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Beginner Help with Index Funds and ETFs
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Beginner Help with Index Funds and ETFs

  #1 (permalink)
Trading Apprentice
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Beginner Help with Index Funds and ETFs

Hi all, new member here. I am brand new to investing, and am looking for a buy and hold strategy so I hope I am not so out of place here that this thread will get closed. I appreciate whatever general advice I can get though. I find it hard to find much specific beginner help so I was hoping a forum with knowledgeable people would be a good solution.

Since I know very little about this I am only interested in holding index funds/ETFs long-term. I am only 27 and my risk tolerance is very high. I am trying to find out what's a reasonable "lazy portfolio" when your money is spread across retirement accounts and ETFs and you have limited 401k fund options. And I generally am looking for a little help with regard to thought process for an investment strategy when you're young and are willing to be very risky.

I started with the assumption that I have a solid emergency fund, and then should max out retirement accounts before investing outside of them. I'm going to max out a 401k and Roth IRA and will then have $8k to put into ETFs. Between my 401k and Roth IRA I've selected 3 Vanguard funds that track the CRSP US Small Cap, Mid Cap, and Large Cap indexes respectively (all blend - VSISX, VMCIX, and VLACX), plus a T. Rowe Price healthcare sector mutual fund (PRHSX). I basically made these choices with not much of a thought process behind it, but it seems I've ended up with something akin to a US total stock market index fund? Although my allocation between the 3 index funds is roughly equal so I haven't exactly weighted the large caps in line with the market I guess.

Now, I've read that perhaps the best way to go as a beginner is to just get a total us or total word index fund and sit on it. But I'm inclined to be more risky than that. With my remaining $8k, it would seem redundant to get some sort of small or large cap, etc ETF. In order to not be redundant and be risky, it seems to make sense to me to go with sector, small cap growth (to really weight things towards small cap), or international stock ETFs.

My questions are:

1. Am I right that the combination of CRSP US Small Cap, Mid Cap, and Large Cap index funds is akin to a total US stock market fund?

2. Is my idea to go with sector, small cap growth or int'l stock ETFs for the non-retirement account money reasonable or is it ill-advised?

3. Regardless of a willingness to be risky, is it just ill-advised to go with this allocation on the basis that I'm unlikely to beat the market and thus a total US or total world fund is simply more likely to have a higher return for a buy and hold method?

Bonus question:

Is an employee stock purchase plan with a 5% discount on the closing price for the quarter worth it to buy and hold?

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  #2 (permalink)
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  #3 (permalink)
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Why do you think that buy and hold is not risky?

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  #4 (permalink)
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deaddog View Post
Why do you think that buy and hold is not risky?

Good point. I remember a friend who had invested (not trading) on margin during 2008 and his positions got liquidated...all trading is risky. Buy and hold is very risky if market drops again like in 2008 because of opportunity cost.

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  #5 (permalink)
Trading Apprentice
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Warren Buffett recommends putting fund into a low cost index fund consistently (weekly, monthly, basis). This way, you can employ dollar cost averaging and over a long period time, you should see good results. This is a pretty safe way to invest. Just don't expect market beating returns.

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  #6 (permalink)
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jamusued View Post
Warren Buffett recommends putting fund into a low cost index fund consistently (weekly, monthly, basis). This way, you can employ dollar cost averaging and over a long period time, you should see good results. This is a pretty safe way to invest. Just don't expect market beating returns.

Yet Buffet invests in individual companies. Buys low and sells high. He says that he will hold forever but he also trades in and out. He buys under valued companies and will sell if they become over valued.

Buy and hold is riskier than trading because you do not define your risk. You have to ask yourself how much am I willing to lose?

Buy and hold is a long term trend following strategy with no risk control.

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  #7 (permalink)
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I'm not too sure about buying and holding at a Dow, S&P record high, and things like QE working in the background.
But I could be wrong.

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  #8 (permalink)
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doodsmack View Post
My questions are:

1. Am I right that the combination of CRSP US Small Cap, Mid Cap, and Large Cap index funds is akin to a total US stock market fund?

2. Is my idea to go with sector, small cap growth or int'l stock ETFs for the non-retirement account money reasonable or is it ill-advised?

3. Regardless of a willingness to be risky, is it just ill-advised to go with this allocation on the basis that I'm unlikely to beat the market and thus a total US or total world fund is simply more likely to have a higher return for a buy and hold method?

Bonus question:

Is an employee stock purchase plan with a 5% discount on the closing price for the quarter worth it to buy and hold?

1.) Not quite sure. I think you can multiply the beta of all the positions and then divide that # by the total positions that you have. I believe the closer the beta is to 1.0, the closer your portfolio will mirror the overall stock market.

2.) Going with an international sector or international stock isn't ill-advised as long as you use a liquid instrument and understand risk. With small caps, the Russell 2000 ETF (IWM) has been reaching new all time highs, and with the emerging markets, they had a major sell off about a month ago but are working on pushing higher again. There is plenty of opportunity in the market regardless.

3.) Beating the market is a theoretical discussion. High beta holdings like small caps or international ETFs mean that you are much more likely to overperform/underperform the market depending on when you enter the trade.

Bonus Question: Depends on the stock chart and your future expectations of the company overall.

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  #9 (permalink)
Trading Apprentice
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Well here I am after a year, and am looking to redesign my portfolio. Figured I would lay out my thought process here, any thoughts welcome.

What I went with before was 5 stock funds with an intention to approximate the total world stock market but with an emphasis on small cap. But I ended up with basically 50% of my portfolio being small cap. At this point my intention is too just approximate the total stick market, for simplicity's sake and because I don't really know what I'm doing with that 50% tilt, although maybe I I'll go with a slight small cap value tilt.

The complicating factor is that my holdings have to be spread across 401k, ira, and taxable accounts. My 401k plan actually has excellent options to accomplish my overall goal, so ideally maybe I would have everything in there, but I already have money tied up in these other accounts. Not only that I but have unrealized gains in those accounts, which is another thing to consider.

My ultimate goal is to have 100% stock, 70% us and 30% int'l. The question now is whether the holdings of my 3 accounts should be mirrored, I.e. They would each have 70/30 split, each portion being an approximation of the total us and total int'l stock markets respectively. Or, should funds be separated into different accounts depending on what funds are available to each account, I.e. One slice of US being in 401k, int'l being in ira, and another slice of US being in taxable account, as an example. A big factor determining whether to go mirrored vs separate is my ability to maintain the chosen distribution going forward, considering only the 401k will have automatic regular contributions, and those contributions will be in larger amounts, AND the 401k should ideally be prioritised due to its tax benefit.

As I said the 401k has excellent options to approximate the US and int'l markets. There's a total int'l market fund (VTSNX) and for the US market, there's S&P 500 (VINIX), mid cap (VMCIX), and small cap (VSCIX) funds (all of these vanguard) with very low expense ratios. I have determined that if I allocate 81% if 401k money to the S&P 500 fund, 6% to the mid cap, and 13% to the small cap, I will have approximated the US stock market reasonably well. I have determined this by comparing the percentage of my portfolio's holdings in large, small, and mid cap companies respectively to the equivalent percentages in Vanguard's total US stock market funds.

Now, the ira and taxable accounts are with vanguard so I have access to any vanguard fund with those. I already have an int'l fund in the ira, VFWIX, so it seems like a good option to keep that (with its unrealized gains) and make the IRA the int'l portion of my portfolio.

The remaining question, then, is whether the taxable account should mirror the 401k for the US market, likely with a Vanguard total US stock market fund, or whether I should split the Us market between these accounts, maybe S&P 500 in 401k, and mid and small cap in taxable.

So I'm trying to think of what to consider as far this remaining question. If the S&P 500 stays in 401k, that would leave just 19% of the US market left for the taxable, which is good because I can contribute a greater amount to the 401k, and therefore hopefully maintain my intended distribution going forward. The other factor is what my blended expense ratio wil be, depending on whether I mirror or split the US market between 401k and taxable.

Thoughts?

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  #10 (permalink)
Membership Temporarily Revoked
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Index funds are good idea in lazy investing as you just buy peace of US Equities and pay very little management fee. Still Dow Jones, S&P and others will actively switch particular stock in their indices so they will grow in long term. Who would look at index that has companies that are bankrupt .

Warren Buffet trades, but he spends all day managing his portfolio. Index ETFs are fine for not professional investors.

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