Throughout the last year, I’ve been participating in a friendly competition among friends. We each placed $1,000 in an investing account (or multiple investing accounts) at the beginning of the year, chose an investing strategy, and tracked progress throughout the year.
I gave the initial details in the beginning of 2014. My strategy was to invest in the products I use the most. I split the $1,000 between Honda, Samsung, Google, Microsoft, and Canon. For some of these investments, I had to use an ETF or an ADR to invest in the company. Honda, Samsung, and Canon are traded on foreign stock exchanges, and Google’s share price was too high for me to invest in the stock directly with about $200.
While the S&P 500 index ended the year up 11.29% (noting that it accomplished this even after the first two days of the year were down), my investment didn’t fare as well. It’s worth pointing out that the transaction fees charged by ShareBuilder ensured I’d be starting this experiment from a tough position. And the commissions come when you buy and when you sell the investments. So unless you’re trading lots of money, transaction fees are way too significant to make trading stocks worthwhile. Of course, you could end up choosing stocks that climb high, but the chances of that happening, especially when you choose a strategy that involves investing in established companies, are low.
And of course, if you choose to invest in companies that are not well established, the risk of failure is higher.
I’m fairly happy that I lost only $15.75. In fact, my performance is a little better than Quicken is calculating here because it is including dividends in the cost basis. I invested with $1,008.82 of my money, and that includes $34.75 for commissions — resulting in an immediate “paper loss” in my investing reports of $34.75 before any stock price changed. One way to look at this is that the performance of the investments failed to cover the cost of investing.
It was a waste of a year that was supposedly good for the stock market. Had I invested in an S&P 500 index fund, I would have fared much better, particularly if I had been able to avoid commission fees.
Thankfully, the rest of my investments more than made up for this strategy’s disappointment. The return for Vanguard Total Stock Market Index Fund (Admiral Shares) in 2014 was 12.56%. The return for Vanguard Total International Stock Index Fund Admiral Shares was -4.17%. Two two bond funds I own returned 7.33% and 9.99%. All in all, my investment returns represented enough so that the cost of commissions in another account shouldn’t really bother me.
I can’t say I’ve learned anything in particular from this experience with the Grow Your Dough Throwdown. It’s been fun to see the choices made by my friends, like Larry, who invested in one stock and later switched to cash; Miranda, who took a dividend investing approach; Tom, who invested in two Canadian dividend-paying stocks; and Glen, who invested in a bucket of stocks, much like I did, but with lower commission costs.
But other than fun, the experienced reinforced what I knew:
Don’t bother picking stocks for the short-term. When you invest in the stock market for the short-term, you’re gambling. Everything that happens to that investment is beyond your control. Unless you hold sway over the management, you are putting your trust in people to make decisions that are best for you as a shareholder in the distant minority. Nobody cares about your needs — you might as well not even be a shareholder. If you’re Warren Buffett and you’re interested in investing in a company, not only will you get a favorable deal unavailable to the little people like you and me, but management will listen to your opinion and take your guidance.
The banks and brokerages are the real winners. Because fees! Keep trading. You’re making the investment companies richer through transaction fees and commissions and you’re unlikely to beat the market’s return with any kind of consistency.
There are too many variables at play in the economy. External factors affect your investments, so investing with a one-year time frame is too volatile. At the beginning of 2014, you couldn’t have predicted that North Korea would (allegedly) hack Sony. You might have expected some unrest in North Korea, but the way this happened was a surprise to investors. That’s only one example of world events that affect stocks — specific stocks and the market overall — over a short-term time horizon.
Stick to index funds. At this point in my investing career, it’s been suggested I could beat the ridiculously-low expense ratios in my index funds by creating my own basket of stocks that capture the S&P 500. I haven’t decided what to do, but I do know that the lack of fees external to the funds and the inability for anyone to beat the indices consistently is keeping me enamored with a passive investing strategy. The only deviation, other than what I just described, is the possibility of investing directly in companies where I would hold a significant stake. But that’s still a long shot.
Now that the first Grow Your Throwdown has concluded, I’m selling the stocks I held in that investment (and paying the associated commissions). To be honest, I’d rather sell these to raise some cash than selling the stock market and bond index funds I’m holding in my Vanguard investing account. I also plan to stop my automatic reinvesting of dividends and income to provide a monthly cash cushion for my expenses, now that I plan to reduce the income I’m earning from work.
This year, the Grow Your Dough Throwdown is returning, but in a different form. I’ll have more details about that in a few days. Thanks to Jeff for setting up the initial Grow Your Dough Throwdown and continuing the fun in 2015.
Published or updated January 7, 2015.