanguard is probably the best know indexing mutual fund manager. These are market weighted index mutual funds. They have very low expenses and generally track very close to their benchmark in performance. A unique type of index funds recently came to the market. They are called fundamentally weighted index funds. Check out WisdomTree for information on these fundamental index funds. I have seen the research that went into the design of these funds and know the people involved. The back testing and modeling numbers are excellent. Keep in mind this is a relatively new concept with limited hard historical performance data but some of the best minds in the business are behind it. Investing is a very individual subject. Everybody is unique. Everyone has different goals, risk tolerance levels, etc. If you look at successful long-term investors such as Taft Hartley (Union) Pension Plans - historically the best performing institutional investor class - they all have similar traits in common. They have a firm defined investment process in place backed by an investment policy statement. They tend to focus more on asset classes and asset allocation first and manager selection second. They know they can't predict the future only diversify against it. You have to be careful about diversification you can have too much of a good thing. You get to a point of diminishing returns if you over diversify. The key is to put together a portfolio that you will be comfortable with over the long haul and be able to stick with. Just because you are younger and the books say you should be heavily invested in equities it doesn't do you any good if you can't stand the volatility. Learn as much as you can from multiple sources. You don't have to build a crazy exotic portfolio to achieve your objectives sometimes simple works best. One other thing you should do is try to put as much of you money away in tax deferred accounts like 401k, IRA, etc. Assuming you don't need the money before 59 1/2. That way you get to keep more of your earnings to put to work for you. |
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Thanks for the info guys. I had been shying away from mutual funds more recently because I'm not really into long term investing at the moment, and the 6 mo holding time to avoid a redemption fee puts me off. This isn't really meant to be retirement savings, though I could certainly put it into an IRA at some point. I may look at some (diversified) ETFs and maybe go long term on a mutual fund. The morning star Xray tool is very neat, I will have to play around with it.  Also, I wish someone had told me to take advantage of work sponsored retirement stuff when I was still in HS, as I opted out of it at a job that I spent 2.5 years at. I know better now, but my next job with benefits will likely be after I graduate. |
just to clarify a few things... 1) a majority of funds do not have any kind of "6 month holding time to avoid a redemption fee" -- where did you get that notion from? 2) a good money market fund/money market account will pay you a risk-free 5.1% right now, and so that's where your short term money should be parked. check out Fidelity Cash Reserves Fund (FDRXX). there are no fees etc for set up. 3) do whatever it takes to make Trad IRA/Roth IRA contributions while you are young. the power of long term compounding is incredible. ar-jedi |
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Well, the No-Load/ No-Fee funds I have looked at recently have a minimum period to remain invested to avoid a redemption fee ("Contingent Redemption Fee"). Many are 90 or 180 days. I guess since you don't pay up front, they make you pay if your holdings are short term. |
what fund families? what are the symbols?
in general, trading in and out of mutual funds in short order is counterproductive -- twice over. first, for the individual investor, and second, for the other investors in the fund. the latter is the reason that some funds institute a minimum holding period. ar-jedi |
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Fund Families like Royce, U.S. Global Investors, U.S. Global Accolade Funds. I've held funds from the last 2 in the past (EUROX and PSPFX), but was looking at some of the small cap funds from Royce (RYVPX, RYVFX) more recently. Like I've mentioned I haven't looked into funds much. All my holdings in the past 8-10 months have been Stocks until recently, when I bought an ETF. |
ETA 'cause the phone rang before i was finished... ok, some small cap fund houses do employ measures to penalize rapid trading. Royce is one such company. they do have a good reputation on small caps.
my portfolio is approximately 50/50 in terms of taxable/tax-deferred. so i have to pay attention to taxes -- it affects a good chunk of my investment money. for this reason i have begun, over the past two years, to work ETF's into my taxable side. currently i hold EFV, IJJ, IWS, and VWO in my taxable to augment (in a very tax-efficient manner) my mutual fund holdings. i think that ETF's like EFV complement active funds like DODFX very well, especially in the international arena. i have ~40% international in across my portfolio so i am always looking for the right places, be it ETF's or active funds. up until february i held FXI as well, but somewhat ham-handedly i kept ratcheting up my stop-loss order in an effort to keep >90% of my gains if china were to collapse. when there was a -10% blip, i got stop-lossed out and i haven't seen an oppty to buy again. i did increase my holdings in VWO, which is more of a broad BRIC play vs a pure (and very concentrated) china fund like FXI. you will also notice that IJJ shows up in the 4 fund portfolio i constructed for the $10K portfolio thread. midcaps are doing extraordinarily well these days. if you are interested in further study on ETF's, see seekingalpha.com/ especially etf.seekingalpha.com/ also www.etf-central.com/ and www.etftrends.com/ regards, ar-jedi |
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First off....listen to ar-jedi, he knows what he's talking about and is one of the handful of people on this board who I'd trust with financial advice since I've never seen him give (what I consider to be) inappropriate advice. The guide he linked to the other day is also very good information, and even though I know this I still don't follow it 100%. In direct opposition to what you're apparently planning, since you're a new investor with limited experience I personally believe you should stick solely to mutual funds and avoid stock-picking (which is what it sounds like you have been doing in the past).
I don't know what kind of money you're playing with but in any event it is highly unlikely that you will be able to consistently trade individual stocks (or ETF's) which beat a decent fund after costs are taken into consideration. Although you don't have to do it this way, one of the biggest advantages of mutual funds is the ability to make regular, consistent payments into the fund and get the benefit of dollar-cost averaging and automatic diversification due to the variety of assets the fund holds. You can still be an "aggressive" investor without buying a bunch of long-shot single stocks trading on the pink sheets! Also since you're a young investor you should really keep an eye on costs as some of these actively managed funds and trading costs will really eat into you over the long time you have to invest\. But my point is that YOU can directly control the costs by choosing funds with low expenses which much like inflation eat away constantly and insidiously against your net returns. The costs of frequent trading also eat into your investments. Everyone has their own approach and what works for them, just be smart enough to realize it when your approach isn't working. Like it or not, unless you're planning to drop-out in the next 5 years you are a long-term investor since every dollar you spend/waste today are dollars that won't be growing for you in the future. I'm 98% certain that most of your future wealth will come from the power of compounding, not because you were smart/lucky enough to pick a few winning stocks. But I'm certainly no expert, just some dude trying to build a comfortable future for myself and my family and wishing I'd have started investing at 18 instead of 25. |
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I guess to explain my situation more I should elaborate. I haven't added money to my stock account since Q2 2004 (added money to get to $1000 for a mutual fund buy), mostly because: 1) I was young and stupid until recently (and didn't really save) and 2) I've been working part time (<20 hr/ wk) since I was "shown the light" and haven't had the income to do anything but pay bills (this trend [of not adding money] will most likely continue until I graduate and get a "real" job). After reading the replies in this thread, I'm considering putting most of my money into Mutual funds and ETFs. At the moment I've got a little over $3200, a lot of it is due to 2 stocks I picked up after the Feb/Mar correction (1 I still hold, and the other I bailed out of during a small down turn, after which it then went up 25-30%). As it stands, most of my money is in MDR, and I've been waiting for the "top" of it's current ride upwards. I'm considering cashing in on it this week, and buying a mutual fund (since funds seem to be the consensus), most likely one of the 2 Royce funds I mentioned (unless there is some reason not to that I'm missing). Thanks for all the replies guys, they've been very helpful. 
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Nlinc, If you are going to hold your money for a short period of time do what AR Jedi suggested and look at a MMF. You can find some over 5% with 0 market risk. Check out these sites for info on MMFs and savings accounts with high yields. Also check out the banner ads on these sites. You will see companies like Citi, ING, etc offering deals like $50 if you open an account over a certain $$. BankRate.com iMoneyNet.com |
Risk : return is not linear, and a riskier investment is not necessarily the one that will give you greater returns. Some pedants like to draw risk and return as a linear line, but as Graham said the greatest factor in an investor's returns is the investor himself. Is the risk the same if Warren Buffet and I both pick stocks? Of course not - he is much more able to pick winners and therefore his risk is less. I usually encourage people to use that as brainstorm material. For example, I have a friend who buys and immediately resells heavy equipment, like bulldozers, cranes, etc. It's what he knows, so he can sit tight at auctions until he finds that undervalued piece of equipment, snatch it up, and resell it, many times over the phone while he's still at the auction. Most people couldn't do that, but Mike can. Put Mike at a jewelry auction though, and he'd lose his ass. Not nearly a complete treatise, just some brief food for thought. Just remember that the risk-reward generalization is just that - a generalization. Treat it as such. |