Stock investing: Focus on what you can control

With the market recovering, assorted PF bloggers are getting into the details of stock investing.  They all have some system that they think is going to beat the market.  Most of these systems take a lot of time, but they say the time expense is worth it if they can make higher returns than the market.

On average, once fees and transaction costs are considered, people who try to actively manage their portfolios make LESS than people who just stick money in diversified target-date funds and sit.

That means that the majority of people who sink time in with whatever system they’re following are making less money in the market than the people who just set and forget.  On top of that, they’re making less money than they would be if they were spending that time doing something that actually earns money.  (Cynically, some of these folks are getting advertising $ from their blogs for misleading people into becoming active investors.)

What can you control:

1.  The amount of money you put in
2.  The diversification mix of your portfolio
3.  The fees you pay

What can’t you control:

1.  Market returns
2.  The random walk down WallStreet

And what you might have difficulty controlling:

1.  Man’s (and to a much lesser extent, according to Greg O’Dean, Woman’s) tendency to trade too much and at exactly the wrong times

If you want to invest like Buffett, then buy some Berkshire Hathaway funds.

Even better, pick a target date and buy a Vanguard Target-date fund.  (If you’re not sure about when you’re going to retire, pick a late date.)

40 Responses to “Stock investing: Focus on what you can control”

  1. Comradde PhysioProffe Says:

    It boggles my mind that amateurs think they can “beat the market”. There are very few ways that professionals regularly beat the market (other than illegally), and they absolutely require the fact that they don’t have to pay middlemen transaction fees to make their trades:

    (1) They have the ability to move the market themselves.

    (2) They can trade instantaneously on combinations of microfluctuations of different markets, using computer-driven trading systems.

    And even with all of this, very few professionals ever regularly beat the market. The illusion of there being “tricks” or “techniques” comes from the fact that there are kajillions of motherf*ckers trading in the markets all the time. Of course, just by dumb random luck, a few of them are going to regularly beat the market. So these few are wrongly perceived as “geniuses”.

    That Paulson motherf*cker who bet on the housing collapse and made a fortune more recently bet on the collapse of US Treasuries, and he was as wrong as could be.

    • chacha1 Says:

      My pet theory is that individual investors who play the stock market are really just gamblers. But because they are throwing their money at a stock instead of a poker game or roulette wheel, it’s more “legitimate.”

      The house always wins, folks!

    • Rosa Says:

      I had to stop talking money with all my male in-laws because of this. Which in some cases meant just not talking to them at all if I can help it, because they can’t help asking/telling me how to manage my money.

      I seriously had exactly this argument with one after he got super on the Rich Dad Poor Dad bandwagon, where I said “There’s no system to beat the market, investing just in real estate concentrates risk through lack of diversity, I am happy with my index funds” and he finally said to me “Well if you’re so smart how come you’re not rich!”


      I <3 Vanguard. Aside from low fees and a lack of junkmail from them, I always forget my password and they are super nice about it on the phone – and have no hold music. Just hold silence.

  2. plantingourpennies Says:

    We’ve gone almost exclusively with the last option since opening our accounts and have been very pleased with the results. Having a date (30+ years in the future) on the fund when you’ll likely touch the money makes you far less likely to want to trade shares in the meantime accruing fees and losses.
    We do have one small account that Mr. PoP has made a couple of trades in with individual stocks, which he usually ends up holding a couple of years each. But that’s not really what we consider investing, since it’s just with his accrued birthday/Christmas money and I think it’s more of a game to him than anything else.

  3. Holly@ClubThrifty Says:

    We have a “hands off” approach for several reasons. First, we don’t have the time or will to try to time the market or investigate many individual stocks. And second, I don’t want to get caught up in wishful thinking or paranoia and make all of the wrong moves. Target date funds work best for us.

  4. Scooze Says:

    Or just invest in a stock index and a bond index with low fees and do the same thing – but this way yiu can control your own ratio of stocks ti bonds. I use 120 minus my age. Great advice!

    • nicoleandmaggie Says:

      That’s what we have going in our Fidelity account. The Vanguard target-date funds are pretty much at cost though, so no need even for trying to futz with individual indexes.

  5. Cloud Says:

    I used to check in on my retirement fund twice a year to rebalance. But I haven’t done it more than once a year for awhile. I don’t have a target date fund option in my current 401k. In fact, I have generally crappy options in my current fund- which is probably why I don’t check in much. It makes me cranky each time! At least I still have a Vanguard fund from a couple of jobs ago. I keep that and roll the crappy funds my newer employers have into that one each time I change jobs. Outside of our retirement funds, we still buy mutual funds, because neither of us wants to mess with stock picking. The only exception is stock from employee stock purchase plans and options.

    • nicoleandmaggie Says:

      Can you not sell your employee stock right away? My sister sells hers because she wants to avoid being in an Enron situation.

      Why mutual funds over index funds? On average they match the market (just like index funds), but they cost more in fees.

  6. Mark Ferguson Says:

    I am thinking of stopping all contributions to my IRA and putting everything in rental properties. I have complete control of my rentals and I am seeing much higher returns.

    • nicoleandmaggie Says:

      Wow, that sounds like a bad idea. You don’t actually have complete control of your rentals– the market is out of your control. Real estate has a place in a diversified portfolio, but it shouldn’t be the bulk of it.

      • Mark Ferguson Says:

        I don’t buy properties at market value. I have 7 so far and they are all bringing over 24% cash on cash returns not including any appreciation, equity pay down or tax advantages. I invest for cash flow, not appreciation

      • nicoleandmaggie Says:

        See CPP’s comment.

      • Mark Ferguson Says:

        The Real Estate market is completely different than the stock market. That is why I invest there. You can regularly buy properties under market value and I have been doing it for ten years. There is not one outlet to buy houses like the stock market. You can purchase homes in multiple ways and in different conditions as well.

        foreclosure sale
        Bank owned
        short sale
        tax sale
        direct marketing-buying houses from sellers who do not have their home listed

        That is the beauty of Real Estate, if you know what you are doing you can always find properties below market value. Many of the sales above require cash or are not actively on the market. If not everyone can buy the property or knows it is for sale than the market has no way to adjust for those sales except within the small realm of the investors buying with those techniques. Those investors only buy if it is a great deal.

      • nicoleandmaggie Says:

        You can end up having the same problems with a big housing crash that affects the entire US. Same problems when interest rates go up. Etc.

        The problems are even more exacerbated if you’re shopping in just one market. No, real estate has the same problems as the stock market, but the individual “stocks” are more expensive, so unless you are super-wealthy there’s even more risk.

        And yes, it’s easy to think that you’re doing the best thing when you’re making money. People are making money in the stock market right now too. Whenever there’s a boom, people attribute their winnings to their own mental acuity, and not to the market fluctuations.

        And on average, you get almost as many people apparently “beating the system” (though not quite as many, because people screw up with transaction costs and too-frequent trading) as you do taking a bath. That’s just the way a normal distribution works– on average half of people will be doing better than average. Then folks extrapolate huge success from the tails. (And remember, Dave Ramsey himself made a huge amount on real estate before he lost it all in a down-turn.)

        Go ahead and do your real estate portfolio thing, obviously you’ve got a blog about it, so that’s the product you’re selling. But no, that’s not what the average investor should be doing. And I would not be surprised if someday you got back to $0 after all that work you put into it. That’s the way that non-diversified portfolios run– sometimes you do great, sometimes you lose it all. That’s why diversification is so important.

      • Comradde PhysioProffe Says:

        Check out Ferguson’s Web site. It’s a very fine line between his comments here and comment spam.

      • nicoleandmaggie Says:

        Personal Finance bloggers have a product to sell, and that’s ok. We will be talking about our “plans” for a hipster personal finance blog this week, I think. ;)

      • Mark Ferguson Says:

        I apologize if this comes off as spam. If you look at my site I have no products and no advertising. I make no money from my blog, I am only trying to educate people and show them there are other avenues to investing than the stock market

        Many people lose money in Real Estate just like any other investment avenue. I am not trying to say anyone can invest in Real Estate without doing any work and make a killing. However, in Real Estate there are thousands of proven investors across the country who have beaten the market for decades. The difference is the buying options Real Estate has. I have bought all of my long-term properties at least 15% below market and usually at least 20% below. I also fix and flip houses and I have flipped over 70 homes in the last ten years with my father all based on buying below market or adding value, not market fluctuations.

        I would estimate 5% of people who want to become investors in Real Estate actually do it or succeed. It is not easy and takes a lot of time, money and knowledge. My long-term plan involves paying off homes and I will have my first house paid off this year.

        My plan is to become wealthy off Real Estate, not be able to retire sometime down the road in 30 years and hope I saved enough money. If you look at all the super successful people in the world most did not diversify. They put all their eggs into one business or idea and didn’t quit until they made it big or lost it all. If they lost it all they tried again and again until they made it big. Dave Ramsey is worth 55 million now, Donald Trump went broke and came back even stronger.

    • investfourmore Says:

      One more thing I forgot to respond too. If the market crashed I would be fine, I invest for the long term and depend on cash flow. If prices drop dramatically I have enough equity built in to survive it. My rents would have to drop by 50% or more to cause me to lose money On a monthly basis and I have enough reserves to cover all mortgage payments for 6 months.

    • Rosa Says:

      On the topic of diversification: the point of diversification is to lower risk. Focused investment in one market is high-risk, and buying on margin/with debt magnifies the risk. If it’s high-risk high-return, when it pans out it pans out big.

      If you are only looking at “the most successful people in the world” and finding out what their investment strategy is, you’re missing the element of risk because you’re not looking at all the people who attempted the same strategy and failed with it.

      Since we each only have one life and one investment portfolio, high-risk high-return is not for everyone – it doesn’t help me if 1 in 100 pays out big with a strategy, because I’m unlikely to be that 1. (Unless it’s the lottery, Because I can afford $2. I can’t afford to lose my whole net worth).

      • nicoleandmaggie Says:

        The lottery, of course, being an excellent example of high-return for a small number of random players.

      • Mark Ferguson Says:

        Very good points. It is hard for you or anyone else to know my risk without knowing the details of my investing. Everyone puts a blanket statement out that Real Estate is high risk. I differ on that opinion.

        I put 20% down and I always buy below market and usually around 20% or more below market. Plus I make repairs to increase value as well, that is one reason I can buy below market. If I pay 100k for a house, I put 15k into repairs, put 20k down plus 3k in closing costs. I have 38k into the house and my loan is 80k. After I am done the house is worth 150k, not dream market value but real market value, I have been a Realtor for ten years. My payment with taxes and insurance is about $450 a month and I can rent these homes for $1200 to $1300 a month. My cash on cash return is well over 20% just from rental cash flow. I have almost no maintenance because I just repaired the home and my vacancies are extremely low in our market. I have 70k in equity in the home, but I did put 38k cash into it.

        I am still increasing my net worth by 32k on one deal and can refinance the home in a year getting most, if not all the cash I put in back and still having cash flow coming in. If I were to factor in the increase in value, equity pay down and tax advantages my returns are ridiculous, but I only factor cash on cash because the other returns(except for tax) are not realized until I sell or refi.

        I consider this extremely low risk.
        1. Prices would have to drop 25% for me to lose money and 50% for me to be in a negative equity position.
        2. Rents would have to drop 50% for me to lose money every month.
        3. I take all my cash flow and pay off one house at a time. I will have my first paid off in December.
        3. For me to actually lose money I would have to sell when the market is in a downturn. I have plenty of reserves to make payments on all my houses for vacancies of if rents drop dramatically. The key is I won’t have to sell in a down turn and historically Real Estate has always gone up in value just like the market. I don’t plan on selling anything in the next 20 years. The down turn in markets will affect my net worth and may affect cash flow if rents drop, but I won’t lose my investment because I can wait out the down turn. Plus many of my houses will be paid off and I won’t have to make mortgage payments if things go bad. If I really need to I could sell one to provide enough cash to keep going for years.

      • Rosa Says:

        Sorry, we’re too far into the margins for me to reply directly to you.

        It’s not that real estate is especially high risk. It’s that investing in only one thing is high risk, and investing on margin (which is financing investment properties is) is high risk, and investing both your capital and your labor in one market is high risk.

        Above, Cloud talked about her employee stock options – the risk-conservative approach is to sell right away. Not because anybody’s employer is necessarily a bad risk, but because it’s high risk to weight your portfolio to any one company or industry, and it’s doubly high risk to put your income and your investments in one basket. People talked about balancing between stocks and bonds, because being too far into one market is higher risk.

        You are of course free to go high risk with your money. You might win big. But that won’t mean it wasn’t a big risk, or that you accurately assess the risk by only looking at people who are successful with that strategy.

        For example: Both my grandfather and my husband’s grandfather worked for big, city-dominating, no-longer-in-business corporations. Both had vested pensions, both had paid-off homes, both put a little money in the stock market.

        One ended up with a fully paying pension that continued to pay out to his widow after he passed; one’s company went belly-up after gutting the pension fund. One retired in the middle of a recession and spent the stock money on a trailer on the Gulf Coast; one held out until the market was booming and vacationed in Europe. One had a home on a quiet suburban street that kept its value. One had a home in an inner-city neighborhood that was gutted by white flight.

        The key is that this isn’t one Rich Grandpa and one Poor Grandpa – neither one hit bad luck with all 3 investment areas, so neither one ended up destitute. That’s diversification (and boy were we thankful for it.)

  7. Leigh Says:

    I hate seeing comments on Twitter/Facebook from guys about stocks they just bought or how stocks they’ve bought have dropped. Why are you investing in Facebook, Linkedin, Groupon, RIM, etc.??? We already work in tech. Your job is tied to tech. You are keeping your RSUs. That is way too much in tech. And you’re picking stocks right after they IPO!!! /rant

    I sell my RSUs immediately because if my employer gave me $30k-80k/year in cash, there is no way I would buy their stock. No matter how much I like or believe in my employer’s future.

    Your last point is why I have a very strict rule about only rebalancing with new money. I seem to be doing mostly okay with that too. The only reason I don’t use target date funds is because I knew I would start to have a large taxable account and I wanted to practice working with regular index funds in tax-advantaged accounts first. And mixing target date and regular funds makes rebalancing confusing.

    Oh and another point – the difference between 0.05% and 0.10% isn’t generally worth stressing over. My 401(k) is now all in institutional funds which is really cool!!

    • nicoleandmaggie Says:

      Great points, all! And DEFINITELY on the too much market exposure in one market.

      Re: target date funds and rebalancing– I think of my target-date funds as “neutral” so I just don’t include them when rebalancing.

      And definitely .05% vs. .1%, but when it gets to .7% (plus whatever the fees are for each fund) like we had for Ing, that can start adding up.

  8. bogart Says:

    Hahaha, “If you want to invest like Buffett, then buy some Berkshire Hathaway funds,” pretty much sums it up — no? I was aggravated by how much you appear to be preaching to the choir, but then Ferguson showed up and I felt better.

      • bogart Says:

        Long string above. Prior to Mark Ferguson’s multiple comments above, the comments on this post seemed to be mostly a variation on “Amen!” As, indeed, is mine, so nothing against “amen,” but it was getting a bit dull to hear so many :) . I’d say I turn to church for that, but not really, more to Lyle Lovett.

      • investfourmore Says:

        Excellent. At least I added some excitement to the comments. :).

    • Rosa Says:

      I get so much crap advice/hectoring in my real life, I need the amen choir sometimes.

      • nicoleandmaggie Says:

        And right is right, after all.

      • bogart Says:

        Sure, there is that.

        Also, upon reflection, while I’m happy to add an “amen!” I do watch my portfolio. I like to see it go up, and I also want to know that I can watch it go down without freaking out. So far so good. Of course the bigger it gets, the more difficult those downs will be (as noted elsewhere in a comment here, I am effectively still underinvested in stocks for my age if we include the value of my survivorship in my DH’s pension in the equation, so intellectually I understand that I do not need to rebalance and should not freak out, understanding is one thing, and not doing is another).

  9. hush Says:

    “If you want to invest like Buffett, then buy some Berkshire Hathaway funds.”

    Yes, and also: he’s pretty much long only. Buy those funds and hold them indefinitely.

    “but they say the time expense is worth it if they can make higher returns than the market.”

    They are wrong. Unless they are trading on behalf of a hedge fund or at some prop trading desk on Wall Street, they will lose both their money and their time. The institutional trading machines beat the proverbial little guy every time, even if the little guy happens to be Mitt Romney’s account.

    • chacha1 Says:

      There are a lot of people out there who will work really, really hard to avoid working. Time expense is real.

      Anecdotally, I’ve seen and heard of men (it’s usually men) who will utterly neglect the maintenance of their health, relationships, homes & cars in favor of chasing get-rich-quick schemes like playing the market. They always, *always* lose money in the end.

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