Bought Some Bridgeway, Selling Individual Stocks

As a follow-up to my post Researching Bridgeway Funds and BRSIX, I went ahead and opened an account with Bridgeway and bought $2,000 of BRSIX. I chose Bridgeway over other Micro-Cap alternatives for a variety of reasons.

First, after looking at the Micro-Cap ETFs, none of them were truly indexes either, as you really can’t be in this sector. They all have their own unique algorithm for choosing which stocks to hold, for better or worse. Also, since the ETFs are new it is unknown how they will react to large inflows or outflows of money as Micro-Caps are very volatile. These concerns are mentioned in this CBS MarketWatch article.

Second, I like that it is a mutual fund and that I can dollar cost average into it easily. And now that I’m “in”, I can continue to invest even if the fund closes to new investors in the future due to asset becoming too large.

I was also interested in the DFA US Micro Cap Portfolio Fund (DFSCX), but it’s only sold through designated advisors, and has a minimum initial investment of… $2,000,000!

Also from the MarketWatch article:

Academic research has shown adding small amounts of microcap exposure to a portfolio can reduce overall risk since they tend not to move in lockstep with the broad market. And despite their volatility, the market’s smallest stocks tend to dish out the fattest returns over longer periods, if investors can stomach the ups and downs.

This reminds me – this purchase is a buy-and-hold longterm decision. I am not looking for a quick flip, and will only sell to rebalance my portfolio. I haven’t quite figured out what percentage micro-caps should be in my portfolio, this was kind of a ‘let’s just do it and worry about the details later’ type of decision.

Finally, to balance out this decision I’m going to sell off at least some of my individual stocks. I’d much rather have money in this fund than a bunch of stocks I picked without thorough analysis.

Comments

  1. Anonymous says:

    I like this webpage:

    http://www.ifa.com/12steps/step9/step9page3.asp#94

    If you scroll down, you’ll find a table that shows the correlation between different asset classes. All of the stock classes have a correlation coefficient of 0.7 or greater.

    Is diversifying among different funds so important that you need to sell and rebalance? Why not just wait until you contribute more and by the asset class you’re low on?

  2. I was wondering if you were able to add your Bridgeway account to yodlee aggregator. I haven’t been able to do so, I remember from one of your old posts that you also use yodlee to track your accounts.

    Thanks!

  3. I think you should really start getting into doing your own stock analysis. You seem to have the inclination to do it and if done right, individual stocks will blow away any index/sector funds.

  4. Yodlee doesn’t have Bridgeway listed, so I’d be very interested to learn how to add them if you can. I love Yodlee, and I also just purchased some BRSIX to round out my portfolio. Awesome blog by the way!

  5. Did you open a taxable account or tax-advantage account? I am wondering if it’s better to hold the fund in tax-advantage accounts?

  6. DJ – that’s one of the attractive things about this fund: It’s OK for taxable accounts.

    Morningstar lists annual turnover for BRSIX is just 13%. (For comparison’s sake, Vanguard’s Tax-Managed Small Cap is 20%).

    The text below is from a 2003 interview in which the fund manager talks about the tax-management of the fund:

    What makes your fund a tax-advantaged portfolio?

    We haven?t distributed a capital gain in 5 1/2 years. That is the proof that we are a tax-advantaged portfolio. One of the neat things about having companies this small, or the structure of having only 400 out of 2,000 companies, is that at any one time I don?t have to own any one of those companies. There is always a roughly equivalent company I can buy, and sell the one we have. This means we can go through periodically and harvest tax losses; we track individual tax lots and periodically harvest some of those tax losses. We will sell that company or those lots of companies that we own, and then get to report that realized capital loss for those positions. This offsets future gains…

    … With ultra-smalls, we have figured out how to buy close to the bid and sell close to the ask, and we actually create a little value on average every time we make a trade, even though the tax management of the portfolio increases our turnover. Most people think that is a bad thing. But in our case, this is like the frictionless gear. As an engineer, I think this is really cool. So the implication on the trading is that it allows us to do tax-loss harvesting.

  7. Kansas City Saver says:

    Hello,

    I own a work at home business & my wife works out of the home.

    She makes good money @ 125K & I have a real job as well that pays around 50K.

    My question to anyone reading is this.

    I was talking to my tax accountant yesterday & she said that we are making too much money & need to find more deductions.

    I can’t pull more deductions out of the sky. We both have @ 6 year old vehicles that have been paid off for over 4 years & the only debt we have is our home.

    I do have some stocks that I have owned for a while & are currently down. Odds are @ 5K in losses at this time.

    Would it be tax wise for me to sell them & move them over into something else… Just to take the Loss on my taxes?

    Let me know!

    Kansas City Saver

  8. Bridgeway is a great fund. Montgomery is a very solid manager. While not part of your analysis, he is one of the most ethical managers out there.

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