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?

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