Alternative Indexes

[MWKXJ]

Would any here care to share their thoughts or experiences with mutual funds, ETFs, or CEFs tracking alternative stock indexes?

Equal-weight indexing (e.g. Guggenheim's RSP) seems intuitive; buy an equal share of each company that passes the S&P's market cap threshold.  This prevents toy companies like AAPL from becoming the largest equity position in one's portfolio.  The turnover inherent in such a strategy is concerning, though.

I don't know if I trust the fundamental indexes such as those offered by Schwab.  Any opinions?  Fundamental indexing seems to approach the slippery slope of complexity; I can't easily explain how the stocks are being selected.

Is there such a thing as employee-retention indexing?  In other words, is there an index which sifts stocks by employee retention, employee satisfaction, native citizen employment ratio, average employee family size, average employee economic-class, etc?  While not a social investor, I would much rather invest in companies which have not streamlined away its middle class workers and their families.

Has anyone here foregone market indexing and instead directly held 10 or 20 "Dogs of the Dow" or "Dogs of the Dividend Aristocrat" companies?  The DRIP community produces a spreadsheet of high yielding companies with unbroken dividend increases here: http://www.dripinvesting.org/Tools/U.S. ... mpions.xls.  While selecting individual stocks with a mind toward capital appreciation is akin to collecting baseball cards (see here: http://www.bauerwatson.com/stocks-that- ... ball-card/), perhaps stocks can be more reliably screened when the metric of their dividends takes precedence.  I like the thought of a company working for me and sharing its earnings, as opposed to the popularity contest that seems to underlay modern investing.  Again, seeing AAPL as the top percentage holding in my broad market index is a major turn-off to me.  What's next, Facebook?  By the way, has anyone taken a look at the MP 63 DRIPX fund?  The expense ratio is high, but it seems to have performed well since 1999 and the stock selection in based on unbroken dividend increases per above.

Also, have any here thought of using some of the old-timey CEFs in place of their stock allocation?  Examples are Adams Express (ADX), Central Securities (CET), and Tri-Continental (TY).  Their turnover is low, they trade at a discount, and they produce high dividends.  Plug in their tickers here http://www.portfoliovisualizer.com/AnalyzePortfolio and compare with a fund or ETF tracking a broad market index.

Thanks in advance.

[tnt]

MWKXJ, the premise you are presenting is valid.  There are many alternative methods/philosophies/indexes that could be worthy of your capital.  The key is having a philosophy you believe in, finding the correct investment to replicate that for you and sticking to it.  The variable pp discussions are a perfect example.  No matter how good you have thought it out, someone always comes up with a better mix. I also like companies that pay dividends and have included that in my variable pp.  The core philosophy you choose will be important.  For instance, the foundation of pp is using non-correlated assets to smooth out declines and using expensive assets to sell and buy cheaper ones.  With that said, everyone seems to have a different idea on the best mix.  I would advise a lot of thought before as I myself have made a few mistakes by hitting the buy ands sell button too quickly.

[Stewardship]

Is this for the PP or VP?  In the PP, to quote the Stock FAQ,

You want to own the cheapest and most broadly-based stock fund available. That leaves two main choices:

1. Standard & Poors (S&P) 500 Index
2. Total Stock Market Index

So I guess the question I have is why would you want to deviate from that?  Because of AAPL?  The PP currently consists of less than 1% AAPL and holds more in shares of Apple's competition...

[MWKXJ]

Thanks for replying.  This is a PP account, Steward.

I'm questioning conventional market-cap indexes because of concerns over the malinvestment.  I realize that the ranking implicit in market cap weighting comes about by what is in effect a "vote" by the market, but frankly, I see index investing as rigging the "election", just as mass media controls federal, state, and local elections by cherry picking the coverage of candidates.  Apple's portable toys may be popular now, but somewhere there are still utility bills that need to be paid, tires that need replacing, roads that need machinery to maintain, vehicles and equipment that needs gasoline, etc.  I'd rather invest in the companies that, while not fashionable, are not liable to disappear and have sane P/E ratios.

I hear you on the importance of keeping expenses down, however, I don't want throw my money into another Y2K tech boom just because millions of other investors are passively throwing their money into the same market indexes.

In short, I don't believe that the metrosexual office worker service economy is sustainable long term.  The entrepreneur startup culture will eventually run out of venture capital, or, make life so unbearable for workers seeking to simply raise a family that the mindset will cause a cultural reaction.  A good portion of our young will likely begin "detooling" back to physical labor, just as the flappers of the 20's put away their dancing shoes once the depression sobered the country.  Drive through nearly any older city which hasn't been recently gentrified and the decay is apparent; America needs to shut of the computer get back to work.  The future isn't frappachinos and iPhones, banana-shaped shoes, rectangular glasses, and Facebook, rather, its a toolbox, a thermos, and an exhausting days work to look back over with pride.  I believe that by investing in index funds I am malinvesting in that my money is being indiscriminately placed in the hands of companies that foster decadence.

Anyway, that's where I'm coming from.

[Pointedstick]

Apple's portable toys may be popular now, but somewhere there are still utility bills that need to be paid, tires that need replacing, roads that need machinery to maintain, vehicles and equipment that needs gasoline, etc.  I'd rather invest in the companies that, while not fashionable, are not liable to disappear and have sane P/E ratios.

AAPL has a P/E Ratio of 13.46 right now and has been publicly traded since 1981. I get your point, but if you were looking for a "flash in the pan" tech company, AAPL ain't it.

I totally get why you might not want to invest in the likes of Twitter and Zynga, but to put things in perspective, tech stocks are only 15% of VTI, which means that if that segment of the economy were to, let's say, melt down and fall 80%, VTI would lose 12% and your whole PP would take a hit of 4%, and that's before gold, bonds, and cash had their say. You would be jumping for joy while people with 50+% of their investments in stock indices were rummaging through the medicine cabinet looking for sleeping pills.

America needs to shut of the computer get back to work.  The future isn't frappachinos and iPhones, banana-shaped shoes, rectangular glasses, and Facebook, rather, its a toolbox, a thermos, and an exhausting days work to look back over with pride.

What if you're wrong? What if the world of the future is a digital, wired, computer-filled one as farmers, machinists, truckers, and laborers are slowly replaced by ever more sophisticated machines? Don't let your emotions cloud your investing. It seems like you're rather resentful of certain things and it's causing you to want to pre-emptively avoid investing in them out of a mix of fear and certainty that they will explode.

[Stewardship]

While selecting individual stocks with a mind toward capital appreciation is akin to collecting baseball cards (see here: http://www.bauerwatson.com/stocks-that- ... ball-card/), perhaps stocks can be more reliably screened when the metric of their dividends takes precedence.  I like the thought of a company working for me and sharing its earnings, as opposed to the popularity contest that seems to underlay modern investing.

Stocks (corporation equity stakes) are much different from baseball cards (collectibles)!

A dividend paid by a stock simply reduces its share price by an equal amount.  So to me, a non-dividend stock is essentially a stock with the dividends automatically reinvested and compounding with taxes deferred until the shares are sold and capital gains realized.

[MWKXJ]

Steward,

I've rolled over this in my mind many times.  Non-dividend stock seems to be an example of "I'll gladly pay you Tuesday for a hamburger today".

Companies earn.  Investors seek earnings on investments.  The marriage of investor and company springs from expectations.

With dividend stocks, one invests with an eye toward measurable success.  With non-dividend stocks, on the other hand, one is given a promise, "I'll just keep your slice of the earnings and promise to grow for you".  The latter approach to appreciation is less founded on near-term metrics, and is instead akin to the mindset which drove the recent housing crisis; buy low and flip "it" when it gets big.  Like real estate flipping, the owner of a non-dividend company expects to sell off positions to realize earnings; the marriage between stockholder and company is thus is very much like a boy and a baseball card which is hoped to be worth more at a later date.  The investor in a dividend company, on the other hand, has an eye toward an ongoing stream of dividends (some of which might be invested in other dividend earning companies).  The relationship is based upon recent performance rather than future hopes.

[MWKXJ]

America needs to shut of the computer get back to work.  The future isn't frappachinos and iPhones, banana-shaped shoes, rectangular glasses, and Facebook, rather, its a toolbox, a thermos, and an exhausting days work to look back over with pride.

What if you're wrong? What if the world of the future is a digital, wired, computer-filled one as farmers, machinists, truckers, and laborers are slowly replaced by ever more sophisticated machines? Don't let your emotions cloud your investing. It seems like you're rather resentful of certain things and it's causing you to want to pre-emptively avoid investing in them out of a mix of fear and certainty that they will explode.

And that which first came to the city of Ilium,
call it a dream of calm
and the winds dying,
the loveliness and luxury of much gold,
the melting shafts of the eye's glances,
the blossom that breaks the heart with longing.
But she turned in mid-step of her course to make
bitter the consummation,
whirling on Priam's people
to blight with her touch and nearness.
Zeus hospitable sent her,
a vengeance to make brides weep.

It has been made long since and grown old among men,
this saying: human wealth
grown to fullness of stature
breeds again nor dies without issue.
From high good fortune in the blood
blossoms the quenchless agony

-Aeschylus, Agamemnon

[tnt]

MWKXJ, in regards to your observations about dividends, I agree.  An investment is an expectation of a future stream of cash and holding a stock for a long time because of solid business fundamentals and value.  With that said, with only that philosophy, your are a priest amongst whores. If you have enough time, it becomes more and more likely to be able to hold a single position and end up the same as everyone else whether they held all bonds or all stocks but it will give you a wild ride and you may not be able to exit at the stop you desire. This is where the indexes come in and serve as non correlated assets so you can sell assets high and buy others low such as pp does. 

[Stewardship]

With dividend stocks, one invests with an eye toward measurable success.

As with non-dividend stocks.

With non-dividend stocks, on the other hand, one is given a promise, "I'll just keep your slice of the earnings and promise to grow for you".

"I'll just keep your slice of the earnings, which is already built into the price of your shares.  After all, if you wanted to liquidate, you would just sell shares."

The latter approach to appreciation is less founded on near-term metrics, and is instead akin to the mindset which drove the recent housing crisis; buy low and flip "it" when it gets big.  Like real estate flipping, the owner of a non-dividend company expects to sell off positions to realize earnings; the marriage between stockholder and company is thus is very much like a boy and a baseball card which is hoped to be worth more at a later date.  The investor in a dividend company, on the other hand, has an eye toward an ongoing stream of dividends (some of which might be invested in other dividend earning companies).  The relationship is based upon recent performance rather than future hopes.

The marriage between dividend stockholder and company is very much like a boy and a collection of baseball cards.  The boy doesn't want to wait until a later date to realize gains, so he immediately liquidates 1% of his collection, which he calls income, or a dividend.  He then decides to do this on a quarterly basis, each time with a higher percentage than the last, which he calls "unbroken dividend increases."

Both relationships are based on recent performance AND future hopes.