Thursday, March 09, 2006

outside retirement account investing - individual equity investments vs. ETFs vs DRIPS

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I recently read a very interesting discussion and series of comments on $2M blog regarding his individual equity investments.

Ultimately drops in his equity investments (outside of retirement accounts), which he sought to grow through DRIPs and Shareholder (which is a brokerage that acts like a DRIP program), seriously diminished his overall increase in net worth for 2005. In his words, he would have done better putting the money under a mattrass.

I think the challenges he's facing are common to all of us. Individual equity investments are very challenging unless you have:

  1. enough money to buy in larger quantities - this reduces the % cost of commissions
  2. enough money to diversify your holdings into many different equities in different sectors - this reduces your risk
  3. enough time to research your investments and follow them
  4. enough patience to buy and hold versus trade frequently
  5. sufficient non-equity asset classes to have a broader level of diversification
  6. enough time to allow long term trends to overcome short term dips in the market (10+ years)

With the above concerns in mind, I replied to his posting and to the comments of others. You might enjoy reading it.

This was my major point:

If you want to invest outside of retirement accounts consider a diversified portfolio of ETFs. Use online tools like x-ray at morningstar.com to understand your diversification and risk.

I'm especially interested in learning about different portfolio allocation models, risk assessment and expected returns. Any advice?

1 comment:

MikeJ said...

Cool site -
I invest money for living and you seem to have a good grasp on the basics. Most people lose with investing when they confuse it with gambling, but you understand diversification and problably understand that the lottery is a bad deal, so you'll be fine.

There are some really cool portfolio strategies coming out now, but they are unproven and they all lean toward tactical allocations versus strategic. While there is some theoretical merit to these strategies they are a little scary and still unproven.

As for me, I stick to mutual funds and probably will until the account balance is over 750k - 1MM. I would then move to individual managers for the larger asset classes.

Lastly, I think that you would really find the "quantitative" based funds to be very interesting. An example is HFCGX, this strategy was developed by Jim O'Shaugnessy (now at Bear Stearns) and has done very well. Bill Zeiff at Evergreen funds was just named Co-CIO there and will be developing an entire line-up of quant funds. He already has a couple that he is managing. If you find a fund he manages, just note that his track record would be the numbers within three years

I'm rambling so I'll quit.

Check out our blog at http://www.joycekids.blogspot.com/
We are in our 30's and in NC as well - Take care and best of luck