Index Funds vs Individual Funds

meditate89 · #1 02-13-2007, 01:19 PM

Do you believe that someone who is willing to put forth 10 hours per month of research should invest in Individual Stocks or Index Funds?

Personally I think that Individual Stocks can yield a larger return than index funds, but I have read many posts suggesting index funds are the way to go. While there are certainly some people out there who I would highly recommend index funds to, it seems to me that if you can be a winning poker player, you have the potential to be a "winning" stock picker. (meaning beating a portfolio of index funds on a consistent basis). Although I understand the simplicity and attractiveness of a few index funds, I just don't see them as a great place to park your money- especially for such an intelligent segment of the population. With a little effort, I think that anyone can pick stocks that will outperform the market overall.

It just shocks me that many wealthy(it's all relative) poker players, who I presume are fairly good at math, are willing to accept sub-standard returns in an index fund, when the difference between 10% / 12% and 15% annualized returns over 10-20 years is simply enormous.

If you have a long record, ( I would say at least 5 years, 10++ years would be much preferred ) I would encourage you to post it here, especially if you are a reputable poster. I realize that there will be some bias here, as many people may be afraid to post their results if they didn't fare so well compared to an index fund... but I would encourage anyone to share their results in the most honest and accurate method possible.

I'm sure this matter has been discussed before in great length, but it just kind of bothers me that whenever people ask for help, they are automatically referred to index funds. Perhaps they're willing to put in some more effort to get better returns, and index funds really aren't for them. Although they are simple to understand and even to purchase, I feel that telling everyone to buy index funds is truly misleading.

For example, I feel this is sort of like saying- don't play 78s from the SB, it's just a headache to play in certain situations. You can play it when you get better at playing it. But you'll never get better at playing it if you don't limp in! And while it may be a headache to play 78s- it is also +EV to play, and folding that hand over and over will really take away from your winrate!

gull · #2 02-13-2007, 01:23 PM

To answer your question: index funds.

maxtower · #3 02-13-2007, 01:48 PM

10 hours a month is not nearly enough time. You are better off in an index fund. Time isn't the only reason a lot of smart people with analytical minds don't buy individual stocks. There is also a lot more risk. An investor who picks stocks will really need to concentrate his portfolio to maximize the gains. This could mean anywhere from 7-20? positions. There is a lot less risk in holding hundreds of stocks through an index fund. If you pick individual stocks, it only takes one or two flawed ideas to blow your year. I don't gamble with my retirement.

bav · #4 02-13-2007, 02:47 PM

10 hours a month is enough to ferret out and keep track of a very few stocks. Nothing wrong with putting, say, 70% of your nut into index funds and picking ~3 individual stocks to invest the rest in. You should not try to put 100% of your portfolio into individual stocks on 10 hours a month unless somehow you find yourself capable of beating the market on 2.5 hours a week.

jba · #5 02-13-2007, 02:58 PM

"... are willing to accept sub-standard returns in an index fund"

index funds by their very nature offer super-standard returns.

almostbusto · #6 02-13-2007, 03:05 PM

[ QUOTE ]
"... are willing to accept sub-standard returns in an index fund"

index funds by their very nature offer super-standard returns.

[/ QUOTE ]actually the original is true. they trail the benchmarks they are indexing against due to fees. it is necessarily true that you can increase your expectation (though at greater risk) above an etf without doing homework.

Perplexity · #7 02-13-2007, 03:07 PM

A substantial majority of actively managed mutual funds perform worse than index funds.

Do you really think that by working 10 hours a month, you can do better than professional investment managers who work full time, with a staff, with access to much more/better information than you will be able to get/afford?

meditate89 · #8 02-13-2007, 05:05 PM

Sorry I meant the title of this to be individual stocks... i'm really not at all interested in managed funds. In fact, I am totally against managed funds in most situations because of their fees and unimpressive performance.

However, I don't believe it is fair to substitute managed funds as a comparison for individuals. These professionals have a lot of restrictions placed on them in terms of what they can invest in- for instance many small caps are under their radars. I'm not gonna sit here and try to come up with excuses for these fund managers- I wish none of them got a higher salary than Buffet, and they invested in their own funds!

So, please try to keep this topic exclusively about individual stocks vs index funds and keep actively managed funds as far out of the picture as possible- we can discuss them in another thread.

gull · #9 02-13-2007, 05:40 PM

[ QUOTE ]
10 hours a month is enough to ferret out and keep track of a very few stocks. Nothing wrong with putting, say, 70% of your nut into index funds and picking ~3 individual stocks to invest the rest in. You should not try to put 100% of your portfolio into individual stocks on 10 hours a month unless somehow you find yourself capable of beating the market on 2.5 hours a week.

[/ QUOTE ]

What's the rationale for having both index funds and individual stocks? Either you expect your picks to beat the market or you don't. I see no strong reason for straddling the fence. Reduction of risk isn't a good argument in this case. Do you see why?

pologuy64 · #10 02-13-2007, 09:06 PM

[ QUOTE ]

What's the rationale for having both index funds and individual stocks? Either you expect your picks to beat the market or you don't. I see no strong reason for straddling the fence. Reduction of risk isn't a good argument in this case. Do you see why?

[/ QUOTE ]

I don't see why. And i do think that straddling the fence is a great way to lower risk. I might not be able to handle 100% ind. stocks but if i can do 30% ind and 70% funds with the reasoning of trying to out preform with the 30%. This is alot safer then 100% ind. if u know u cant handle 100%. Bacailly im looking for a reason why it doesnt reduce risk.