Is There a Wrong Way To Invest In The Market?
Recently I’ve started purchasing individual stocks again after taking a few years off. And in addition to that, I’ve started to invest in small cap index fund shares. Now that I’m buying individual stocks again, I’ve been asking myself why I stopped picking stocks in the first place. A few questions bubble up to the top of my mind as I ask myself this.
Is there a wrong way to invest money?
Well, that’s a loaded question. This is like asking if there is a wrong way to live your life. Depends who you ask. But in short my stance is no. I may view someone as careless with their money, but its their money and life. Who am I to judge how someone else might invest?
I didn’t stop picking stocks because I lost money. I stopped because I thought I was investing the wrong way.
The first ever company stock I purchased back in 2007 were both bought out or merged shortly after I sold. Budweiser by InBev and Airgas merged with Air Liquide. I missed out by selling in the depths of 2008. But hey, I needed to pay rent and work was scarce.
The few bunches of stock I bought back in 2015 and 2016 were good investments. Amazon. Home Depot. Taiwan Semiconductor. Starbucks. There wasn’t a substantial amount I bought. In all it was around $12k at the time. With Amazon making up the bulk of this sum. And these have done very well since 2016.
So why did I think I was investing the wrong way? The stocks I purchased rose in value. Wouldn’t that be the definition of investing correctly?
Well, for one I started to doubt myself. I started reading and listening to people who provided some pretty hard data that over the long term, low fee index funds will win. Along with that data came the “success stories”. The regular kinda folks who just saved hardcore and dumped it all into index funds.
JL Collins and Jack Bogle had a lot to do with this.
The more I made with individual stocks, the more I began to fear losing it all because I believed “I didn’t know what I was doing”. And if you don’t know what you’re doing, how can you possibly succeed? These seeds of doubt were planted in my mind. They were watered when I started to learn more about FIRE and read more about investing.
You can’t beat the market, so be the market. Don’t bet on one horse bet on the entire race.
So what did I do after some reading and listening and becoming part of the index fund crowd? I stopped buying individual stocks. In a way, I stopped thinking too. My mind closed up. I saved up for initial purchases into my beloved VTSAX and VFWAX and began my “set it and forget it” mentality. Which has done well for me, I might add.
I started to think, why would I put all my hopes on a single stock when I can purchase swaths of the market? In taking this route, the trade off is accepting (hopefully) steady average returns. Which is really all I want. But I’ve actually done a little better than the S&P returns over the last year. VFWAX has balanced me out when the markets have fallen, and a handful of individual stocks also kept my head above “average” returns. It didn’t hurt that I had dry bond gunpowder ready to deploy back in April 2020 too.
I’ll always be an index fund investor and invest towards the boglehead philosophy. My daughter’s first ETF was VTI. I admire the boglehead 3 fund portfolio model, and if traditional retirement were my path, I would likely have a 3 fund portfolio right now.
As I’ve aged, the risk that I take on a daily basis has certainly been blunted over the years. I have kids now and a mortgage. A wife. A Jack Russel Terrier. There’s too much at stake for me to make a giant gamble or do something without feeling comfortable about it. I’ve seen people lose out trying to get rich quick. I know there’s no shortcuts in life.
So why would I start picking stocks again? Isn’t that a riskier type of investment? Why not invest only with my two lovely funds VTSAX and VFWAX?
After a few years of auto-investing in the last bull market and more recently saving 50% of my income for a year, I’m ready to venture out and diversify. I’m not changing directions, just fine tuning the course like any good pilot. I do not think I can classify what I’m doing as taking a classic barbell approach. I’m not speculating, and I sure as hell don’t have money in a no risk asset. I do feel confident with the amount I now have in my main index funds. Confident enough that I won’t rock the boat by making small and calculated deviations in search of some juice.
Diversification
I feel as if I have this giant safety net under me with my main index funds beginning to churn their own decent returns. So with this, I’ve started to reduce what I typically put into VTSAX. Instead of 100% of my weekly auto-investing amount, I’m now going 80%. The other 20% is going to be sprinkled around to VSGAX and individual stocks.
The reason I’m doing this is that I’m not diversified if I have the majority of my wealth in VTSAX–I know, I know…VTSAX holds 3,640 companies…but…its the weighting that matters.
All the eggs might not be in one basket, but they’re certainly in one semi-truck traveling at a high speed down the highway. It might be more prudent to have a few trucks barreling down the road, maybe taking different routes, in case one gets a flat or runs into traffic. So that’s what I’m going to do, I’m getting more trucks to carry my more eggs.
VTSAX Holdings
If you take a look at the biggest holdings of VTSAX above you’ll see that the top 7 holdings are tech companies. Including Tesla! And look at the country breakdown.
Inflation is likely to start rearing its head now that Uncle Sam is gearing up to deposit free money into American’s accounts. Recently there’s been an inkling of what may be in store for us as the ten year yield has spiked a bit and the markets did the typical overreacting gig. This choppiness does shed light to a reality that may present itself way down the road: higher interest rates. VTSAX does not like higher interest rates as its weighted right now.
During this recent sell off (which seems like a distant memory), as I watched the S&P and Dow spend days in the red, some of my other investments were in the green. VTSAX went down, but this was hedged a tiny tiny bit by some individual stocks and my foreign holdings. I tell you what, it felt pretty good to see I was growing something, even if it was miniscule, on a bad market day.
For me, now is the time to start diversifying. Not because I’ve changed my stance. I still love VTSAX. Always will invest in it. But because it would be irresponsible for me not to. To only hold VTSAX would be riskier than for me to spread my money around. And as I said, my risk tolerance has been blunted over the years. I’ll sleep better at night knowing all my domestic money is not in my beloved VTSAX.
I’d started this diversification process last November, prior to the interest rate jump. But the recent events have only reinforced my decision to diversify while the times are good.
Above is my new fund and friend, VSGAX. The chart compares it to VTSAX over the last 5 years. Not bad.
I know I’m not completely diversifying out of tech with a small cap fund. I’m diversifying from big tech to “riskier niche tech”. Because these days, new and up and coming companies are inherently going to lean tech. It’s hard to avoid that.
The top VSGAX holding is Plug Power PLUG. An energy company that specializes in developing hydrogen fuel cell systems to replace conventional batteries. Not just for cars, but for power grid systems. Even the top holding of VSGAX is only 1%. Compared to VTSAX’s top being 5%.
The second top holding, ENPH is a software company that focuses on home energy storage and web based monitoring for control of solar energy.
I don’t fear the bear market, because there’s no avoiding a downturn if it happens. I fear missing what could have been if I had of just invested in “other” vehicles when a new bull market emerges.
Along with this fund, I’ve picked up CHGG and TDOC this year. The goal will be to keep up this diversification trend for 2021. Little bit in small cap. Little bit in individual stocks. A bunch in VTSAX and VFWAX.
Towards the end of the year I’ll start to put more into VFWAX so I can get my current 20% international weighting inching towards 30% in 2022.
I guess you can say I do have a 3 fund approach, a more risque approach to the classic boglehead investment philosophy. Instead of a safeguard bond fund to compliment my International and Total Stock Market funds, I’ve taken Small Cap as the riskier third leg.
Is there a right way to invest your money?
Another loaded question, but yes, absolutely. There is a right way to invest. The right way is to do your own homework and gauge your appetite for risk. Then execute your own plan.
What about you? Are you all in on individual stocks? Are you a believer in the 3 fund portfolio? Whatever your investment style, has it changed much over the years? How did you learn how to invest?
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it brought a tear to my eye when i saw the words “beloved vtsax.” i was cracking up over here. hey, you selected really great stocks back in ’15 and ’16. i think there are good people in the world who really think they are dong folks a favor by telling them they can’t do something and sapping confidence. i’ve never been a fan of that. if i read correctly you have a great approach that balances caution with a plan.
we both know there is a short term top coming at some point and i just hope it doesn’t shake people out who may have just bought their first shares. it takes some riding on the roller coaster to get used to sticking to a plan. 15-20% pullbacks don’t bother me any more even in our top holdings but it wasn’t always that way. happy investing!
I think the crowds that say “index fund investing is the right way” comes from a good place. It’s the safer choice. But it can make people begin to doubt their ability to invest in other vehicles. At least it did for me. Yeah I’m ready to take on a different approach and take a measured risk for more gains. Right now is the time to do it I feel.
When the markets drop I just tell myself that I’m in it for the long haul. I was able to deal with last March’s rapid drop, I even put money in at the bottom (thought I didn’t know it was the bottom then). I think if I were in retirement the drops might bother me more. Thanks for stopping by to comment!
I really enjoy your articles. You have been picking some good topics and fleshing out the topics well. Keep up the good work.
Hey KY, I appreciate you stopping by and taking the time to read and comment. It’s nice knowing that someone appreciates my drivel lol…Thank you!
Good stuff, Noel and glad to see you’re diversifying and getting a bit back into individual stock holdings. Like Freddy, I’m primarily an individual stock investor with minimal indexing and I’ve done very well over time. In any event, you’re right that so long as you do your homework, know your risk tolerance and maintain consistency, over the long-term, you’ll generally do fine in the markets. Dogma is for the dogs, so always “do you.”
Thanks Mr. Fate. Yeah its time for me to get back into stock picking and spreading the dollars around to other types of investing. It’s great seeing folks like you and Freddy do your thing, and you achieving early retirement without the index funds being your primary holdings. Very inspiring. But I like playing it safe, so index funds will likely always be main investing method. I’m happy with average 7% returns, so long as its consistent. Anything more is a bonus for me. I agree that any sort of dogma tends to grind my gears a bit…even when I agree with it. There’s always exceptions to the rule and the world is a better place with people doing/thinking differently. Thanks for reading and commenting. Appreciate your support.
As you mention I think it really just depends on your personal situation/strategy. I myself, have changed as an investor quite a bit over the years. From my mid-twenties to early thirties I was more heavy individual stocks. Now that I’m getting older and more closer to a FI scenario, I’ve been shifting more assets into index funds. Mostly it’s risk mitigation and simplicity. Plus, I no longer need to beat the market, I only need the market and the less I need to think about it, the happier I’ve found myself to be. And that’s simply a personal choice. No right or wrong answer on this one. As long as you can sleep at night and are content with your mix, you’ll do fine over the long term.
Not thinking about the markets is a luxury indeed! I’d say that might be the mark of investing zen. That’s what I like most about index funds, not having to think much. But on the other hand, I have an urge to try and pick a winner, hence my very small toe dipping back into stock picking. Might be I feel I have some catching up to do since I didn’t invest seriously in my 20’s. I appreciate you sharing your investing style. Absolutely right, no right or wrong. Thanks for commenting Q!
Your thoughts reflect mine. Like you, I don’t fear bear markets. If anything, they’re a buying opportunity, and I want to buy as much as possible at the bottom and on the way up. But I also want more diversification because I agree that VTSAX is too heavily weighted to the biggest companies and there’s not enough to balance them out if/when they falter. And, like I’ve said before, I don’t doubt anything is too big to fail. (Yes, I understand the banking system got greedy with sub-prime mortgages, but anyone can get greedy over anything, including selling users’ data.) Like you, I’ve got my strong base in VTSAX and the like and want to branch out again. It’ll be fun to watch your journey and selections if you choose to share them.
When the bear market does hit we’ll just have to hold on for the ride and buy as much as possible. I agree with you on that! VTSAX is too heavily weighted in one sector. I think what’s happening right now is testament to it. Unfortunately a tech sell off drags everyone else along since they’re like 20% of the S&P. I just bought more than usual today of my small cap fund because this week is probably one of the better weeks to buy recently.
Nothing is too big too fail, you’re right about that. Tons of people these days say they knew the real estate market was in a bubble back in 07, but there’s also people who’ve been saying that the stock market is in a bubble for the last ten years. Diversification is the only way to hedge any sort of downturn, but as you and I both agree, its about the ride up not saving ourselves on the way down. If I were retired I’d probably be singing a different tune I’m sure, but even then I’ll probably own some bonds when I do retire to safeguard a bit. Oh yea I’ll sure share my buys along the way.
Thanks for stopping by to read and comment.
I’ve ventured out a little myself (not the best timing in doing so!) and am certainly open to the opportunities that individual stocks provide, but as much as I love to follow the market, I’ve learned that I like doing so more as a spectator while participating in index funds. When I put the decision in my hands, I beat myself up too much if a stock doesn’t perform in line with the index.
I totally get that indexing is almost too broad to recommend to every single investor, but then I remember that many investors are just learning about indexing for the very first time, and for them it can be a game changer (as it was for me years ago).
I think we’re both kinda the same. In which we track and follow the markets and business news and see people making money in different ways and want to participate, while in the back of our minds we know index funds are where its at. I know my recent individual stock purchases took a huge nosedive. Teladoc for example went from $288 (my purchase price) to $189. Pretty disheartening. But others like Disney and Southwest have been winners. Makes me glad I’m majority in index funds. My side dabbling just reaffirms my belief in the funds, while giving me entertainment and learning through the hard knock process.
Now’s really the time to venture though, now that the markets have dipped! I’ve been telling myself that for a few days now…next week I’ll hopefully have the guts to buy another round of stocks on sale.
Thanks for the comment IF
I’ve written on this topic a bunch. My stance is, “there’s nothing wrong with individual stock investing, it’s just not right for me.” I can’t leave my investments alone, therefore I typically take profits way too early, or sell out of investments for no apparent reason. But, if executed properly, it can complement index investing quite well. Good luck!
Yes, that’s a perfect way to phrase it. My stock purchases are just a compliment to my main love: VTSAX. I want just want enough individual stock to give my portfolio some flavor, an enhancement. Sort of how I like salsa on top of my burrito. I’ll have to go and read some of your articles, nothing like learning from people who’ve done it themselves. Yeah I sold some Amazon early and kick myself for it, so I know what you mean. Thanks for stopping by to read.
While I’m a pretty firm believer in index funds, these days. That wasn’t always the case. And while I overdid it with individual stocks in my younger years (where I managed to lose my hat and 50% of my net worth during the Great Recession), they’ve still played a small part in my portfolio over the last decade. Berkshire. Markel. Tesla at IPO. Lots of small plays.
In recent years, money has tended to flow through more and more to index funds. I think this has shifted mainly as my investment targets have shifted. We don’t need more money, our investment goals aren’t higher. When you don’t feel like you need more, additional risk becomes more costly. You just want to keep what you have, be able to maintain a safe withdrawal rate, and go live life.
What’s most important during the years of building your portfolio is the mindset required by an investment time horizon that stretches several years. If the cost of being able to consistently save large chunks of your income is throwing a few grand at individual stocks now and again, so be it. Maybe you’ll beat the market, maybe not. You’ll probably be relatively close, over time. What matters is having the mentality to keep up the saving and investing over the long term. Do what you have to do.
And if it makes you feel any better… I popped open my Vanguard account since something looked familiar.
VSGAX. Cost basis: $78,343.43. Value as of
3/05/2021: $150,793.03.
I’m with you. 🙂
I can totally understand what you mean about the risk being more costly once you have what you need. I think that’ll be my goal once I reach my “number”. I’m just looking for a little more juice, nothing crazy, just a supplement to VTSAX while I’m in my accumulation phase of life. Individual stocks will probably not exceed 10% of my portfolio. But yeah, just going to live life and not worry about what the stock market is doing really does sound like bliss.
Great perspective about the investment mindset and time horizon. I think the minor stock purchasing scratches an itch of mine that makes me feel like I’m doing something, while VTSAX and the other index funds do the heavy lifting. Congrats on VSGAX. I see it’s been good to you. I don’t expect it to keep on tearing forever, hopefully there’s still a bit more juice in the fruit for 2021.
Thanks for stopping by. As always I appreciate your views.
I have followed a somewhat similar path. The first decade or so I have plowed almost everything into a simple global index fund.
But once I felt I had enough, I ventured out a bit. Just a bit and with amounts that wouldn’t rock the boat if shit hits the fan.
Worked out like a charm so far. Forced me to learn and open my mind.
Cheers!
Glad to hear from someone who’s taken a similar path. The index funds do boost up confidence to go out and “gamble” a bit. I think the major draw, for me, is just actively doing something and tracking something that is and acts way different than an index fund. Thanks for stopping by!