401(k): Tell me why this is a bad idea.

[Broken Arrow]

I am seriously considering rolling my old 401(k) into my Scottrade account rather than, say, Vanguard's index funds.

Although I will still practice asset allocation and diversification, I know that making this move will forego most of my diversification, as I am thinking of holding stocks and bonds rather than stock funds and bond funds....

I also want to add that this amount of money is NOT intended for trading, but only for buying-and-holding.

Also, allocations will be made in $10k increments, so stocks at $7 per trade is roughly equivalent to a 0.07% front load (at most), and 0% in expense ratio.... Bonds are free, or no load and no expense ratio....

I suppose the "catch" is that I have to somehow pick decent stocks and bonds, and I have to stay on top of my portfolio as I will be micro-managing it. Normally, I realize that's not recommended, but I do have the interest in it, and I don't think I would go about mucking it up too much....

In fact, the more I think about this, the more this crazy idea seems to be adding up.... And yet, I can't help but feel that perhaps I'm missing something, or several somethings. Please tell me what's wrong with this picture?

[noppenbd]

I don't have a problem with the Scottrade account per se, because I am a big fan of ETFs, and you could probably save on expenses by using ETFs. As far as investing in individual stocks with this money, for me it would depend on how big a portion this represents of your retirement savings, and how many stocks you would be able to buy. I would say if you have less than $200K you will not be diversified enough (20 holdings would be diversified enough IMO).

[jIM_Ohio]

With large caps you should be OK. I'd like to see a person pick good small caps or foreign stocks enough to get close to return of the best 66% of fund managers.

[Broken Arrow]

Hmm, good points so far. Scottrade is capable of mutual funds and ETFs, and small cap and international exposure are also available, both through funds and ADR stocks.

[KTP]

With large caps you should be OK. I'd like to see a person pick good small caps or foreign stocks enough to get close to return of the best 66% of fund managers.

Considering how almost all of my mutual funds have been beaten by regular index funds over the past couple years, is this statement really accurate?

I get really upset when I think about how my Oakmark high rated fund lost 45% and still charged me 1% in management fees...talk about salt on a wound.

I still would have lost with index funds over the same period, but it would have been more like 40% and 0.02% management fee

[sweeps]

Not a bad idea... my only caveat would be the increased temptation to day trade. I'd want to start taking advantage of intra-day swings and such, and that's a good way to lose a lot of money if you're not careful.

But BA you seem to have it pretty well together... go for it.

[EEinNJ]

I use Scottrade for exactly what you're considering. Mine is a qualified plan IRA rolled over from a previous employer. I did individual stocks for a while, made money, but eventually felt more comfortable (and less effort) switching to sector ETF's. If you're disciplined, you can easily use a small portion for individual stock plays.
I have a similar account with Schwab, only I stuck to their basic index funds. Unfortunately the results are equally boring and mediocre. Diversification now means all your holdings are down!

[Broken Arrow]

But BA you seem to have it pretty well together... go for it.

No no, don't say that sweeps. Over-confidence also breeds weakness, and I'm just as likely as anyone to over-trade.

My current portfolio has been set fairly conservatively to compensate for my trading, and no matter where I roll my money to, I will continue that conservative allocation so long as I continue to trade....

But yes, the temptation to buy and sell will be there. Especially since I would eventually be rebalancing like everybody else, and I have to do that manually. Hmm... that's something to consider as well.

Again, I'm still in the brain-storming phase, so nothing has been changed yet.

[jIM_Ohio]

Considering how almost all of my mutual funds have been beaten by regular index funds over the past couple years, is this statement really accurate?

I get really upset when I think about how my Oakmark high rated fund lost 45% and still charged me 1% in management fees...talk about salt on a wound.

I still would have lost with index funds over the same period, but it would have been more like 40% and 0.02% management fee

The stocks in this space are a known quantity (mega caps and large caps). It is also known that 5-15 companies attributed 75% of the growth of the S&P 500 from 1997-1999- this was MSFT, Dell, Cisco and a few others which grew like 1000X or something like that over a short period. This rising tide raised all the other 475 companies which might have only grown about 5-15%.

As BA pointed out, he can keep his costs low (about .07%) which is lower than an index. If he starts with the 10 largest companies (100k investment- 10k in each), he can easily track himself to both the Dow and the S&P 500.

BA will have to decide if his goal is to beat the index, track the index, or just grow his money. If you want to track an index you do NOT need to own every stock in the index. Most S&P funds do own all 500 stocks (in proportion to their size/ percent of the index). But realize that the wilshirt 4500 and wilshire 5000 indexes each have more than 4500 or 5000 companies in them and no mutual fund holds all 5100 or 4600 (or whatever the quantity is this month). They sample (holding most, but not all, of the companies in the index).

The only issue with this is if BA think he can "beat" the index holding only 10 stocks or so. Great if it happens, but as long as BA is more interested in either
a) tracking the index within 1-2%
b) taking on less risk than the index
c) making money

then more than likely BA will be successful.

I generally invest in managed funds which take on less risk than the index (option b above) and find I do quite well- especially in down markets- relative to the index.