Mutual funds, ETF’s, bonds and DGI?

[Slowlife]

I’ve never invested in mutual funds, bonds or etf’s. I’m curious if they have a place in your portfolio and how they fit into your dividend growth strategy? I’m just beginning to build my portfolio and I’m trying to figure out if I should be looking at these types of investments or just stick with stocks.

I feel like mutual funds will give me some diversity while I only have a handful of stocks. However, I don’t like the idea of paying someone else to manage my money.

From what I understand some ETF’s pay a distribution, but they still take some of my money via the expense ratio. Again, I feel like I can do better on my own, but I like the diversity. Or maybe I could invest in an ETF to gain exposure to riskier investments. For example, JNK invests in high yield bonds. That would give me exposure to the bond market, while limiting my risk through diversification I can’t achieve on my own.

I don’t really know anything about investing in bonds. Every time I start to look into them I feel like stocks are a better investment for my age (29) and goals (make as much as I comfortably can off my money). Do you invest in bonds and why?

[EricL]

David Van Knapp has written a few articles on Seeking Alpha about ETF's and I think Tim McAleenan has written about mutual funds.

From memory, neither did very well at replicating a DGI portfolio as the fees hurt the funds yield and re-balancing of positions keeps them from producing a consistent growth in income.

I could see the argument for worrying about diversification if you were near retirement and a big drop in an individual stock would be a disaster to your income, but at 29 and with many years to go till you will be relying on the portfolio, I'd suggest just starting with $1000 positions and build your portfolio as different stocks are at good values. Get up to 15 or 20 positions, or whatever you are comfortable with diversification-wise and then add to your positions when new money becomes available to keep things somewhat balanced.

[cannew]

The standard argument for funds and etf's is that you can buy a bundle of stocks (instant diversification, even though one might not want many of the stocks) without investing a lot of money. I disagree, but that's just me.

If you have limited funds to invest, say $100 periodically, than look at a DRIP with OCP plans. The min purchase amount will vary from zero to $100 with no fees and the dividends will be re-reinvested with fractions of a share (big deal in the long run). Even a fraction of 1% fee will add to thousand of dollars over time, that's why the etf companies have large offices and can afford the fancy advertisements. If a company offers etf's and there is $5 billion invested, with only 0.60% fee, their income is $30 Million.

[Slowlife]

I plan to do exactly what EricL said, $1000 per position until I'm comfortable with the level of diversification I've built up. It seems like most dividend growth investors only invest in stocks (big surprise...). I've only ever invested in stocks which is probably why this style of investing works for me, but I am curious about these other types of investments. Off topic, but with DRIPS I tend to fall on the side of I would rather choose where I reinvest my dividends. I know I have to pay broker fees that way, but for now it allows me to combine fresh capital with dividend income to add new stocks. At some point I will start adding to current positions, but I think I'll be more comfortable if I choose what company at what price.

It seems like, if my goal is to build a diversified portfolio, I should avoid paying someone else and do it myself. But what about an ETF like JNK (I literally know nothing about this other than it invests in bonds, pays a distribution and takes it's cut via the expense ratio)? If I get exposure to bonds and it pays me to hold the position would I want to add more diversification that way? I wouldn't expect much growth out of a position like that, so I guess it wouldn't fit with most peoples strategy around here. I suppose the argument could be made that there are better places to put my limited capital, so why invest in it if I have a better option.

[cannew]

(08-18-2014, 11:53 AM)Slowlife Wrote: It seems like, if my goal is to build a diversified portfolio, I should avoid paying someone else and do it myself. But what about an ETF like JNK (I literally know nothing about this other than it invests in bonds, pays a distribution and takes it's cut via the expense ratio)?

Have you looked at the 5 or 10 yr history of distributions? Apr 2009 it paid 45 cents, and has fallen steadily, today its 19.34 cents.

[Slowlife]

Sounds like that particular etf is not something I'd want in my portfolio. I was just using that as an example from a quick search. I really don't know anything else about it.

[CritMass]

Regarded Solutions on Seeking Alpha has a monthly update going on ETf portfolio vs DGI portfolio. His experiment is only about 3 or 4 months old, but results are interesting, albeit not surprising. See latest edition here:
http://seekingalpha.com/article/2374945-...e-for-july

Happy reading. Me? I subscribe to DGI Theory and have shaped my portfolio thusly.

[EricL]

(08-18-2014, 11:53 AM)Slowlife Wrote: It seems like, if my goal is to build a diversified portfolio, I should avoid paying someone else and do it myself. But what about an ETF like JNK (I literally know nothing about this other than it invests in bonds, pays a distribution and takes it's cut via the expense ratio)? If I get exposure to bonds and it pays me to hold the position would I want to add more diversification that way?

I'm not understanding your wanting to add a bond ETF to your portfolio. If you are interested in personally selecting your long term business partners for your portfolio, and feel that dividend growth is the framework with which you'd like to do it, why would you want to buy a bond ETF in a likely rising interest rate environment?

This is like asking: I really want to buy a selection of cows for my dairy herd, what kind of pig should I add so my selection of livestock is diversified?

[Slowlife]

I'm not saying I want to add ETF's or bonds. I don't really know much about them and I was curious if other people who subscribe to the dgi strategy use them. Sounds like the overwhelming answer is no. Many of the books I've been reading, especially the older books, suggest diversifying using bonds or funds. They don't seem to fit with the strategy I've developed, but being new to this type of investing I wanted to know if other dividend growth investors use them. I'll have to take a look at that seeking alpha article, but I think I already know what it's going to say...

[EricL]

(08-19-2014, 07:04 AM)Slowlife Wrote: I'm not saying I want to add ETF's or bonds. I don't really know much about them and I was curious if other people who subscribe to the dgi strategy use them. Sounds like the overwhelming answer is no. Many of the books I've been reading, especially the older books, suggest diversifying using bonds or funds. They don't seem to fit with the strategy I've developed, but being new to this type of investing I wanted to know if other dividend growth investors use them. I'll have to take a look at that seeking alpha article, but I think I already know what it's going to say...

Ahh, got you, sorry for the misunderstanding.

[Slowlife]

No worries. I just started reading The Single Best Investment, by Lowell Miller. He touches on this topic in the first chapter and makes another good point. Specifically bonds, but some funds as well, don't even beat inflation so they really aren't a good investment. And with so many great dividend growth stocks to choose from, why bother with bonds, mutual funds or ETF's.

[hendi_alex]

You think that investors that bought ten year treasuries at 5% or better yield have not beaten inflation for the past 5+ years? It would seem to me that an investor should pay attention to the over all market and pay attention to the cycle and select from the best opportunity that the market is providing. The best advice that I've heard related to that, [follow the flow of the cash.] It doesn't make sense to me to write off major investment classes just because of some preconceived bias.

For me, now is not the time for bond exposure. While I don't currently hold any ETFs, they certainly can fill a role in an investor's portfolio. I hold both a mutual fund and an ETF in my daughter's portfolio.