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Trying to pick individual stocks has been frustrating for me so far [...]
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I am in investment advisor, and as I mentioned in another thread, I feel strongly about passive, non-forecasting investments strategies.
This board may be a bad place to state my opinions, as most of you seem to trade, but I'll try anyway.
Take any stock - Altria was mentioned in this thread. 11 million shares of Altria traded today. So, pensions, mutual funds, and individuals bought 11 million shares of it today - and all of those buyers think the stock is going up. But other pensions, mutual funds and individuals sold it today - the same 11 million shares worth! - and all those sellers think it is going down, or there is someplace better for their money. So, who is right?
And, what do I or you or any individual know that is better information than the millions of people that trade that stock every day? Inside information, is of course, illegal. And all other information is basically made available to everyone at the same time. All "news" that is basically unpredictable.
I believe that, because millions of people are researching and buying and selling all of the stocks every day, there is no one that can pick stocks and beat the benchmark over a long period of time.
Hey, actually 2+2 is a great place for this tidbit. People looking at mutual funds and their past performance - how many months or years of past performance do you need to know that a funds' outperformance is statistically significant? With variance, a losing poker player can win 100 BB or 300 BB over some short periods of time, right? Well, if Morningstar says some mutual fund is outperforming their benchmark over the last 1, 3, and 5 years, does that mean that the fund company or fund manager actually has skill in picking which stocks are going to go up and which down?
Ken French of Dartmouth College said that if a fund outperforms it's benchmark by 3% a year on average, it takes 140 years of perfomance history to tell if it's statistically significant!
Think of it another way. Take 1000 fund managers and put them in a room. Ask them to flip a coin and try to get heads. After one flip, roughly 500 will flip tails, and they will be asked to leave the room. Roughly 500 flip heads and stay, and flip a second time. Do this for 10 flips. It would not be unusual for 1 of these fund managers to flip heads 10 times in a row. (Odds of that are 1 in 1024.) (If you had 2000 fund managers, you'd probably have at least one of the flop 10 heads in a row.)
So, was that fund manager skilled at flipping heads? No, they just happened to be the lucky one who happened to do it. So, if you take 1,000 US Large Cap Blend mutual funds, you can probably find 1 that outperformed their benchmark for 10 years in a row. Skill? Could just be luck like the coin flipper.
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I want to roll it over to a Vanguard IRA. I think I might move a significant percentage to Fairholme and spread the rest between some other Vanguard Index funds. [...]
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Vanguard is a great company with index funds and low expenses. In fact it is a mutual company owned by the shareholders, so they are not trying to rip off their investors and earn a profit. I have used Vanguard in the past and highly recommend them. (I don't use them now, and have never worked for them.)
I'd skip that Fairholme and stick with index funds. There's a lot of good web sites and books about asset allocation with index funds. If you want to be aggressive (100% stocks) and diversified, how about something like:
20% Total Stock Market Index
20% Value Index
10% Small Cap Index
10% Small-Cap Value Index
10% REIT Index
10% European Stock Index
10% Pacific Stock Index
10% Emerging Markets Stock Index
For Vanguard IRAs I think it's a $2,000 minimum per fund, so you could do this allocation with $20,000. With a smaller amount, I could come up with a simpler allocation.
If you want to be a little less aggressive, add Short-Term Corporate Bond Fund and keep the stock funds in the same proportion.
A great book I recommend is The Four Pillars of Investing by William Bernstein:
http://www.amazon.com/gp/product/0071385...ks&v=glance
Good luck!
-Tom