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Locked: Index fund vs individual stock, dividend

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Index fund vs individual stock, dividend

S&P Index vs IBM, KO, TD, MCD and JPM

I picked these dividend paying stocks, not for academic study, not with the intention to criticize stock picking,not to promote de-diversification. to the contrary, I do believe picking stocks could be very rewarding(also can be extremely risky), and I acknowledge the fact that a well diversified portfolio is the way to go, for most investors.

These are all very solid business with very reasonable price, or in other words, they were all fairly valued back in 2009. Any investor positioned into these equities, should have a pretty good return today. An investor holding these individuals stocks until today, are generally very confident investors.

This thread is started with the intention to serve as an eye opener, for amateur investors, or someone with no knowledge of investment at all, just like what I was before, the purpose of this thread is to alert them to avoid costly mistakes, with our hard earned money.

Given above statement, it's very revealing and interesting to make an amateur comparison against all known s&p index, in the same time frame.

take 2009 Jan 2nd start, up to now

S&P, around 931 up to 2990, return 321% minimum, not bad for 10 years
ko, around 22 up to 52, return 236%, ok less than index
ibm, around 87 to 141, return 162%, ok, a lot less than index


td bank around 22 to 77, return 350%, better
mcd, around 58 to 211, return 360%, better
jpm, around 31 to 113, return 364%, better

even compared with the best return JPM here of 364% return, the index return of 321% return is pretty impressive.
on the other hand, solid stocks like Ko and IBM are performing very bad, much below the index.

Index fund is more than vegan

s&p.PNG
mcd.PNG
jpm.PNG
td.PNG
ko.PNG
ibm.PNG
Dividend growth is great, good example is our Canadian CP, very good return! over 700% and still trading at 23 PE ratio, paying a modest dividend.

However dividend by itself is not good in investment, growth in share price is always more important, it's an indicator of a healthy business.

There are proven dividend growth index fund too, very diversified and solid performance with proven and reputable management, vanguard had it, some other investment dealers also have it. For the safety of your hard earned money, choose very carefully.

It's indisputable conclusion by all investment professionals, that well diversified index fund is much less risky than individual stocks, given the above comparison, I encourage everyone reading this thread think rationally.

Ask yourself, can you always pick a well managed business for investing? IBM and KO are all very well managed, they were both beaten by the index.

What if you bought a bad stock, innocently thinking it's a great deal, an excellent business.

What if you exited a great position like CP at a bad timing, lost money or making peanuts? And watching its price steadily rise and rise ever since?

Jumping in and out can be very costly. Is always a bad idea, good investment strategy doesn't need shuffling your stocks frequently.

I didn't say it, Buffet said that, long term is the way to go.
Last edited by tigerdemi on Jul 13th, 2019 1:04 pm, edited 15 times in total.
Index Fund vs Individual Stock..."tigerdemi is a great man" tigerdemi said to himself in his dream.
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This post is really really silly. You’ve chosen 5 random stocks.

If you replace IBM with Apple or Amazon the individual stock portfolio would probably crush the S&P.

Remember Buffets major wealth came from only 15 stocks.
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Why are you comparing apples to oranges? Why comparing a portfolio sorted by market cap (which is SP500) with just a few individual (random?) companies, without taking into account their valuation?

Investors holding IBM and KO are doing so to build a portfolio of growing dividends, so dividends can replace their salary. They don't buy it to outperform the index. Not everyone is interested in capital gains. I can't count on capital gains every year. But I can count on the growing dividends that these companies provide every year. This is cash that can be reinvested or spent. These dividends not only replace one's salary, it also keep up with the cost of living, so one can remain fully invested including in retirement. In that sense, IBM and KO are great stocks that continue to deliver solid growing dividends - exactly what a dividend growth investor wants as a growing income replacement without depending on capital gains.

A portfolio built solely on the stocks you mentioned above is poorly diversified. Yes, the market has bad stocks and good stocks. When picking individual stocks it's all about the criteria used to select the stocks from the supermarket of stocks. Most, if not all investors that builds a portfolio of individual companies, tend to have a mix of growth companies with stable / boring companies. A diversified portfolio of quality companies purchased at a sound valuation will always outperform the index because the index doesn't always contain best quality companies nor is fairly valued at all times. This is also irrelevant to many investors, because not everyone wants to spend time and effort screening for companies, researching them and calculating valuation. So a low cost fund works great for them.

There are many ways to build wealth. There's no single method to how to implement it. There are many right answers on how to achieve this. Every investor has their own goals and risk tolerance.

This thread would add value if discussing best ways to implement an indexing strategy, or best ways to implement how to choose individual stocks - not comparing the strategies, because one is not better than another.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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What is the point of this thread?
Keep calm and go long
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Dividends reinvested?
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tigerdemi wrote: Dividend are good, but paled a lot in comparison with growth, all these are dividend stocks Rod.

These are all great stocks, a lot not so great stocks are no more, investors are totally crushed, wiping out all their fund, that's why index fund is so popular.
I just taken a look of TD diversified income fund, that fund 's return is ridiculous, in comparison to cheap index. That fund is VERY actively managed I reckon
I don't think you understand what dividend growth investing entails to.

An active managed income fund is also not the same as building a portfolio of growing dividends, so I don't know what you added that into the mix.

Again, you are assuming that only capital gains matter. You are dismissing those that will never sell.... And therefore, capital gains don't matter if the goal is not to lock a profit.

You are also assuming that the capital gains will be there when you need.

What do you mean by "stocks are no more, investors are totally crushed, wiping out all their fund"?

Perhaps you might want to elaborate your point. Indexing works and it's convenient. Works for a lot of people. But it's not optimal to all. Or are you suggesting that index meets the goals of every investor, regardless of their risk tolerance for equities (and therefore it's the only way to go)?

I rather demonstrate that there are many ways to build wealth, their pros and cons, and discuss how to identify goals and risk tolerance, than picking a single solution as a one-size-fits-all.

You started the long term passive investing thread 2 days ago, why creating another thread with the same topic?

2 questions for you:

1. Why the index goes up?

2. What is the index, how does it work?



Rod
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Investing strategy based on dividend growth

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Rod, I m not sure why you asking me these 2 questions, an index is a mathematical model or indicator of the target, in this case the stock market. As an average investor, we only need to know this, and the fact that all index fund closely or accurately track the market or sector performance. It goes up and down closely tracking it's tracking target, the market.

We only need to know this to understand index, nothing more.

Back to dividend vs growth, well. Growth bests dividend income anytime of the day, for any equity traders, long term or short term.

In this time of age, we only need to click the sell at MKT button to get our capital gain realized, it's cash in real time, beats dividend anytime.

One has to be really lucky and patient to have a position with JPM back in 2009, holding until today, get about 360% return. One can still be considered very lucky if he did the same even for a much poorer performing IBM.

But again, an index fund holder tracking the sp500, didn't need that luck, he just got it, since most index holder are long term, and unlike individual stocks, he has only the market to monitor, that is a task behind even the best professionals.

Index fund holder can get a very impressive return, even in comparison with very staunch performing stocks.

In my post, some stocks were no more, meaning they go chapter 11, a lot of these looked very fair valued before that, they were cheap for a reason but most average investor won't be aware of it.

Stocks are emotion driven and perception influenced, mathematical model always can not accurately predict or locate a good stock, not impossible but such models always errs.
Index Fund vs Individual Stock..."tigerdemi is a great man" tigerdemi said to himself in his dream.
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Though a silly premise, the OP makes a salient point in that it's both a waste of time and potentially hazardous to own individual stocks at the core of your portfolio instead of an index fund. I'm not saying playing around with some stock picks is a totally bad thing, but the core of your portfolio should always be the index.

I forget the actual stat, but it's something like 5% of S&P500 stocks drove the majority of its returns over the past X decades... Basically the risk of concentrating your portfolio into fewer stocks is that you miss out on potentially owning (however small, as part of a 500 or 4000 stock index) those few stocks that drive the returns, while owning mostly the other 95%.
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tigerdemi wrote: Rod, I m not sure why you asking me these 2 questions, an index is a mathematical model or indicator of the target, in this case the stock market. As an average investor, we only need to know this, and the fact that all index fund closely or accurately track the market or sector performance. It goes up and down closely tracking it's tracking target, the market.

We only need to know this to understand index, nothing more.

Back to dividend vs growth, well. Growth bests dividend income anytime of the day, for any equity traders, long term or short term.

In this time of age, we only need to click the sell at MKT button to get our capital gain realized, it's cash in real time, beats dividend anytime.

One has to be really lucky and patient to have a position with JPM back in 2009, holding until today, get about 360% return. One can still be considered very lucky if he did the same even for a much poorer performing IBM.

But again, an index fund holder tracking the sp500, didn't need that luck, he just got it, since most index holder are long term, and unlike individual stocks, he has only the market to monitor, that is a task behind even the best professionals.

Index fund holder can get a very impressive return, even in comparison with very staunch performing stocks.

In my post, some stocks were no more, meaning they go chapter 11, a lot of these looked very fair valued before that, they were cheap for a reason but most average investor won't be aware of it.

Stocks are emotion driven and perception influenced, mathematical model always can not accurately predict or locate a good stock, not impossible but such models always errs.
You have not explained how index works or why they go up in the long term. It's a mathematical model of what? If I want to replace the index by purchasing individual stocks, how does one do it? In the long term, stocks are driven by earnings and cash flow, not emotions. Stock price always follow earnings and cash flow in the long run.

Saying that an investor doesn't need to understand how it works, just buy it and call it a day, deprives one to do better than market returns. There's a reason to why Buffett, Munger, Lynch, Greenblatt, ONeil, and many other famous investors don't index. Anyone can learn too.

To beat the market, you need to address the pitfalls of indexing. That includes buying at a fair valuation (instead of paying market price for everything), buying companies that will keep growing earnings (instead of buying in the mix companies with signs of distress) and reducing or eliminating MER. Then there's the selling component. There is a large segment of the financial community a lot smarter than me that may not be able to outperform my results over the next 20 years because they won't be allowed to make the decisions necessary to do that, at a time when it is beneficial to do it. Money flows in when the market is rising, and money flows out when the market is falling. The money managers have to buy when they should sell, sell when they should buy, all due to money flows. This puts a drag on performance. That's why a small retail investor can easily beat professionals.

The advantage of holding individual stocks is that the better performing stocks can be harvested (sell high) rather than having to sell a piece of everything (selling low) - besides buying them with a higher margin of safety.

An idividual investor can do much better by investing only in businesses that meet their objectives. They can choose the level of risk, since not all stocks carry the same risks. They can choose valuation, and only buy when a business is attractivelly priced, instead of buying at any price. They have control on their portfolio, by selling the businesses that no longer meet their objectives, by lacking earnings growth or being very overvalued. Can't do or control any of that with a fund or index. There's no reason to why anyone can't succeed at investing in individual stocks.

You mentioned Chapter 11. Earnings will always decline for years before that happens. Valuation needs to be taken into account with earnings and cash flow health. Anyone investing in individual stocks need to be aware of it (that's the cost of being exposed to returns beyond the market return), but it's easy to learn and technologies nowadays make that work very easy.

The individual investor has the full freedom to choose whether or not to follow Mr. Market. You have the luxury of being able to think for yourself.

The index, however, has no choice but to mimic Mr. Market’s every move - buying high, selling low, marching almost mind-lessly in his erratic footsteps. That's why I asked you to explain how the index is built.

The financial theory is just part of the puzzle. Discipline to stick with the plan and separating emotions is the other part that is hard to implement, and it's more of a soft skill (temperament) than hard skill. Many also mix up trading techniques (market timing, price movement) with investing techniques, which should be geared towards the business and its valuation.

Also, keep in mind that beating the market is not everyone's goal, not everyone will do it, and many times that's by design. Every individual investor does not have the same investment goals, needs or investment objectives. Some investors are concerned with beating the market, others are concerned with maximum safety over the highest return, and others are concerned with maximizing their income and the growth thereof. So both strategies are valid.

Every strategy has pros and cons. There's not a single answer for everyone. An investor should be educated about the all options available, understand the pros and cons, and choose the one that meets their goals and risk tolerance accordingly.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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Rod, even someone like you, will have a tough time beating the market, I m just pointing out the risks.

Sure if you really good at it, u can always beat it but these are very few.

Again, I say if a stock is cheap, it's most likely not worth buying. The stocks that performed really good always looks scarily over valued.

If you read Bogle 's book, he listed numerous examples of how brilliant fund managers got beaten by the moody Mr. Market. It cited example after example and get really boring but the fact sink in, it's a lot harder than most people can take it.
Index Fund vs Individual Stock..."tigerdemi is a great man" tigerdemi said to himself in his dream.
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Anyhow Rod, I see your point,no I have no interest of knowing how market index works. Like I could use a TV without knowing how it works.

I agree that individual investor may stand a better chance beating the index, it really could happen more often than institutional players.

Maybe u are a good example of that.
Keep up the good work.
Index Fund vs Individual Stock..."tigerdemi is a great man" tigerdemi said to himself in his dream.
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One consideration missing from this thread is the time and effort required to research individual stocks. I used to be obsessed with researching stocks and did well, but the amount of time to get ahead 1-2% was not worth it imo. I funnelled most of my money into index funds and have been happy with the returns. Like @rodbarc said, it all depends on your goals and risk tolerance. I do agree with other posters that this thread is a bit silly though, you're not making an apples to apples comparison here. In fact, all the companies you cherry picked (except TD) are part of the S&P500..
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Here’re MO, AAPL, T, CMCSA, STZ, DIS, NKE, WPC struggling to beat S&P500 this year in Nick's Picks 2019: Half-Time Report :)

(yeah I still have SeakingAlpha app on my phone - and this was the second article on top when I opened it to help kill time on my coffee break.. the first one is
The Single Greatest Factor In Your Portfolio's Returns, but it was too long - and boring! (tm) - so I just scrolled thorough both instead 🤪)
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If someone can show us a decades long study where non-dividend stocks have had better returns than dividend paying equities I'd certainly be interested to see it. Certainly haven't seen one yet, it's always been the opposite.

I probably spend as much time and effort running our own portfolio of near thirty individual Canadian dividend growth stocks as I do our index funds. This is portfolio 2 which got started in 2003. Portfolio 1 which consisted of some dividend paying U.S. equities and a few international ADR's was collapsed in the late 90's to enable us to put a hefty down payment on the house we purchased. Mortgage was paid off in less than three years. Although I like index funds, using individual stocks allows me to design the portfolio the way I personally want it. Since our own home made portfolio got us through the 2008-09 financial crisis without any major damage to it, I'm not complaining. In 2010 I got the portfolio more sector diversified, but no other major changes since then. Selling usually occurs after a dividend cut or a company buyout, but other than that it's not a high turnover portfolio by any means.
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Stryker wrote: If someone can show us a decades long study where non-dividend stocks have had better returns than dividend paying equities I'd certainly be interested to see it. Certainly haven't seen one yet, it's always been the opposite.

I probably spend as much time and effort running our own portfolio of near thirty individual Canadian dividend growth stocks as I do our index funds. This is portfolio 2 which got started in 2003. Portfolio 1 which consisted of some dividend paying U.S. equities and a few international ADR's was collapsed in the late 90's to enable us to put a hefty down payment on the house we purchased. Mortgage was paid off in less than three years. Although I like index funds, using individual stocks allows me to design the portfolio the way I personally want it. Since our own home made portfolio got us through the 2008-09 financial crisis without any major damage to it, I'm not complaining. In 2010 I got the portfolio more sector diversified, but no other major changes since then. Selling usually occurs after a dividend cut or a company buyout, but other than that it's not a high turnover portfolio by any means.

These stock beats almost all dividend stocks

Google, Amazon and BRK A, they don't pay dividend.
Last edited by tigerdemi on Jul 24th, 2019 9:11 pm, edited 1 time in total.
Index Fund vs Individual Stock..."tigerdemi is a great man" tigerdemi said to himself in his dream.
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tigerdemi wrote:
These stock beats almost all dividend stocks

Google, Amazon and BRK A, they don't pay dividend.
That's only cherry picking a few stocks. That's not a study.
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tigerdemi wrote: I guess you have great fortune in doing so well.
Congratulations fr sure

These stock beats almost all dividend stocks

Google, Amazon and BRK A, they don't pay dividend.
I did ask earlier what the point of this thread was, but it went unanswered, so maybe that isn't yet clear.

Regardless, as @Stryker mentions cherry picking stocks or time periods to prove any sort of point isn't useful.

You commented earlier about how dividends are less important than growth - by growth I am assuming you mean earnings growth (which then translates to share price growth) Nonetheless, growth also takes the form of dividend growth (which @rodbarc also touched on).

Dividends are actually a fairly important contributor to total return, especially when re-invested. Also, objectively, looking over a long period of time, a group of dividend growth stocks can do quite well - see below . Source here - https://www.hartfordfunds.com/dam/en/do ... /WP106.pdf

Image

Of note, the index of comparison isn't a traditional index (that is cap weighted) - it's an "equal weight" index. Nonetheless the Div Growers and Initiators return 9.84% annualized from 1972 - 2018.

You talk about learning and educating yourself - rather than saying things that you think are right or rather than going based on your gut / feeling I would encourage you more to read about dividends and how they can drive total return.

Also, to close, this isn't an anti-indexing post - I'm an avid indexer and I think it's powerful way to invest.
Keep calm and go long
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To Treva84, I m not saying dividend are bad, never
In your example, what dividend stock are in the group, are they not cherry picked?

Anyone can come up with a chart like that, it's meaningless

To echo what you said, I m not against stock picking, actually for the right person with unique temperant, that's the way to go, even if they can't beat s&p, but some of them sure can.

I.sm just pointing out what a fabulous product we have , the index funds
Index Fund vs Individual Stock..."tigerdemi is a great man" tigerdemi said to himself in his dream.
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tigerdemi wrote: To Treva84, I m not saying dividend are bad, never
In your example, what dividend stock are in the group, are they not cherry picked?

Anyone can come up with a chart like that, it's meaningless

To echo what you said, I m not against stock picking, actually for the right person with unique temperant, that's the way to go, even if they can't beat s&p, but some of them sure can.

I.sm just pointing out what a fabulous product we have , the index funds
If you read the link I posted, the methodology is defined. The stocks are taken from the S&P 500 universe (so, the index).
The “dividend payers” were then divided further into three groups based on their dividend payout behavior during the previous 12 months. Companies that kept their dividends per share at the same level were classified as “no change.” Companies that raised their dividends were classified as “dividend growers and initiators.” Companies that lowered or eliminated their dividends were classified as “dividend cutters or eliminators.” Companies that were classified as either “dividend growers and initiators” or “dividend cutters and eliminators” remained in these same categories for the next 12 months, or until there was another dividend change.
Keep calm and go long
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rodbarc wrote: Saying that an investor doesn't need to understand how it works, just buy it and call it a day, deprives one to do better than market returns. There's a reason to why Buffett, Munger, Lynch, Greenblatt, ONeil, and many other famous investors don't index. Anyone can learn too.
Another good example of survivorship bias

https://en.wikipedia.org/wiki/Survivorship_bias
Survivorship bias or survival bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways. It is a form of selection bias.


Using your logic, I could draw the conclusion that since Bezos, Gates, Zuckerberg, Ellison, Dell, ...... etc. all made billions in Tech, anyone can learn to do the same. The flaw in this reasoning, of course, is that it ignores the countless number of entrepreneurs in Tech who have failed to achieve the same success.

As the OP said, it is very difficult to consistently achieve better than market returns. And as JoelK pointed out, you have to consider the time and effort you need to expend to achieve these returns.

You keep saying, over and over again, that anyone can do it. There are a lot of things I can do, but I choose not to do them because the effort/risk does not justify the potential reward. When it comes to investing, the rational choice for the vast majority of people is to go with a couch potato strategy, not try to pick stocks or, God forbid, dabble in Cryptocurrencies, just because some anonymous person on an Internet forum says it is a great way to "build wealth"

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