No. of Recommendations: 2
forgive me if this is addressed regularly, or is hiding somewhere in the FAQ--i couldn't find it.

i've been thinking a lot about what to do with the money i'm in the process of budgeting for investment each month. i'm convinced of the necessity, and will certainly be socking at least 15% away now that i've finally taken a hard look at things, but i'm feeling kind of ambivalent about whether to drip the money into a few stocks (i was thinking KO, JNJ, INTC and either GE or PFE) or to auto-invest the same amount into a portfolio of index funds covering the S&P 500, the EAFE and the Russell 2000.

after reading the _investing without a silver spoon_ book, i'm guessing that the main reason one would DRP specific stocks rather than invest the same amount monthly in an index is to *beat* the index--and yet i'm a little frightened of having that objective, given how many articles i've read bashing managers of actively-managed mutual funds for attempting to do the same thing, beat the index. and it appears that few of them can. will i really be different?

i'll also admit that organization isn't my strong suit, and i'm concerned about the recordkeeping involved with having multiple accounts. there's something pretty seductive about the idea of having all my investments at vanguard, where i can check on them via the web in one go.

is this a question any of you struggled with when you began opening DRPs? and how did you decide?

thanks,

s.
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No. of Recommendations: 6
I definitely struggled with this question when I started. I think my final decision came from my fierce independence and refusal to turn my financial future over to high-paid "experts" -- And I thought it would be fun to pick stocks. My final decision was probably based more on emotions than it should have been. But, hey, I'm human. It also made it easier once I decided to put all our retirement accounts into index funds, and approach the drips as something extra for a big purchase 10-20 years from now.

I've been dripping for about a year and half now. I'd do it again. I know it would have been less of a hassle to just go for the Vanguard 500 Index fund. But, for me, it was a time when I was very curious about investing and had the time to learn more. I read about 15 books and hundreds of articles. Now, I'm not saying you have to do that at all. For me, though, it was like creating my own crash course in investing. Now, I figure it only takes about an hour of my time per month and I'm feeling pretty confident. My wife is even learning some of this stuff and helping me with the process. So I plan to continue for many years to come.

Maybe I can give you some parameters to make your decision easier.

1) Are you really interested in learning about individual stocks and the tools used to measure performance? DRP'ing really forced me to learn about PE ratios, EPS, cash flow and all that other stuff. And I knew that I had to pick real stocks based on my own research, instead of just reading about it in a book. There's nothing like the fate of your own cash to compel you to learn! And I'm glad I learned these things. Even if I just match the index, I'd say it was worth it as a learning experience.

2) Are you prepared to MAKE organization a "strong suit"? It sure wasn't mine, and still isn't. But I've learned to compensate and just file everything very carefully, which has been a good self-discipline thing. But it aint rocket science. All it takes is a few manilla file folders.

3) Are you willing to get interested in your companies? It doesn't take much time, but it does take a certain awareness. I see a story in the paper on Intel and I don't brush past it. I read it. I don't track them assiduously, but I do keep abreast of big news and read annual reports.

4) Can you deal with mistakes? As they say, risk and reward go hand in hand. I've made all kinds of mistakes -- Started a drip in a company that I no longer like (so I've stopped adding to it) ... Screwed up a transfer during a stock split, so now I have one orphaned share of Harley Davidson that still lives at Ameritrade ... But, hey, these have all been learning experiences. Presumably, my reward will be increased because I'm taking more risk and I'm saving a bundle on fees, turnover and management costs.

5) Are you familiar with portfolio management? Why not do both Index and DRIP? The Fool doesn't talk about it much, to my knowledge, but I'm a big fan of portfolio management. There's software that will measure risk and reward to tell you the right balance of stock picks and S & P. To oversimplify, most portfolios will have less risk (and sometimes even a higher return) with 50% or more in the S & P, whether it's through exchange traded funds (SPY) or mutual funds. I think of S & P as a kind of stabilizing force on my portfolio. I can adjust that "lever" to suit my needs. If, in the future, I learn something new that changes my mind about drips, I'll just buy more S & P. If I discover I have a real talent for picking stocks and I'm handily beating the indexes, then I might lower my monthly contributions to the index and ramp up the proportion that's in individual stocks. You can learn more in an online booklet I created with Mike Schoeffler of Street Falcon (not a plug for software here...just letting you know about a free info packet that's out there): www.streetfalcon.com.

6) MOST IMPORTANT: Is it fun? It is for me. So I'll keep doing it. Once it's not, I'll stop.

Cheers,
FoolEd
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that's a really lovely thoughtful reply--thanks.

your suggestion that i do both is a valid one. i--maybe like you when you first started--have been reading a lot of books, and all the advice is starting to make my head spin a bit. those who suggest indexing often suggest that even the indexes be diversified, so i was looking at three separate montly contributions to three different indexes, and that plus four DRPs, plus my IRA seems like a lot of investments to keep track of. but maybe i just need to suck it up. i would be willing to buy some manila folders if i knew the investments were good ones and worth the time to keep track of.

of the parameters you suggest, the only one that gives me pause is the first one. while i'm very willing to do lots of reading of articles and books and keeping an eye on the media, i know myself better than to think i'm going to have fun looking at P/E ratios and cash flows and yadda yadda. and maybe it isn't responsible to invest in a company you're not willing to do math for.
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No. of Recommendations: 3
i'm feeling kind of ambivalent about whether to drip the money into a few stocks

Your trepidation is normal and proper. This is something we all go through, and in the end, you may well decide that DRiPs are not for you, and that an Index Fund would be a better vehicle.

many articles i've read bashing managers of actively-managed mutual funds for attempting to do the same thing, beat the index. and it appears that few of them can. will i really be different?

Beating the Index is not something that is easy, but you have many advantages over a fund manager. I won't go over all of the advantages, but I'll mention a couple.

For one, you don't have to report your progress to anyone on a quarterly basis. If you had that pressure, you might have to do some odd things to make things look better than they actually are. Eventually, these things will catch up with you. You have the luxury of taking the long view, which really runs in your advantage.

Also, you don't have people forcing you to sell. A fund manager may have things where they want, but if enough people want their money, then you'll have to sell some things that you wouldn't have sold otherwise. This (and the above) are a couple of reasons why turnover is so high.

There are at least half a dozen other advantages I could mention, but I think that you get the point. Don't compare yourself to the 85% of equity fund managers not able to be as good as average, since they have things going against them tat you don't.

I would suggest that an Index Fund (I like Vanguard's funds - very low fees) is a great place for you to start. If/when you feel comfortable selecting a company/ies for individual purchase, you can then put a couple of toes in the water. If that time never comes, you should still end up just fine if you get rid of your debts and put your money to good use.

Cheers-

george
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No. of Recommendations: 2
You sound like a newby just like me. I had the same dilemna and came up with this solution. As a beginner, I am placing a majority of my savings in an index fund, while dripping only one company to learn. I found that reading more and more books did me no good. When I started and got the real reports, I was hooked. My two cents says to do both.

KNutter
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No. of Recommendations: 1
Nut,

I "rec"ed your last post.

I'd just like to give the opposite take though that reading more and more books for me is extremely valuable.

It provides a broad basis and continually provides exposure to different ways of thinking and looking at something.

In the past, it was fairly true for DRIPs, that there was nothing new under the Sun. Little material went beyond: 1) here's how you start a DRIP and 2) here are a few Co.s that have plans. Pretty straight forward stuff.

But have you cruised the DRIP Port articles or "Investing Without a Silver Spoon" or "All About DRIPs and DSPs". When you read the DRIP boards you begin to realize the myriad ways people approach the subject. There is no one size fits all with DRIPs. I can't say enough about how the above have helped me.

The more reading I do the more I continuously refine what I do.

I really like your idea of an index fund and one DRIP to start. That would give me more time to read about and become comfortable about DRIPs. So why don't we take the next step and ask "Newbie" to give us more information about himself and let's see if we all can help him arrive at a "good" (not neccessarily right) choice for that first DRIP.

I'm also very curious to hear what your first DRIP choice was. Mine US was Compaq followed by Texaco. But that was before I'd read and learned enough about investing in general and DRIPs in particular. Neither was a "good" choice (but neither was wrong also).The reading I've done since then would have kept me from choosing them today. I would be more partial to Intel and Exxon with today's understanding. In fact I own INTEL now.

Regardless, please don't take my comments as negatives to your's. I understand that what your saying is it's important to "get started".

OB

OB
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OB,
Compaq followed by Texaco
Are you going to keep your stock in Texaco and end up in the Chevron drip?
Ginny
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I'm also very curious to hear what your first DRIP choice was. Mine US was Compaq followed by Texaco. But that was before I'd read and learned enough about investing in general and DRIPs in particular. Neither was a "good" choice (but neither was wrong also).The reading I've done since then would have kept me from choosing them today. I would be more partial to Intel and Exxon with today's understanding. In fact I own INTEL now.

OB,

I sold Compaq for a lost.
I bought Texaco directly using their DRIP plan (At the time, I was excited that I bought the shares at no commissions) My original investment of $500 is probably worth $1,800 at last I checked.
I just establish a position in Intel using www.elephantx.com (the first time I bought a stock through a broker for $0 commission).

Are you following me or am I following you?

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Ginny,

OB,
Compaq followed by Texaco
Are you going to keep your stock in Texaco and end up in the Chevron drip?


Yes, my plan at the moment is to just let it sit for 10-15 years and possibly add a little in amounts large enough to reduce the effect of the new fees.

I believe size matters and the new Chevron is certainly going to be bigger which makes me think of the discussion about diversification and whoever said something about holding the 5 biggest Cos. in each sector:

There was arecent study of the Canadian market that showed holding the 2 largest Co.s in each sector produced far superior returns than holding only the largest in each sector.

I'm not sure 5 would work in Canada as I think some of our sectors only have 4 Co.s in them.

OB
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Vulstock,

I'm also very curious to hear what your first DRIP choice was. Mine US was Compaq followed by Texaco. But that was before I'd read and learned enough about investing in general and DRIPs in particular. Neither was a "good" choice (but neither was wrong also).The reading I've done since then would have kept me from choosing them today. I would be more partial to Intel and Exxon with today's understanding. In fact I own INTEL now.

OB,

I sold Compaq for a lost.
I bought Texaco directly using their DRIP plan (At the time, I was excited that I bought the shares at no commissions) My original investment of $500 is probably worth $1,800 at last I checked.
I just establish a position in Intel using www.elephantx.com (the first time I bought a stock through a broker for $0 commission).



Well, you're one of my heroes so I'm following you and I hope you know where the h*ll you're going!!

Funny about Texaco, by today's knowledge I wouldn't have picked it but it's been one of my best performers. That's what I meant for the "newbie" about making good but not neccessarily right choices. Still informed is better than uninformed IMHO. I bought it DSP too just after reading the MF chapter on brand name recognition. When I was a kid the only gas my father used was Texaco and we always got great services at Tremblay and Son's Texaco at 4th and McDonald in Vancouver in the 50s and 60s but it's gone now.

As for Compaq: same story DSP and brand recognition but unlike yourself I've doubled down at current prices. (2 shares now!!!!). It's still my smallest holding and it's my little gamble.

OB
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Vulstock,

I just establish a position in Intel using www.elephantx.com (the first time I bought a stock through a broker for $0 commission).


We were discussing the cheapest Canadian brokers on the Canada-DRIPs board. The consensus was about $25 trades with various brokers. Then we had one lady post in.

It seems this lady went to several brokers and pretended to be the little naive old lady. She'd tell the broker she'd never traded before and was scared about the process but had been thinking of trying it but oh! was so scared etc. The brokers, hoping to generate future business, would then offer to give her a free purchase or two to try it out.

"Oh! but I'm scared and would really want the share in my hands because I'd be afraid about what would happen to it."

"Oh!" would say the broker, "We could do that for you too."

She said she got 5 purchases out of one broker before he dumped her.

Now I'm not advocating doing this but I do think it's a poetic turning of the tables!

OB




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OB,

Nothing negative here. I still read about DRIPs and other topics, as I am still very fresh here. I had just read so much and never used it, that I could not keep all the loads of info straight. I just needed to started studying the real thing and I couldn't motivate myself for just any company. I now understand more of what I am reading.

I was just giving an idea, if there is one thing I have learned, it is one size does not fit all. I am open to hear new things and change if it meets my criteria. I have to say I still have only one DRIP and am still new with the actual investing. I have been reading the boards for about 2 years but finally was in a position to start saving on the side of my retirement about 3 months ago. I am still a rookie.

Since I am avid motorcycle rider, my first and only Drip--
Harley Davidson.

Keep doing a great job of educating us rookies. I realy appreciate it.

KNutter
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No. of Recommendations: 1
Well, you're one of my heroes

Well thanks
but some think I am a villain.

Speaking of heroes and villians - Maybe sock puppet should have a comic book

Call it "Sock Puppet - Defender of the small investor"

The first issue - sock puppet can battle BuyandHold and Sharebuilder for charging new fees.

In following issues - sock puppet can battle any DRIP that even thinks of starting new fees.
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OB,
My first Drip stock was Harley Davidson. (long time ago, mid-80's)

Jenn
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Vulstock,

some think I am a villain.

Perhaps an anti hero then!

OB
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thanks, george. i suppose waiting a while and seeing how it feels never did much harm . . .

you guys are so warm with your advice! i kind of expected some rough equivalent of an athletic pat on the tochis and a bunch of voices telling me not to be such a weenie . . .
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Back to the orig. question, another reason to own specific stocks in a Drip is you control the date you will realise any capital gains (or capital losses). When I had more money in mutual funds, I had capital gains (long and short term) every year (even years I personally did not see any gains) even though I had taken no money out of the fund (thus I had to pay taxes on "gains" I did not have in hand). This is extremly common with mutual funds because of the constant buying and selling by the portfolio managers. Index funds, by their very nature, experence less "phantom gains" than the average fund because the managers do not do much in the way of selling - unless the market drops and lots of people pull their money out of the fund (most index funds have a lot of unrealized gains in there - you could have capital gains in a down year!). The vast majority of my drips have resulted in no taxable gains - and they won't until I sell them (if I ever do sell them - you have lots of other options with actual stocks you do not have with funds - like donating the appreciated stock to charity, etc). Basicly any advantages that purchasing individual stocks have also apply to drips, PLUS no-fee drips have the advantage of being the cheapest way to own stocks (even cheaper than index funds).

(note there will be small non-capital gains with both drips and funds, due to dividends, but given the tiny dividend yield of most stocks this is not really much of a concern - and should be about the same in either case if you are investing in similar stocks).
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sockiboo,


you guys are so warm with your advice! i kind of expected some rough equivalent of an athletic pat on the tochis and a bunch of voices telling me not to be such a weenie . . .


With a name like yours Fraid, Frebe, Holey, Stitch, Lefty and the gang could never be anything but warm, especially, if you wear us all at once and assuming you have 2 feet maximum.

Actually socki we've all been in the same place as you. View DRIPpers as the Anti-Heroes of the investing world (especially Vulstock) as we run about spreading the word and defeating the evil brokers and mutual fund salespeople. We're there for the little guy!!!! Hey where is everybody.

Welcome to the cult!

OB
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I'm also very curious to hear what your first DRIP choice was.

Mine was Coke. Since I am descended through my grandmother from Asa Griggs Candler, it made sense to me (yeah, I also had a few other reasons). I still own the stock, but will be closing it out very soon, as I have discontinued purchases of the company.

Second choice was Intel, and I have no plans of ending my association with them. As a matter of fact, I will be transferring a share to my son in a few years so that he can begin his own DRiPping (my daughter is DRiPping Pepsi - her choice).

Cheers -

george
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Vulstock,

> some think I am a villain.

Perhaps an anti hero then!


No, I would say that Vulstock is more of an iconoclast. He attacks the sacred beliefs of DRiPpers and forces us to reexamine that which we may be taking for granted as true. We need the iconoclasts to occasionally break down the walls and force us to rebuild.

Cheers -

george
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George,

No, I would say that Vulstock is more of an iconoclast. He attacks the sacred beliefs of DRiPpers and forces us to reexamine that which we may be taking for granted as true. We need the iconoclasts to occasionally break down the walls and force us to rebuild.


That's what I like about him!

Which brings me to something I've wondered about concerning "frictional costs" in DRIPs.

Regardless of whether it's "fee"ed or "no fee" are there other costs we delude ourselves about. This is just for consideration as I DRIP very happily.

In the traditional broker situation I would have some input into the "buy /ask" price relationship. With my DRIPs buy/ask is controlled by the transfer agent. My relationship is only whether to buy or sell. As the money is just some set amount sitting there is there any motivation on the part of the TA to get me the best price possible other than market price? Is it possible that I'm paying slightly more or selling slightly lower?

As I said I'm very happy about DRIPping as a small investor with an element of self determination but I have wondered about the above.

OB
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No. of Recommendations: 9
Back to the orig. question, another reason to own specific stocks in a Drip is you control the date you will realise any capital gains (or capital losses).

==================

I believe the better choice of words here is, you have control of the date you will realize any capital gains (or capital losses) unless your shares are acquired for cash by another company, private or public.

This has happened to me on several occasions - and they MADE me take all that dirty money - THE HORROR!

Once I was stuck with a small loss, the other times I made significantly more than I had invested. My latest DRiP to be acquired was DRAI (Data Research acquired by a private company for $11 per share). I had only sent an initial $50 to them, acquired about 10 shares and change plus my single share, so it wasn't too awful to make about double the money, just awful I had no other opportunity to add more OCPs. Boo-hoo.

Oh well, pay the tax and invest the proceeds in the next best idea, right?

exilion
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How about having the sock puppet dressed in one of those color-clashing suits of the Chicago Futures Board traders, with a wreath of soybean leaves and a belt of old-stock machine ticker tape???.....[g]

Oh, and let's not forget the Monopoly-Game cigar and moustache...
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The world needs iconoclasts and anti-heroes. If everyone was always in complete agreement, it would be a dull, dull, dull, existence.[g]
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My first two drips were Intel and Pepsico, followed by Johnson & Johnson a month or two later.

As to the more-or-less original question, I would use drips for my core holdings in good, solid companies; and (if and when I could ever afford it) an index fund to balance out risk and invest (generally) in those market sectors that are too cyclical and/or volatile for me to invest in directly (i.e., new technology, biotechs, energy, internationals, etc.) or that I would feel definitely queasy about investing in via any other kind of mutual fund.

Egerius
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No. of Recommendations: 11
If everyone was always in complete agreement, it would be a dull, dull, dull, existence.[g]
====================

This holds true for investing also. If we all agreed, stocks would always consistently inch higher and higher, or lower and lower.

At the initial basic level, disagreement is what makes a market.


exilion
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Sockiboo,

I spent a great deal of time analyzing this very issue. Based on the following principles, I came to a conclusion. The principles are:

1. It is very difficult for any investor, even an informed one, to beat the market over time.
2. Analyzing companies for investment is fun.
3. The money I am putting in the stock market is not "pin" money, in that it will constitute a chunk of my retirement money.
4. I personally would be an idiot to trust my judgment about companies for a chunk of my retirement money (recognizing that there are a lot smarter people on this board than me).
5. Notwithstanding point 4 above, picking companies that are well-established, meet strong financial criteria and have excellent growth prospects mitigates the possibility of my losing a lot of money over the long-term.

I concluded that about 50% of my stock investing (not including my 401(k), which I treat separately) would go into index funds. I currently "drip" an equal amount every month into the Vanguard 500 index and the Vanguard Total Stock Market index. The other 50% of my stock investing goes into drips. Whenever I get a raise, I increase somewhat my investing. The 50% into the index funds is easy. However, rather than increasing the amount that I drip into my current stocks, I take advantage of the increase to drip a new stock. I actually only drip two stocks right now, and am actively researching new stocks. I want to eventually get to about 6 drips or so, maybe as high as 8. That will also give me enough diversication in my drips so that one or two bad decisions will not torpedo my investment strategy.

Joe

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Joe,

1. It is very difficult for any investor, even an informed one, to beat the market over time.

I'm not sure I agree completely with this, but I think that it's a problem in perception or, on a more basic level, definition. This sounds a lot like what we often hear...that few, if any, "experts" (let alone us commoners) can beat the Index over time. BUT...the group most often pointed to (mutual fund managers) fails primarily on account of active trading...jumping in and out of the market.

So it may be a mistake to generalize for the complete population, mainly because you risk definining "investor" as the same as a trader. If, on the other hand, you define "investor" as someone with a long-term focus...as we should...then the picture is not so bleak. In fact, it wouldn't be wrong to say that "it is very EASY for any investor to beat the market." The key is to invest long-term in a high-quality companies. For example, if someone invests in Johnson & Johnson for 25 years, then the chances are pretty good that they will have beaten the S&P 500, even if they spent the 25 years on a remote South Pacific island. Come to think of it, they'd be displaying excellent sense as an investor if they simply bought JNJ and then spent 25 years on a remore South Pacific island...:)

dave fish/moneypaper
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Dave,

Funny you should write that. JNJ is one of my two current drips..... The other being PFE.

My real problem is determining my next drips. I am posting a separate message on the DRIP - Companies board, asking some advice based on my research. See you there!

Joe
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...it wouldn't be wrong to say that "it is very EASY for any investor to beat the market."

Very easy? That may be over-simplifying it a bit. Possible, yes. Easy, IMHO, not so. Here are a few quotes to the contrary:

"If there's 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that's all that's going on. It's a game, it's a chance operation, and peoples think they are doing something purposeful... but they're really not." - Merton Miller, Nobel Laureate and Professor of Economics, Univ. of Chicago

"Human beings cannot pick stocks. Period." - William Bernstein

"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, forty years ago when [Security Analysis by] Graham and Dodd was first published; but the situation has changed... [Today] I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost... I'm on the side of the 'efficient' market school of thought." - Benjamin Graham


If stocks are going to be a part of your portfolio, one must do their due dilligence and research before investing the first buck. Another quote from William Bernstein:
Investing competence does not come without some sweat. Expect to put at least as much time, effort and intellectual energy into this task as you would for a difficult college course. Four basic areas must be mastered, in the following order:

A. You must acquire a working knowledge of the nature, returns, and risk of various asset classes.

B. You must then acquire an appreciation of how various assets behave in diversified portfolios. This is called portfolio theory. The central concept of portfolio theory is that of the "efficient frontier." This involves identifying the portfolio composition(s) that provide one with the maximum return for a given degree of risk (or alternatively, the least amount of risk for a given return).

C. You must then develop a coherent and well defined personal strategy for the allocation of your assets among broad asset classes (i.e., foreign and domestic stocks and bonds, small versus large, growth versus value stocks, cash, real estate, precious metals, etc.).

D. Finally, you must implement this strategy through the proper choice of investment vehicles (individual stocks and bonds, mutual funds).


The key is to invest long-term in a high-quality companies.

But finding them is the hardest part. Hopefully my DRiP's are among them. ;-)

For example, if someone invests in Johnson & Johnson for 25 years, then the chances are pretty good that they will have beaten the S&P 500

Yes, but doing so with just one stock would make for an awfully high volatility and risk. Finding one company is a great start. Maintaining a diversified portfolio with several more stocks makes for quite a task.

Please don't misunderstand me Dave, I practice both investing methods. And I respect you and the info you provide to all of us here. I guess we'll just disagree on this matter, and hopefully not think the less of each other.

Bookm
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Bookm,

Please don't misunderstand me Dave, I practice both investing methods. And I respect you and the info you provide to all of us here. I guess we'll just disagree on this matter, and hopefully not think the less of each other.

There's always room for disagreement, and, as someone recently pointed out, it's a healthy thing. Judging from your lengthy reply, though, I think I may have simply failed to emphasize the simplicity I was trying to highlight. Your examples are correct, and your conclusion that it's not easy to replicate for a larger portfolio is well taken. However, by the same token, what I was getting at (in using JNJ as a one-stock example) was that mathematically, it only takes owning stocks that average in the "upper half" of the S&P in order to beat the S&P. Naturally, hindsight would be completely accurate, so any of us is bound to pick a few losers in the bunch. But, again, I was simply talking about beating the average...NOT recording the best gains ever known to mankind.

Getting back to the "easy" part...many of us...perhaps even most...could choose 10 top companies out of the S&P 500, and that group would likely outperform the S&P over the long-term. I know that sounds like I'm "going out on a limb," but I really don't think so...and, again, the reason I can say that confidently is that all I'm saying is that a small portfolio of the "best" companies in the S&P will beat the average of the S&P long-term. (I wouldn't be surprised if identifying the best 10 S&P stocks of the last 25 years would give you a group that would outperform the S&P over the next 25 years. Rtemember, we're talking about investing, not trading, so transaction costs would not trip you up...as they do with the typical mutual fund or short-term "investor.")

dave fish/moneypaper
P.S. No...I don't know which were the best 10 S&P stocks of the last 25 years...:) Maybe someone knows where that info can be found.
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Dave,

...mathematically, it only takes owning stocks that average in the "upper half" of the S&P in order to beat the S&P.


I think you could argue it doesn't even take that for DRIPpers. The reason:

Dollar Cost Averaging (and I don't mean blind DCAing).

I'm talking about things like George 1's InvestMete or the Couch Potato Portfolio approach.

When I did my poll by fully 2 to 1 the DRIPpers who follow these boards indicated they do not follow strict blind dollar cost averaging. We keep reading that "you can't time the market". Yet 2 to 1 here people think you can time it to an extent.

I think the basic assumptions are:

1. Pick a solid company
2. Recognize that price fluctuates through the year
3. Try to maximize your OCPs below the mean price

The Couch Potato Approach (designed for mutual funds) has outperformed the target index by something like 3% per year. In terms of LTBH this is very significant. I think the CPA can be applied to a portfolio of DRIPS too. Its what I basically practise:

1. I believe in my companies future growth
2. I try to keep each company at the same dollar equivalent
3. I favour the poorest performing companies on a monthly basis

This forces me to buy low relative to the individual holdings in my portfolio. Long term I believe (but can't prove) that this approach is meritorious.

OB
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OB,

When I did my poll by fully 2 to 1 the DRIPpers who follow these boards indicated they do not follow strict blind dollar cost averaging. We keep reading that "you can't time the market". Yet 2 to 1 here people think you can time it to an extent.

Actually, I think the reason most people don't blindly dollar-cost average is simpler than that...it's the fact that most people don't always have the same amount of money to invest. They have to pay property taxes one month, buy a new (something) another month, receive a bonus once a year, etc., etc., etc. And if they try to meet a quarterly, rather than monthly schedule, it probably gets worse. They might have $200 for 3 companies this month, but just $75 for four companies next month, or $300 for two companies the month after.

But you're right that incremental investing is a big advantage. However, what I was getting at applies to lump-sum investing as well, and it goes back to the old "stock selection" argument. If you pick good companies, you'll beat the average...whether it's compared to a lump-sum or incremental pattern. Obviously, it's easier said than done, but some companies stand out enough to give us confidence. Given the choice between putting (an extra) $100 (above a well diversidied portfolio) into JNJ or the S&P, I'd be surprised if JNJ didn't beat the S&P.

dave fish/moneypaper
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