Interesting article about index funds vs concentration

Recently, Vanguard released a research study discussing about index funds vs buying few stocks concentrating on the performance side:

https://personal.vanguard.com/pdf/ISGITO.pdf

It is interesting how the blogosphere gave further arguments on index funds vs focusing on timing vs looking at few stocks. Easily said than done. If we see in 2019 who is good and were we able to predict that say in 2009, even in hindsight it is a tough ask. There is index funds on one side and there is retail companies like Costco or Walmart, utilities sector, healthcare sector, pharma, finance ( which was coming off the recession ), tech sector and so on. Nothing shined particularly bright sector wise. Company wise there is an Apple which actually did well post 2009 when the talk of the town was it was past its prime. Which is also correct since Apple did not have any blockbuster product since then and it is just running off the iPhone launched in 2007! A google could be argued as having a sound strategy but then they did so-so overall. A facebook or twitter? New ones like Uber or airbnb which still have to go to IPO stage as of this writing? Even a fast paced tech sector has lots of delays.

Granted, there are others who went the whole nine yards and maybe performed well. But in the grand scheme of things that is just looking for performers or non performers in a stack of hay. Rather just purchase the whole hay ? One strategy that I found useful was to diversify to real estate as well as put the money in some sort of bonds or safe harbor. That atleast gave me lots of good sleep. Diversification is key and very important. Market timing in stages is also important. Getting some sectors and owning whole market is also key. Then focusing some money on few top performers is also not that bad strategy. That said, be ready to lose some money or focus on duo-polies and multi-polies. But that is again a tough ask in tech sector.

If I had 100 bucks to invest, I would still maybe put 20 in safe like bonds, 80 in stocks, which further would be 50 in index funds, 20 in sector funds, 10 maybe in individual stocks. Maybe. I would still keep it at 5 or so. And then break this 5 to 50 cents * 10 each and distribute across various sectors. Forget about the timing. There is no way to predict right now which company would perform good, would hold on to market, would buy or get bought, would compete or just be upstaged by a rival. And if they do hold ground, in wall street speak that is just losing ground. Market does not care for hold and stability and what not. That is what the Utilties are for or holding companies are for. Or big dividend paying stocks are for. They want growth like an Amazon.

Does it even make to have a strategy with so much change and volatility ? After all, I guess, one might be able to play this game for a 2-3 decades at max. As a fund manager ,same time frame or maybe more if you survive. As a common man, that is the time to invest and maybe preserve capital for a 5-6 decades long. Not to mention, the main focus on career and to buy home and maybe a rental property or bootstrap a startup or two. As rightly said by wise men a many, index funds is the way to go for most people, most institutional investors and most any other people. A fund manager with lot of clout and money can maybe play a bit. Just like a warren buffet. Maybe one works for a pre-ipo company or in a public company which gives these stocks and options for less. Say an amazon exec banking amazon stocks. But that is again part of earning and said exec might start a new company or work hard to get there at the top of amazon which merits such huge payout. All said and done, that is a function of your earning potential and not investing potential. As said earlier, diversify and also have realistic expectations. Some stock is doing well, own a piece of it, keep it for long, bank some profit and wait for long time if it is a good stock. And if you lose money on that, dont dwelve on it since you will have a fallback of index funds to cry yourself on!

Updates in October

The market has been steady since July. Went up and came down and went up and came down but overall the monthly returns have been good. It broke lots of records and there is a certain volatility these days in the run up to the elections due to uncertainity. This is expected but the 100-200 points are becoming rather normal - ideal for the swing traders. Fedex keeps going up for no reason. There is no major revenues posted or profits had. But wall street keeps putting them very low thresholds to cross and obviously they beat that expectations and the result is $10 pop up in shares in last two years now. For such a large company, it is rather behaving as if it is Berkshire Hathaway on steroids. Tech companies continue their upward swings are prime suited for bubble territory. Who would have thought FB going to 130 from 40 ( to 20 ) ?? Google or Apple or rest are all in good stead. Same with bio and utility stocks. Rather than following any individual ones, better to stick with the indexes though everything is pricey for now. I think the best bet would be to keep piling cash and putting the money in high interest savings or money market accounts or CD or really anything that the cash will make money on. Post elections, there are going to be downswings. The data seems to be on the bad side. Employment figures are a bit all over and there is legit concern that automation and not outsourcing or offshoring or immigrants are going to be a challenge for the employees. But that is just general part of the cycle. 

With elections around the corner, there is a lot of unpredictability. With two unpopular candidates this is rather a very different election than anything in recent memory or in the past 30-40 years. But by all account, the world has changed a lot and with the penetration of technology and internet, this is an election with different rules. It would be interesting to see how this all plays out. 

June 2016 roundup of stocks and online savings and CDs

So the markets has been doing the usual jig saw. It is clearly in swing mode .. from the start of this year it has fallen down by more than 5% points and back up few times now .. It has been doing that for a while now. The general feel is new highs are being tested and likely the only way to go up from here is down. But we all have seen that being told multiple times. So what to do ? I guess maybe buy some and hold. Only in safe stocks such as utility etc. All of them are high at the moment. Speaking of highs, Apple did fall quite a bit and lost its most valuable company tag for a bit. But overall, still it is high. The market analysts started clammering around the 10 p/e statistical measure as if that alone determines the worth of a company and market. Not us. We do not recommend Apple as of now even if berkshire h buys a position in it. Just hold off for the moment. These things have a way of working yourself out.

Meanwhile, one suggestion that no one seems to be giving is about the role of safe instruments such as CDs and MMAs and online savings. There is Discover, Amex, Barclays, credit unions such as Air force, Nasa, Navy FEDCU, Penfed, Alliant, Ally Bank and really any local credit unions, big yet stingy banks such as Bank of America, Citi and Chase; online only banks such as Capital one among others. A simple query to bankrate.com and similar sites such as smart asset gives you an idea of what all banks and rates are out there. And it is easy to check out the local banks - takes about an hour in an afternoon to check them out and put them in an excel based on which banks are near you and you comfortable with the site/technology and people among other things. I for one, really like the big banks such as Chase and have good experience with their call centers in India. Ditto with the Citi bank and Bank of America. There have been some US based banks and local call centers who tried to give some attitude and have promptly shafted them and severed relationship with them. So do not discount the human aspect in this banking relationship and go beyond just a simple app to what the wide array of features are out there with the various banks. Given that there is no super flash crash expected in coming few months, I thought it will be good to move some money to the online savings or CD accounts. Not only will they earn full 1% instead of the 0.1% currently but there is a good chance that with increasing interest rates, this will go up and set up the portfolio quite well for an eventual fall of the stock market.

Avenues

Fortune and luck favors the brave!

Nowhere that statement is more apt than the stock markets. As seen before, timing does have a pretty sizeable impact. And if there is a way to automate those thought process or maybe even put an algorithm that could help in managing swings. Now, this is not a novel thought and there are plenty of algorithms and strategies out there which run in an automated fashion where +/- 15% or 20% is something that triggers a rebalancing or buy/sell decision. That is pretty solid move for sure. 

But for those that are safe and want to time the market a bit or just wait till the opportunity presents itself, the way to go is to have some squirreled away in a CD or an online savings account. Here will go thru which ones are some of the good ones.

Of course, you can go to the bankrate.com or similar websites and plug in your city and get the list and you can also go to the list of your local credit unions for better rates since they often almost come at top. However the drawback of the CU is that the website is often not that great and transfers etc take time. Be prepared for additional paperwork such as faxes and scans etc. With online national banks etc those can be saved. The rates are good at online banks as well as CUs while the national banks unilaterally suck. As for 2016, for about 7-8 years now, all the big banks give about 0.1-0.5% max. There are few of the online versions that are coming up and many of them are simply bad. 

Some standouts are American Express online savings but they have only general savings and no IRA. Barclays is also the same. 

Standout here is Discover Savings. They are really good.

So is Ally Bank. Nationwide Bank. Synchrony Bank. 

Credit Unions affiliated with Govt or military are good with rates such as PenFED CU, Navy FED CU, NASA CU, Airforce CU among others. Alliant CU is one of those which are really good with rates and worth a checkout.

Here are the rates in no particular order:

http://www.alliantcreditunion.org/bank/credit-union-certificate#rates

https://www.depositaccounts.com/banks/air-force-fcu.html

https://www.discover.com/online-banking/ira-cd/

https://www.penfed.org/IRAs-Overview/#tabs-2

https://www.navyfederal.org/assets/rates/view-all.php and https://www.navyfederal.org/products-services/checking-savings/iras.php

https://www.nationwide.com/bank-IRA.jsp

https://www.ally.com/bank/savings-account-rates/

A big shout out to Ally bank since they offer the 1% as online savings which is very nice since a lot of banks carry penalty when you have to withdraw the money or transfer over to your brokerage account. If you see an opportunity, such as the oil crisis in early 2016, when you feel to transfer a portion over to a brokerage account, with CUs and other places there are penalties while the online savings such as Ally, there is none. Discover also excels in this department. And honestly, one wants minimum number of hoops to jump before making any transfers. It is fine if it takes about 2-3 standard days to transfer over. But it is altogether different mental block if there is a CD break and issue a new CD, think about penalty and all that. Maybe you might come out ahead or whatever, but in the long run, from a psychological perspective, it is better to keep things simple and straightforward. And predictable.

Notes on timings

Popular notion fueled by advisors and written material in finance literature points to a strict NO when it comes to timing the market. But then if you run the portfolio simulator and backtest various allocations and performance models, it clearly points to the impact on timings. Of course, we live in the present and have some benefits of past and immediate past and the pressures of the future as well as that of the immediate present. Put all this, and you have very limited time to analyze or react to what is going on currently in a dynamic medium like a market. Add to that, for most of us, the finance stock market is not the place of employment. We could be in something related like technology or something a bit more  farther off which will further skew your views on the materials that you read and absorb in real time. Then there is often well crafted and formatted views which can manipulate you without you even realizing that you are being cooked! Hence it is better to be slow in such environments and take time to find that needle in the haystack. By that I dont mean finding a gem of the stock or anything like that. Rather, on the defensive side, not to be burned by any one particular philosophy. Diversification is the mantra for that though there might be others who will say not. First diversify. And by that I mean not only assets but also your thoughts. So apart from long term static investments, have some that is in short term or medium term, some in auto pilot mode for the new money while some in the cash only or CD mode for a rather lengthy period of time. Why ? Well because if you run various asset allocation porfolio between 2006 and 2016 you will see that for $10,000 investment, you get about $15,000. And with or without rebalancing at various levels of frequency - annual or semi annual or quarterly or what not, you end up with a $1,000 differential here and there. 

So assume you do all this, still there is no enough thought diversification. The one related to timings say that leave them alone, determine a time horizon and do not touch. Yet in the above example, if you had contributed in lower amounts thru 2008 and racked up during 2009 then you have a $20,000 balance at the minimum without the other variables. Meaning, no rebalancing or anything but during the gloom days when everyone is pulling off the market, had you just put even about $5000 in it, you are still nearing $18,000. Hence, we will never discount the aspect of timing. That definitely does make a lot of difference.

Shoutouts

There are few blogs and sites which catch our attention and we subscribe  to it and visit it daily to get the view points or rather monitor the trends in a particular space - say credit cards for this site, or finance for other sites or travel.

So some of the recommended sites in credit cards space are:

http://creditcardsteroids.blogspot.com/

https://creditcardsteroids.wordpress.com/

Mr Money Moustache Blog

My Money Finance blog

For auto deals: There was only place that is worth recommending which is www.autoslash.com

There are multitudes of other apps in both Apple iOS and Android where you can download them and try for their features. They might not be really great and simply an extension of what your text. word or excel files does but it good to have them handy but to tune off the noise you are better off just putting them in a document and then transferring over to a calendar or task manager and execute them from there.

Buy low sell high!

This one is a big topic and deserves its own post.

And that is the ultimate mantra of the market world. There is really nothing else. I mean just do this one thing and you are all set. Just like for fitness just do the stretching/lifting routine and some physical activity and you are all fine and dandy till 90 and also eat well etc. Just like in computer world have html/js/big data/free db/java and you are all set for any application, it is the same way with this idea or concept. Have it at its core and you tide along the financial advisors, however persuasive they are. Really at its core, markets are nothing but test of patience, perseverance, honesty to the ideals, application of calmness, ability to tune out noise and false data among other things. So this blog  and the private blogs in my home computer, the tools that I have created is all I need for not only my portfolio but also for the startups that might get created by me in future. Might be. And the rest is just have this algorithm in the core and present format differently.