The Opportunity Cost to Active Investing
It has been about one year since I have purchased my first stock and since then I have learned many things about active investing.
As I have mentioned before, I am one of those people who like to dive right into something and piece the puzzle together myself instead of following a manual. This is what I have done when it came to my investments.
I started off purchasing stocks from well-known companies that intrigued me. When I figured out that this was the wrong approach to investing, I began looking into some technical aspects such as the P/E ratio, EPS, yield and 52 week range.
From there, I entered a dividend phase where I got obsessed with high yield dividend aristocrats. Although this was definitely a level up from buying random stocks, I still felt as if this wasn’t the right move for me.
This is why after taking a deeper look at my portfolio goal, I have decided to return to investing passively through low MER index funds and ETFs. Here are my reasons in doing so:
Not enough time to do a thorough research
As someone who works 40 hours a week and very little energy left over after work, I do not have the time to increase my knowledge in active investing at the present moment.
Exposure to a diversified portfolio
Recently, I have been taking a closer look at how my portfolio is distributed through the various sectors and as it turns out, my portfolio isn’t as diversified as I would like it to be.
Instead of trying to purchase stocks from every sector, investing in a well balanced index fund will give me the exposure that I want.
Index out performs the average investor
It is a fact that the index fund will probably out-perform the average investor.
Since my investment in the S&P 500 one year ago, my index fund has returned a total of 20% while my stocks have returned 6%.
Cutting down on expensive commission fees
Investing in a few index funds and ETFs instead a large amount of stocks will cut down on the commission fees. However, the trade-off will be the MER that comes with owning the index.
More difficult to manage
There will be no more need to hold and track 30+ stocks in a portfolio that have a total asset of under $50,000.
For smaller portfolios, the index will give you a piece of all the stocks you would want to have in your portfolio at a more discounted price.
My Plan Moving Forward
Since now that my portfolio is allocated in 80% stocks and 20% index funds, I will be slowly transitioning it to the exact opposite. The plan is to hold 80% index funds and 20% stocks.
For the 20% of my portfolio dedicated to stocks, I will only look to invest in stocks that I believe will yield a 20% growth within a one year time frame.
This will give me the practice that I will need to slowly transform my portfolio to one that will out-perform the index.
Hopefully this change to passive investing will better align my portfolio to meet my goals for 2015.
What do you think of my strategy? Do you agree or disagree with it? I would love to get your input in the comments.
I think your strategy is a good one. As long as you’re investing in something, you’re better off than not investing at all.
Thanks Tawcan, I will slowly transition my index portfolio into a dividend one as my portfolio grows larger. : )
In my 401k portfolio, i have the s&p index fund, because I’m not planning on taking it out anytime soon, over a long run, it’s very hard to beat the s&p, plus the fees are significantly lower than the more actively traded funds.
Hi Vivianne! I’ve been doing some research myself and apparently a dividend portfolio is less volatile to the bear market then an index investing style. I suppose that there will be more selling when it comes to the index.
I thought about the volatility, I agree with you about the dividend portfolio being less volatile in the bear market. I’m not planning on touching my 401K for a long time. The gain in S&P will work out. Most of the S&P contain blue chips. These companies would pay 1-5% dividends anyway, but it spreads out in 500 companies. The management fee is 1/10 of what I’d have to pay with other funds, so for now I’m sticking with it, will see what happen.
Indeed. I don’t ever touch my investment accounts either unless it is to fund a property. Even that im hesitant about it. Low index funds seems to be the right strategy for me right now. It’s nice to see that it has been working out for ya!
What returns are you looking to achieve on an annual basis? Don’t you have to take into account taxes if you sell within 1 year? So 20% return within one year is more like 10% after taxes and fees.
Hi Henry, there are no taxes in the TFSA (tax free savings account) here in Canada and no account fees.
The 20% growth in my account now is pure growth and undiluted. If I was to hypothetically withdraw it from my account now, I will get the full 20%.
The only fee there is to take into account is the MER from the index fund or ETF.
However, it has been a bull market so far from 2014-2015 which prompts the high returns but I expect the index to return an average of 10% in terms of long term growth.
ME,
I like the plan! I recently started investing about 5 months ago, and it seems like we have very similar goals. I have about 6k invested in stocks, but by the end of 2015 I hope for that to be around 35k. I like how you’ve listed lofty goals for yourself. Do you plan on getting into real estate?
Good luck,
D2R
Hi D2R, I do plan on getting into real estate hopefully by the end of 2015. I look forward to your progress on your blog!
Jeff,
Reading this post I believe you’ve made the right choice to go for low TER funds and exchange-traded funds. Even though I switched from ETFs to dividend growth stocks, I still believe that index funds and passive investing are the way to go for most people.
Can’t go wrong if you keep saving and investing your money, good luck!
Cheers,
NMW
Hi NMW! My transition to ETF is only temporary as I believe index and ETF provides faster growth than dividends. However eventually I will transition to dividend stocks for stable cashflow when I reach financial freedom. : )
Hey man, I think you made the right decision. I would only say otherwise if you were investing bulk amounts of money (and time) into stocks on a regular basis. This is therefore a really easy and worry-free way of gaining great exposure to a diversified list of stocks – what’s not to like?
For me, I have a mixture of funds and stocks. I am currently acquiring more stocks as I have both the time and the desire to track them and investigate them.
Cheers!
Hi M!
Thanks for your input. I’ve always been a big fan of funds. Your portfolio looks well balance and very diversified. As my portfolio gets bigger, I’ll be looking to transition more into dividend growth stocks and less of funds as well.