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Here's an article buy a guy who runs a managed fund company shooting Vanguard in the shorts.

http://tinyurl.com/qx0d

Ignoring the fact that he has an agenda to promote, what do some of the people on this board due to (they hope) maximize investment returns. I started investing in 1988 and my portfolio has turned into an unweildy mess. I have drips, index funds, straight stocks, bonds, 2 401k's from different companies and a roth IRA. The drips are all with different banks, and I have the original stocks all sitting in certificate form in a safe deposit box. Talk about a guy who just went out investing with no real plan.

Anyway, I have vowed to get my investing house in order over the next year or so and was wondering what some of the people on this board do or what your overall plan is and how it is working.

Volucris
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The article is full of you know what. Talk about biased crap from someone with something to sell! The guy runs managed accounts, which are a little like extremely expensive custom mutual funds for the affluent set. If you run enough of them, at least a few will be in the top 1% of all managed accounts out there, as this guy's bio claims. Ignore this nonsense.

As to what to do to keep it all together and juice returns, I suspect you will get a variety of answers. I have consolidated all my 401ks except the one with my current employer into a single IRA that I manage. The only mutual funds I own are in my 401k because I have no other choice. All my other accounts are in individual equities, although I will occasionally buy a sector ETF when I think something is cheap. I have also used a Rydex fund to effectively short the bond market in the past. To keep things from getting confusing, all my accounts are with one brokerage (DW and I have six accounts, with a traditional IRA and a roth each, a taxable account, and a checking account).

To juice returns, I invest almost exclusively in small caps, which tend to provide excess returns, and more recently in low beta stocks, which tend to outperform what their volatility would suggest. I started buying low beta stocks in the past year or so simply because my portfolio of small caps was (and is) really volatile and I wanted some more steady stuff to balance it out. So far, so good!
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I keep things simple: a Couch Potato portfolio (75% total stock market/25% total bond market), an extended market fund to balance out my S&P500 fund in my 401k (and increase my mid and small cap exposure if desired), and a money market fund for short term stuff. I rebalance on my birthday. I sleep fine at night and have a healthy nest egg. I couldn't say the same when I was investing in a managed fund years ago (which ended up being one of those that got caught in that recent fund scandal re: after hours trading!).

I know that many people pooh-pooh index funds, but frankly I don't feel like wondering whether I picked the "right" fund, which would occur if I chose a managed fund. Average performance is good enough for me, and indexing just makes sense to me for my lifestyle and personality.

CK
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75% total stock market/25% total bond market

I'm not going to pooh-pooh a stock index fund, since I own quite a lot of SPY and VFINX, but I completely don't get why you own any shares of a total bond market fund.

I'd understand a bit more if you were FIRE, but if you're still building, stocks provide better returns at a cost of volatility. If you can afford not to touch the money for 5-10 years, the volatility isn't a hardship.

I don't really understand them for FIRE, either, since they have some volatility. If it's funds I can't afford to see lose value, I'd rather buy actual bonds to be held to maturity, or CDs, not a fund.

- Gus
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IMHO, you should run screaming away from Mr. William E. Donoghue.

His logic is faulty, full of garbage about short term results indicating you should dump index funds and be an active trader or part of an active trader's fund. Buying into a sector simply because it is hot and short selling another because it is cold, and using leverage, are high risk approaches to investing. Chasing fads, IMHO, is a particularly bad approach to investing.

Taking pot shots at Vanguard "destroying wealth" is cheap, low down and dirty IMHO. Vanguard led the way with low cost index funds, a huge benefit to the small investor in my book. I think using a dollar cost approach when buying into the Vanguard total U.S. stock market index is an outstanding and easy way to achieve solid returns over time. We started investing in 1987 and have stuck to this approach of using d/c/a into index funds sucessully. Last month, I tried to estimate a return for an IRA concentrated in index funds after adjusting for additional principal over time. I came up with a CAGR over 12% from 1992-2003.

On simplifying your portfolio, moving everything to one brokerage will help. After this, make a nice pie chart and table listing all investments as a percentage of your porfolio. This is easy and critically important. I posted our most recent portfolio breakdown on this board recently FWIW. Tracking this breakdown over time is critically important to a disciplined investment approach. We have had success limiting portfolio shifts to a twice-a-year schedule, with automatic investments being made twice-a-month in between.

Cheers,

JohnH
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Anyway, I have vowed to get my investing house in order over the next year or so and was wondering what some of the people on this board do or what your overall plan is and how it is working.

I did just that this past year to some degree. I had two 401(k) accounts from previous employers and rolled those into my IRA at Vanguard. In addition to my IRA at Vanguard, I also have a SIMPLE-IRA at Vanguard and my DW has an IRA at Vanguard.

The only funds I have outside of Vanguard right now are some stocks I am still holding in an E*Trade account, although I have been thinking of moving these to Scottrade. However, I have really moved more towards investing in index funds as I realized I did not know what I was doing with selecting individual stocks.

As far as an allocation, right now we are fully invested in the Vanguard Total Stock Market Index fund and my one IRA in the Vanguard S&P 500 Index fund. While these two really mirror each other quite closely, there are slight differences. Right now we are in an asset accumulation mode and to reduce fees, we are staying with just the one fund for right now. We are both 28 and as we get older, we will look to balance out more with some bond funds.

As far as additional investments, I am starting to research ETFs/CEFs/REITS and dividend paying stocks. At the present time, my knowledge is not high enough on any of those areas to consider investing in them but that is where I am directing my future learning to see if that can play into our plans.

dt
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I agree. I think the main reason is convenience. Money goes into the fund rather haphazardly because part of my compensation is commission-based, so using a fund seemed easier than keeping track of actual bonds or CDs.

It is something I'm re-evaluating, however. It pays to stay flexible!

CK
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As far as additional investments, I am starting to research ETFs/CEFs/REITS and dividend paying stocks.

******************

ETFs are pretty sweet, IMO. They are low cost ways to get exposure to a sector or asset class and be able to get in and out any time you like. Even better, you don't sacrifice some performance because the fund has to have cash on hand to meet redemptions, which is one of the many things I do not like about traditional mutual funds. Check out the iShares website for more info, as this is one of the larger families of ETFs.

BTW, I would pass on REITs for now. Sector looks overpriced to me at this point. If you like high yielding stocks, check out IDU (utility ETF) and partnerships like SPH, FUN, APU, NBP, etc.
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ETFs are pretty sweet, IMO. They are low cost ways to get exposure to a sector or asset class and be able to get in and out any time you like. Even better, you don't sacrifice some performance because the fund has to have cash on hand to meet redemptions, which is one of the many things I do not like about traditional mutual funds. Check out the iShares website for more info, as this is one of the larger families of ETFs.

BTW, I would pass on REITs for now. Sector looks overpriced to me at this point. If you like high yielding stocks, check out IDU (utility ETF) and partnerships like SPH, FUN, APU, NBP, etc.


brewer,

Thanks for the feedback. With regard to ETFs, don't they typically only make sense when dealing with large amounts of money? It was my belief that the commissions/costs would erode any benefit when dealing with smaller amounts of money. Thank you for the direction to the iShares website for further reading/learning.

As far as REITS, I am not looking to invest at the current time but appreciate your opinions. Right now I am just trying to learn so that I will know when is a good/bad time to invest on my own. Actually, in all of these areas I am a fair amount of time away from investing as I want to be better educated before I move forward.

dt
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With regard to ETFs, don't they typically only make sense when dealing with large amounts of money? It was my belief that the commissions/costs would erode any benefit when dealing with smaller amounts of money. Thank you for the direction to the iShares website for further reading/learning.

It really does depend on how much you are investing at one time, how many ETFs you want to hold, how often you will invest, how low you can keep your fees, and why are you using them.

I have my taxable account invested through ETFs and I hold a small number of them. I invest a small number of times a year with large sums at each time (I funnel as much money as I'm allowed to through my company's stock purchase plan for an almost guaranteed 17.5% gain and then feed this twice a year into the ETFs along with additional funds) and I use a discount broker. My yearly expenses are below 0.25% of the money invested as a one time fee.

Now, having said that, I think you should have some other reason to be using them. The above only explains how to keep the costs low if you are going to use them for some reason. Perhaps there is a sector that doesn't have a suitable mutual fund for you, perhaps you wish to "time" your market hopping (good luck - you'll need it), perhaps you don't live in the US and don't have access to some good low cost mutual funds, or perhaps like me you are a non-US citizen who wants low cost investments that they can take with them when they leave the US.

Hyperborea
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Now, having said that, I think you should have some other reason to be using them. The above only explains how to keep the costs low if you are going to use them for some reason. Perhaps there is a sector that doesn't have a suitable mutual fund for you, perhaps you wish to "time" your market hopping (good luck - you'll need it), perhaps you don't live in the US and don't have access to some good low cost mutual funds, or perhaps like me you are a non-US citizen who wants low cost investments that they can take with them when they leave the US.

Right now I do not have any reason to be using ETFs as index funds are serving my purpose quite well. The main reason I have added ETFs to my list of research is because I have been seeing many people talk about them but I do not understand the benefit/hype of using them versus index funds. Since I do not understand, it is only prudent to learn so I can make a fully informed decision as to whether or not they should be a part of my investing plan.

The same applies for CEFs and REITs. On another board I visit, there is often mention of using CEFs to provide an income stream. This has gotten my interest but again, since I do not know anything about them I need to learn first.

Thanks for the feedback.

dt
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Here's an article buy a guy who runs a managed fund company shooting Vanguard in the shorts.

It really shows he has an axe to grind.

The truth is that something will always be beating the S&P500. And several somethings will be doing worse than the S&P500. The trick is to find what that will be going forward. I don't think most people can do that reliably.

I have vowed to get my investing house in order over the next year or so and was wondering what some of the people on this board do or what your overall plan is and how it is working.

My investment strategy is one of Asset Allocation (75% equities, 15% bond, 10% real estate) with annual rebalancing (403(b)), or Asset Allocation (75% equities, 25% bond) with nudging back to balance by directing new investment money (taxable investments).

So far it kept me from buying stocks in the Spring 2000 peak (and increasing my bond fund holdings at that time), and last year new money was going predominantly into equities with very little into bond. In retrospect, that appears to have been good. In both cases, it kept me from following my emotions, but instead keep with a plan that has a really easy way of making investment decisions, and all I had to do was follow the plan instead of the feelings (e.g., go against the irrational exuberance leading to the Spring 2000 peak, and go against the irrational pessimism for the subsequent lows). However, the proof is in the next 20 years.

My 403(b) is nice and neat in three investment accounts at TIAA-CREF: equity index, Fixed Income, and Real Estate. (The Real Estate account predominantly purchases various types of income-generating properties outright.)

My taxable investments, however, are right now a little messy with ten different funds (11 if you count a money market fund with a token amount in it), what my investment advisor had started as a "core and explore" portfolio but I later changed to an Asset Allocation plan. However, the reminents of the "explore" part have remained in the AA and a couple years they have been the big winners, but a couple of years they have been the big losers, too. The fund family is halfway decent, but if I were to start over today I would probably go with Vanguard Total Stock Market, an international fund, and the total bond fund. (Yes, I know the argument for holding only tax efficient funds in a taxable account, but I am not convinced yet that I won't be needing to use those investments before I can tap into my 403(b).) The reason I went with an investment advisor was because I figured that having someone to keep me from buying high and, especially, selling low, would be worth a load. Well, my losses were lower than a straight S&P500 investment, probably because I had 25% bond exposure at a time that any bond exposure was "unpopular", but then in the recovery I will probably have lower gains, too, but being less than 10 years from when I can retire, I am uncomfortable with 100% equities.
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<<Ignoring the fact that he has an agenda to promote, what do some of the people on this board due to (they hope) maximize investment returns. I started investing in 1988 and my portfolio has turned into an unweildy mess. I have drips, index funds, straight stocks, bonds, 2 401k's from different companies and a roth IRA. The drips are all with different banks, and I have the original stocks all sitting in certificate form in a safe deposit box. Talk about a guy who just went out investing with no real plan.
>>


My portfolio is a collection like yours, including stocks that have split, been bought out, divided in multiple comapnies and whatever, plus IRAs, 401Ks, FRIPS and whatever. So it's a hodgepodge.

But it's a hodgepodge that's worked well for me. I don't feel any compelling need to rationalize it, although I do sell off small positions from time to time, and will sell off stocks when that seems like they may be overvalued substantially.



Seattle Pioneer
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On ETF costs: I generally invest slugs of at least $10k at a time and i typically hold for years. This means that the $30 or so I pay in commissions is a negligable cost, especially if you amortize it over a few (or more) years. If you are dealing with smaller sums, funds might make a lot more expense if you can find one that will do what you want it to.

On CEFs: If you are looking for income, be very careful when dealing with CEFs. The yields may look attractive, but many of them buy long bonds or preferreds and borrow short term or floating funds. In a rising interest rate environment, you can really get killed with this setup. If you don't understand these things fully, don't get in.
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I like the article because it answers its own questions.

Question:
Why does the Vanguard Index 500 get so much respect?

Answer:
Through the end of July, their S&P 500 index fund has averaged a loss of 1.6 percent a year and ranked No. 1,667 by Morningstar out of 6,460 domestic stock funds for the last five years.

My translation:

Hey, the fund outperformed nearly three-quarters of all domestic stock funds. Sounds pretty good to me.

Article:
Sorry, Charlie, investors want funds that make profits, not funds that used to make profits. While Vanguard offers low management fees, broad indexes, a wonderful reputation and a huge PR and advertising budget, their managers didn't lift a finger to protect investors from the bear market's devastation.

My answer:

Sounds like three-quarters of all domestic stock funds either didn't lift a finger to protect investors, or their finger-lifting was counterproductive. With those odds, I'd rather protect myself than trust somebody else to try and probably fail to protect me.

Article:
I doubt that any single organization has destroyed more retirement wealth in the past few years than Vanguard's index funds.

My answer:

Since Vanguard is a large fund family, its funds may have lost more money in the market downturn than any other - I don't know. What I do know for certain is that Vanguard is nowhere near the top in terms of destroying retirement wealth through outrageous management expenses, sales loads, 12b-1 fees, and other hidden charges.

Rant over.

dan
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I've posted this before so skip it if you're sick of this thread.

DW and I have all our 401K money in S&P 500 funds. Additionally we have some taxable money in the S&P 500 and VGSIX (REIT fund). The e-fund is all in I-bonds. And then the stock portfolio is three REITs and six equities all about equal weight. The percentages are roughly 60% S&P, 10% equities, 20% REITs and 10% I-bonds.

It's simple and it works. We DCA in the S&P and buy and sell stocks based on the market. Additionally, we've got a bunch in home equity, but we're not supposed to count that so I don't. But it's probably 30% vs the rest if it were thrown in.

We could be FI outside of NYC tomorrow. Here we're just middle class wage slaves. But for how long?

nmckay
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On ETF costs: I generally invest slugs of at least $10k at a time and i typically hold for years. This means that the $30 or so I pay in commissions is a negligable cost, especially if you amortize it over a few (or more) years. If you are dealing with smaller sums, funds might make a lot more expense if you can find one that will do what you want it to.

That was my suspicion and since I do not currently have that kind of money to invest in ETFs, I think I have plenty of time to do my research while I stick with my index funds while accumulating.

On CEFs: If you are looking for income, be very careful when dealing with CEFs. The yields may look attractive, but many of them buy long bonds or preferreds and borrow short term or floating funds. In a rising interest rate environment, you can really get killed with this setup. If you don't understand these things fully, don't get in.

Thank you for your opinions/comments on CEFs. Your last statement is where I am at right now and just trying to learn more right now so I can fully evaluate my options as I move forward.

dt
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Hey Choco,

As we've talked before I thought I would chip-in a comment.

The difference between a Vanguard type index fund or ETF index vs. a typical managed mutual fund (ex sales loads) is 0.2% vs 1.5% approx., so 1.3% variance. From 1970-2000, only 6.5% of US mutual funds beat the S&P 500 by 1%. 0.6% beat by 3%. There are also additional taxes with high yearly turnover tax costs on managed funds vs index funds too.

This sort of data which no one seems in the literature demonstrates that the chances of being close to matching the index performance is 6.5% chance. After tax, less that that. So with a 93.5% chance to beat a managed fund, it is extremely difficult to believe any fund will beat the index after expenses. Add that most funds top last year or last decade fail to do half as well the next year or thru the next decade, and it makes it almost impossible to pick one of those few funds that are better long term. Makes it a no brainer.

What is surprising here in the UK is that the Virgin UK index fund with a 1% expense ration has as much money invested as the most popular 0.5% lower cost fund. So even people here who get the index fund message, are only getting part of the message!

Regards,
Petey



I keep things simple: a Couch Potato portfolio (75% total stock market/25% total bond market), an extended market fund to balance out my S&P500 fund in my 401k (and increase my mid and small cap exposure if desired), and a money market fund for short term stuff. I rebalance on my birthday. I sleep fine at night and have a healthy nest egg. I couldn't say the same when I was investing in a managed fund years ago (which ended up being one of those that got caught in that recent fund scandal re: after hours trading!).

I know that many people pooh-pooh index funds, but frankly I don't feel like wondering whether I picked the "right" fund, which would occur if I chose a managed fund. Average performance is good enough for me, and indexing just makes sense to me for my lifestyle and personality.

CK
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I've been getting my investing house in order lately, too. For me it helps to keep things segregated by type. My funds (currently only S&P) is/are with one place, drips at another, equity accounts (both Roth and taxable) at a third. I was getting too confused with everything all over the place. It's a recent change so the only real difference so far is how well I keep track of stuff at my end, and so far it's been a remarkable improvement. Keeping appendages crossed that it holds.
ILC
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