When I updated my financial goals (see link below) on 7-April-2010, I mentioned that one of my short term goals was to focus more on selling off my remaining individual stocks because 1) they were purchased either before I came to the realization that it is foolish to invest large amounts of money in individual stocks or 2) they were purchased as a learning tool by means of “play money” (to learn what play money is, see the post at the following link, My Money Blog – Play Money), and I am no longer monitoring and/or learning from them.
My Money Blog – Financial Goals
In accordance with my goal, this past Thursday, I sold off all of my remaining individual stock holdings in my Zecco.com and Sogotrade.com accords.
How did I fare on these holdings?
Well, I figure that since when tax time rolls around next year, I will have to calculate my “gain” on these stock sells anyway. So, might as well do it now so that you all can see how bad individual stocks are as an investment for an individual investor (Granted, I am no full time stock researcher. But, this is my biased opinion).
The link below contains a spreadsheet where I calculated my returns for the 10 stocks I sold on 4/7/2010.
As you can see in the spreadsheet (green highlighted cells), my total return for holding these stocks from 8/22/2006 through 4/7/2010 was a loss of $26.20, or a loss of 2.8%. Add on top of this the commissions I paid to buy and sell the stock and any capital gains taxes that would be involved, and this makes for one truly awesome performance right!?
To complete the picture, let’s take a quick look at how the market did in this period. During this time, the S&P500 index did not perform well at all; it began at 1304 and ended at 1217, or a loss of approximately 7%. So, the good news is that I did beat the market performance during this time! woohoo! I just did better than 70% of the Wall Street professionals!
However, once we employ the power of dollar cost averaging (buy the same dollar value – I used buying $100 of shares of the S&P500 fund as an example in my spreadsheet – of a mutual fund each month as is done automatically with 401k accounts), we obtain a return of positive 3.6% (shown in yellow highlighted cells). This is quite amazing!
So, let me get this straight. We see a higher return by simply having your mutual fund account buy a set dollar value each month in an index mutual fund. You don’t have to look at it, know what’s going on in the market, worry about your asset allocation percentages, perform dollar value averaging, or do anything for that matter! And, you will get a higher return than I did for all of the effort and money I put in to stock newsletters, books, etc.
Genius right? Hardly. In fact, it’s widely known in the asset allocation/index mutual fund world that your investing should not be exciting. It should be easy, boring, and not a good topic to bring up at parties. However, it takes great discipline to do this.
Clearly, if I had mastered this discipline 3-4 years ago, I would not be writing this post! Live and learn right?
Side note: Recently, while reading the book by author Larry E. Swedroe titled “The Only Guide to a Winning Investment Strategy You’ll Ever Need,” I came across the interesting fact below about the efficiency of markets in responding to changes in information (in other words, further reinforcing the idea that it is very hard to make superior returns investing in individual stocks):
- In the stock market, the window in which investors can profit from new information coming to the market is only 40 seconds! This is truly incredible to me!
Keep on learning!
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