Confessions of an Imperfect Saver #1

Confession Time

I have already posted about how I let my Vanguard IRA sit as “A Minor” for an extra 10 years.  Once I finally got smart and took full ownership of the account (to make it easier for me to add funds), I pulled the money out of the Vanguard 2045 Target Retirement fund and bought…. STOCKS.  My confession: I have invested in stocks instead of investing in low cost index funds with my Roth IRA.

What’s the big deal?

If you didn’t know, individual investors tend to under perform the S&P 500 by a pretty wide margin.  The chart below shows the average annual gap of the average investor return vs. the S&P 500.  It’s not a pretty picture.

Do As I Say, Not As I Do

That’s right.  I went against what I KNEW I was supposed to do (Index Funds) and decided to try my luck at picking high quality companies and holding them “forever”.  I was thinking about legacy and how I would love to leave my children/grandchildren/great-grandchildren individual stocks instead of “just money”.  So, I started gobbling up all of the latest stock news, buy and hold strategy, annual reports, you name it.  I had grand dreams of outperforming the stock market for decades.  Eventually I would leave individual shares of stock to my heirs.

What I Own:

Costco – Shopify – Apple – Hewlett Packard – Disney – Altria – AT&T – Kraft Heinz – Realty Income – Ally Bank – Johnson & Johnson – Philip Morris – 3M – Alphabet (Google’s Parent Company) – Archer Daniels Midland – Starbucks – Hormel

My return over the last year is 13.0% which is pretty good considering it was my first time picking stocks.  However, considering all of the hours I have poured into researching individual companies, I lagged VTSAX (Vanguard Total Stock Market Index Fund) by 3.49%!!  A 3.5% difference in performance every year can equate to millions of $$$ difference in earnings over 30 years.  (I did beat the 2045 target retirement fund by 2.06%).

I recently finished reading John Neff On Investing (check out other good books here), his outperformance of the S&P 500 over 30+ years of portfolio management is incredible.  But it took a brilliant, dedicated team working full time to achieve those gains.  It feels foolish of me to think I could capture any sort of success vs. the S&P 500. I know what I should do: I should sell all, be happy I didn’t lose my shirt, and put everything into an index fund (VTSAX for example).  I can devote my time that was being spent on stocks and the market to this blog and some of my woodworking projects.

So Now What?

It is so much easier to know what I should do than to actually do it.  There is a very big part of me that isn’t ready to give up completely on this experiment yet.  I want to see if Altria (MO), AT&T (T) and Hewlett Packard (HPQ) will turn around and the market will give those stocks credit for the price I think they should be.  I want to see if Shopify (SHOP) can grow to be a mini-Amazon.  (There is obviously a lot of pride driving my stock picking decision)

I’m going to need to continue thinking long and hard about this one.  I think 1 year is too short of a time to call my picks a failure (but I would bet that I would be gloating if I was beating VTSAX over the last year).  Maybe I give myself 5 years total and if I’m lagging VTSAX/S&P500 by any meaningful amount, I will sell off and stick to index funds. In the meantime, I will plan on buying VTI (the ETF version of VTSAX) instead of stocks.  $30,000 is enough to “play with” for this stock experiment.

I should also note that I wouldn’t do this with my entire retirement savings.  The bulk of my money is in my 401k and it is in a blend of index funds (that I weighted) and is currently outperforming the S&P and VTSAX (YTD).

But What About Giving Stocks to my Heirs?

I’ve given this point a bit more thought.  Being given shares of Exxon by my grandmother was very special to me.  It means more to me to get $5,000 in that stock than $5,000 in cash.  But would I rather get $7,500 in an index fund, or $5,000 in Exxon stock?  No brainer: $7,500.  There is a risk shorting them (and me) much more than $5,000 if I continue to underperform the VTSAX.

If I’m going to hit my $1M retirement account goal, I don’t need to handicap myself.  Investing in individual stocks adds unnecessary risk to completing the goal.  After all, I only have 4,350 days left to achieve my goal.

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