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There are an ever increasing number of ETFs available to investors. There is also the “tokenization” of stocks, but that is for another post.
Jason Zweig addresses the proliferation of ETFs over at the Wall Street Journal:
“deworsification: cluttering a portfolio with too many investments.
I think many investors should worry instead about deversification…..That’s the opposite of diversification. Rather than spreading your bets, you concentrate them—and that can be dangerous.”
Over at another forum there has been a running debate about how many stocks to own to achieve diversification. I’m of the opinion that owning a basket of 100 growth stocks isn’t that.
Zweig goes on “The fewer stocks you hold, and the farther away from the overall market you move, the more extreme your returns are likely to become. Your potential gains are greater, but so are your losses……If you must speculate, bear a few things in mind. First, amplifying the risk of single stocks can make you a ton of money when the market is going up. It will wipe you out when the market goes down.
Limit your bets to a maximum of, say, 5% of your total assets. That way, you’ll make a lot if you bet right but can’t wreck your financial future if you turn out to be wrong. ” [That’s what some call a sandbox for experimenting in the market]. The more recently an ETF launched, the fewer stocks it tends to own. “A lot of newer investments are taking on more risk than investors may realize,” – Daniel Sotiroff, a senior analyst at Morningstar.”
When growth faltered a lot of people who had loaded up on a few individual stocks got burned. I’m not much of a stock picker, although I do own individual stocks, focus ETFs and funds. I do think there is a place for specialized ETFs and I do own a few. But as Mr. Zweig points out, you may get more (or less) than you bargained for. Some of these spin off higher dividends or emphasize sectors (the Energy Select SPDR XLE, for example).
My portfolio “ballast” is a number of ETFs/Funds which are large in scope and contain several hundred stocks. My experience has been as Zweig cautions. “Single stocks can make you a ton of money when the market is going up…”
I have sold portions or Dollar Cost Averaged out of individual stocks when they skyrocketed and I locked in impressive gains. It is to be noted I missed the top and that was expected. My ETFs are the foundation for my portfolio. I think a hybrid portfolio of individual stocks and ETFs can achieve better returns than the S&P 500. That’s been my long-term experience. Some of this can be attributed to differences in valuations. My portfolio is about 28% growth while the S&P500 is about 22%. There are other differences, too and for example, I avoid what some call the “sin stocks” which are more heavily a component of the S&P 500.
I’d suggest that there are benefits to tailoring a portfolio but as Mr. Zweig points out there are also potential risks.
Complexity is obviously the antithesis of simplicity. Most people, including a lot of HD readers, have neither the time, or knowledge to follow the strategies you offer. Nor, did you provide any numbers to suggest that someone following your investment prescription had actually surpassed market average returns over any specific periods of time. And, of course, past results are no guarantee of future returns.
There is signifant documentation that individual stocks can do better than an ETF. However they can and do falter at times. The easiest way to take on more risk is to hold 100% stock ETFs and eschew bonds, or take on a 80/20 portfolio. I do know the CAGR for my portfolio since 1995. It was never more aggressive than a 70/30 portfolio, but it did better than the S&P 500. Money chip indicate the S&p Cagr for that period was 10.94%. I did better. However, every hybrid portfolio is different. I accepted the risk inherent in mine.
“There is signifant documentation that individual stocks can do better than an ETF.”
You need to provide some links. Also, “an ETF”? Which ETF? Which stocks? How about a total market mutual fund? Over how long a period?
Visualcapitalist has a chart “the drawdown of the best performing stocks” 1985-2024. It has the top performing stocks for that period and a S&P comparison. The max drawdown of the S&P was -58% with 4.2 years to recover. The annualized return was 11.8%, but each of the stocks on the list did better. Of course, other stocks did worse. In general an S&P ETF will do better than a mutual fund simply because the ETF has lower fees. I can run my CAGR for any period of my portfolio since 1995 to present. That’s a period of 30 years. The performance for the past 20 years also was significantly better than the S&P, even with the drag of up to 30% bonds/cash. I’m not sayng what my current allocation is. Everyone says that is past performance. If you believe as some do that we are on the cusp of another “lost decade’ or worse, then it is expected that future returns will be less than the recent past. I have my own opinion and am invested accordingly. Even Zweig over at the WSJ points this out. A lot of people have done very well in recent years owning “magnificent seven” stocks etc. But be fully aware of the risks and willing to bear them (pun intended).
Ah yes, the “top performing” stocks undoubtedly outperform the market. Unfortunately, I don’t have a crystal bowl. Fortunately, I know I don’t have one.
I’d add that as I approached full retirement i adjusted my portfolio to hold fewer stocks overall. I analyze my stock component to achieve certain allocations. I have made very few changes for 3 years.
Having a portfolio with a bit of concentration does not have to be as complex or undiversified as the posting might imply – it can be accomplished with as few as two index funds.
Before retiring, the bulk of our portfolio was 100 percent S&P 500. Upon retiring, we shifted a portion of our S&P holdings to the Information Technology Index ETF’s of Vanguard (VGT) and Fidelity (FTEC) – these two index funds are identical, just held in different accounts. Over eight plus years, the S&P Index is up about 175% and these IT Index ETF’s are up about 425%. Unfortunately, we’ve recently been rebalancing a bit away from these IT funds back to S&P funds to reduce risk and concentration, but of course, this has been a losing move.
The well respected investment advisors of Paul Merriman and Chris Pedersen have suggested a simple portfolio of 90% Vanguard target date fund combined with a 10% Small Cap fund has a particularly high likelihood of surviving 30 years of retirement withdrawals.
Others like a concentration of dividend funds to have ratable income, some like financials, energy or health sectors.
The proliferation of ETF’s do allow investors to tailor portfolios to sector or country preferences, risk level, income desires, etc and many ETF’s are cost effectively managed to some indices. It can be relatively simple.
“The well respected investment advisors of Paul Merriman and Chris Pedersen have suggested a simple portfolio of 90% Vanguard target date fund combined with a 10% Small Cap fund has a particularly high likelihood of surviving 30 years of retirement withdrawals.”
Christin Benz of Morningstar thinks the problem with target date funds in retirement is when you take withdrawals you are taking them in the percentages of domestic/international equities and bonds in the fixed percentages set by the fund. She recommends if you want to follow this concept you hold the individual funds/ETFs in the same percentages as the target date fund you want to mirror. The advantage of the individual funds is when taking your withdrawls you can trim your winners back to the targeted allocation.
But target date funds always stay at your target allocation. Withdrawals won’t change this.
That’s the approach I’ve suggested to my spouse. However, I also suggested that she delay this until time to take RMDs.
I should add that for portfolio tracking/performance monitoring i did deconstruct her target date funds in the monitoring software I use. I also tweaked her funds. For example, plan to retire in 2030 but want to be more aggressive? Then choose a 2040 target date fund, or a 2030 and a 2040, etc. That was GPS approach.
I also don’t like target date funds because I feel they start shifting to become too bond oriented far too early – starting about age 40. I referenced the Merriman strategy just to highlight that others have suggested a concentrated, yet simple fund strategy to achieve objectives.
In the years since I retired I have been utilizing the investing philosophy of that great investor Henry David Thoreau, “Simplicity, simplicity”
Right. KISS.