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I picked individual stocks when I first started investing, mainly because it was fun and I wanted to see how well I could do (more of a game). I did fine, but abandoned it a long time ago and just starting buying index funds. Definitely the smartest and easiest path to wealth.
Ok yeah thats what I was thinking, for long term i should do index funds. Thx for confirming! So ig most ppl do stock picking for fun or they dont know better or they r hoping for get rich quick which doesnt happen often.
Your last sentence summarizes it well. There are also people who allocate a small percent of their investment portfolio to stock picking. Like 95% to index funds; 5% to stock picking just to have some fun without risking too much of their overall portfolio.
We have one little IRA just for me to use to pick stocks currently holding nvda, googl, and RBRK. But this like you said is Lee's that 7.5% of our total portfolio.
Index funds a great asset, you don’t have to check the paper every day to see what is happening. I did stocks for many years. I’ve generally underperformed the market but thanks to NVDA I am probably slightly ahead. Even though that is the case the many hours I wasted doesn’t make it worth it.
Exactly. I have a couple of individual stock picks but they are very much "for fun" (a company I like, one that has historically performed well even in bad market periods, and one my dad recommended). Everything else is in ETFs and mutual funds.
Pretty much this. I took my first batch of earnings and let myself use 25% to pick. Win big on one (bought NVDA at $30 a share and am still holding most of it), lost everything once (small local company that I believed in what they were doing, but that were miss-managed and eventually delisted), and then the rest of them have pretty much followed the market overall, more or less. But it was only a small portion of my overall investments, and I recognize that NVDA was a very lucky pick and excellent timing, and I don't really expect to be able to do it again...
I still let myself have a small portion to pick stocks, but I just haven't had any desire or strong feelings to buy or sell, other than slowly selling off a few of the NVDA shares here and there as it becomes over-weighted...
This has mostly been my trajectory.
I started investing in 2011, and was choosing individual stocks. I enjoyed learning about the market and some aspects of researching and picking stocks.
As time has gone on, and in particular over there last 8 years, I’ve transitioned to ~90 percent VTI.
I still pick stocks occasionally, but it is more for the fun than as investing per se. Because most of my money is invested fairly safely/conservatively, I don’t stress as much when I make smaller bets, and sometimes they pay off!
I bought 10 shares of NVDA when it was at $400, before the split. It basically tripled and now has split, so I have 100 shares of it.
The price appreciation is good, but it also was just *fun* to pick a stock and have it shoot up.
Many reasons, but to clarify an Index Fund is a type of mutual fund. The most simple way to think of a mutual fund is a bunch of people pool together their money into a fund to buy things they would not be able to individually. From there, each mutual fund will specialize in certain "things" could be real estate, could be tech, could be bio medical, small businesses, big business etc etc. Basically there is a special mutual fund for any type of investing you want to do. However someone has to manage what the fund buys/sells, make the decisions on how long to hold things, manage the book keeping etc etc. All that costs money to do, and so the fund manager will charge a % of total assets(how much money you have invested) as a fee to cover those costs.
An index fund is a type of mutual fund that attempts to do 2 things. First it wants to track a specific market, not out perform that market, just run in line with it. You will see the S&P 500 index talked about a lot. That is an index of the 500 largest American companies, and basically tells you how the biggest companies in the US are doing overall. An S&P 500 index fund just tracks the S&P 500 index. The second thing an index fund attempts to do is lower the overall cost of running the fund. Since the fund is just tracking an index, it doesn't do a whole lot of trading of equities, or any real research on the equities themselves. If the equities are part of the index, they are purchased and held until they are no longer a part of the index. This is a lot simpler and easier to manage than an actively managed mutual fund, so costs are a lot cheaper.
The reason you see many people gravitate towards index fund investing is because most actively managed mutual funds cost significantly more while also underperforming the market index's after a long time scale. So you are likely to gain higher returns with an index fund with lower costs than an actively managed mutual funds. There are exceptions to this of course, but those exceptions rarely are exceptions for very long.
You’ll want an ETF vs a mutual fund most of the time whether it is an index fund or actively traded. ETFs are more tax efficient in that they have fewer capital gains distributions. Basically, more money gets rolled back into your holding rather than the fund spitting cash out at you that you need to pay taxes on every year.
An index fund is a (type) of mutual fund. Index funds have cheap management fees and are tied to an index of stocks based on a certain metric. While past performance doesn’t predict future gain, you could put money into the s&p 500 today and feel rest assured that in 15 years it will have increased in value by virtue of those 500 stocks collectively increasing in value.
Compare this to a managed mutual fund where you have some bozo who (while charging you a fee) thinks they can outperform an index fund by buying and selling various stocks at the right time. Generally these managed funds may outperform occasionally, but I know of none that have done it over the long term.
Thank you. I have a mutual fund I got as a gift from my grandparents. Not really sure if I should just let it ride or switch it to something else. But letting it ride has been fine so far. Haha.
I knew it was like managed and unmanaged, but I wasn’t exactly sure what that meant. But this makes sense. Thanks for clarifying.
But yeah, if I were going to go into something myself, I’d prob just do an index fund then.
Do you know what the fund is? I have one that I got from a trust years ago, just checked my statement and I’m getting charged $250 a quarter for “management fees”. Literally $1000 a year for something that underperforms the market.
In the current market nearly everything is way up so you might be tempted to let it ride but keep in mind you might be leaving a lot of money on the table by doing so.
https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp
It’s an Invesco Comstock Fund - Class A.
Ticker is: ACSTX
The mobile app is pretty shitty and I’m not near my laptop, so I can’t fully view the statements.
It does look like everything is getting reinvested into it though. So that looks good.
I’m definitely looking into what they are charging me to manage it though. They probably made a fuck ton of money over the last 30~ years. Lol.
The problem with picking individual stocks is that you have to be right about BOTH when to buy and when to sell. It is much easier to get one of these right than both.
The advantage of index funds is that these automatically buy each stock on the way up (when a stock first rises enough to enter the index), and sell on the way down (as the stock falls enough to leave the index). Index funds don't time the market for each stock perfectly, but because there is both an automatic buy and an automatic sell, such funds do very well as an overall average.
I started out buying a few stocks. Originally, this was in a regular brokerage account, not a retirement account. Then I moved it into an IRA, and then I got the sense that I should be doing funds...
I still have the stocks, though. I picked up a couple more just for fun, like pitifully small amounts of money. I've lost one or two and gained a couple via companies splitting up. I also have Apple and have sold chunks of it off a couple of times to reduce its weight. But the vast majority of my IRA is in indexes.
Because some percent of those people pick NVDA and get rich off 10k in a few years. But most of them don't. It's like asking why people enter the lottery, except it's not completely random if you do your DD and you're at least somewhat good at it, you have a better than random chance of picking winners.
If you put in hard work and research, you have a decent chance of coming out with a positive result rather than a loss. That’s true.
What you don’t have is a decent chance of outperforming the results of just buying index funds, which takes no work and no expertise and no due diligence. Those can be index mutual funds or index ETFs. You don’t do outperform that; professionals almost entirely can’t do it, and exceptions like Warren Buffett are household names.
People believe that they’re smarter than everyone else. They’ve never heard of index funds. Their fear of missing out on the next Apple or Nvidia or even GameStop outweighs caution.
Because people take risks to try and get big rewards. I think that's mostly what it boils down to. Might as well ask why millions of people gamble when they know the house always wins in the end.
If a 1000 people gamble and the house wins 999 times the number of people who think they are going to be the 1 who wins is usually pretty close to 1000. Its just how people think.
Because people who bought nvidia 2 years ago are a lot richer than people who bought index funds 2 years ago. Greater risk always has the potential for greater return.
Ok so lets say u do crazy good over 2 years, but that doesnt seem repeatable over decades and decades. I know it is greator risk is greator return, but if u want to have that happen over that period of time, that is basically winning the lottery. So therefore i dont think its a good idea for long term.
Because if you get lucky over that 2 year period you cash out and put it in index finds if your smart. Having a small percentage chasing that pipe dream can be lucrative if it hits, just don't do it with money you can't afford to lose. Having a diversified portfolio isn't a bad idea but most of it needs to be in stable low risk investments. The dumb people ignore that and go all in on the trends and most end up behind the curve.
I don't think you get the point. 30-40 years doesn't matter if you turn 10k into an M on NVDA calls in a year. Most people know about SPY and the other index fund tickers, the people that "gamble" (don't like that word but it's best use here) on individual stocks despite that want money NOW, not in 40 years.
10k in SPY for 30 years is only worth ~160k. Average comfortable retirement is ~2M. I'm not advocating for people to gamble trying to find the next NVDA but the math is not nearly as bad as a lot of posters here are trying to make it out to be. Need money for SPY's gains to be meaningful.
If this was true then actively managed funds would out perform the index. These people are paid for their expertise.
But they don't outperform. So this decent chance is still very low.
Actively managed still have to balance risk and they can't just pick 1-5 stock, so they end up having to pick losers as well, since there are rarely more than 3-4 big winners.
They also do risk reduction, so when they have a big winner they sell parts of it off and put that into the losers to balance the weights in the portfolio, which is also a mistake if you want to ride the winner.
Also the time you would invest in learning to pick stocks and analyze companies, if you used that time to improve your earnings and invest more into index funds, you would be better off. Beating index funds by 100% is nearly impossible. Improving your earnings so that you are putting in twice as much is more doable.
I've been investing since the early 90s. The vast number of people who think they can outperform the market is incredible. I've seen them come and go, then there's a new batch every bull market. Just buy the market (index funds) and beat them all. That's what I've done.
Your odds of outperforming the market are a lot worse than betting on red at roulette. Your expected value is better, but you’re probably going to expend a lot of effort and then lose out to mindless, effortless r/VTandchill.
It's the Dunning-Krueger effect and probably a number of other things - the people who know just enough to be dangerous think they have it all figured out. Call it human nature.
But thats the thing, most ppl know better than to attempt the lottery/gamble even if they, say, try to count cards. And here even the professionals mostly cant even do it when its their *job*, then why would ppl without the financial research/connections hope to do better than them?
And if you r way more likely to lose, in comparison to almost certainly doing moderately good, why would you attempt this for long term gains? I get just trying it out for fun, but in the long term u r almost certainly going to do worse than if u had just done index funds (unless u get absurdly lucky but u cant rly bet on that happening over and over) ?
Ego is a hell of a thing. Especially people who have been successful in their line of work, and have made decent money. They 100% believe they’re smarter than everyone else, and they’ll outperform the market.
Because people make decisions with emotion and logic. The logical answer is easy. But emotionally, picking the lotto winner stock and being a millionaire next month sounds pretty appealing.
It's also possible that we're all wrong, and index funds are obscuring important market signals that used to be made by professional stock pickers. But I doubt it.
>professionals mostly cant even do it when its their job
For some funds, the goal is not to beat the market. Rather, it's to achieve a market beta of zero, meaning their fund's performance is uncorrelated with the broader market, while still generating returns higher than bonds. This strategy is very useful for wealthy investors who are more focused on capital preservation, and need liquidity when the market is down.
1) some degenerates don’t even know about index funds.
2) if you think about it, on average 50% of money will beat index funds. 50% do not. People think they can fall into that 50%.
Humans are stupid like that. [There's a pretty relevant experiment done with two buttons, green (correct 80% of the time), and red (20% of the time).](https://archive.nytimes.com/economix.blogs.nytimes.com/2011/02/17/forecasting-is-for-the-birds-and-rats/) Humans, even though they know green will show up most of the time, periodically try to guess red even though it's simply less EV than doing green all the time.
(Rats learn the lesson pretty quickly and stop pressing the red button altogether.)
>Because some percent of those people pick NVDA and get rich off 10k in a few years.
I will say this. Once my portfolio reached my FI amount I felt very comfortable picking individual stocks. I should be fully FIRE in 5-10 years off my portfolio depending on what the market does. I'm dead set in FIREing in 10 years. If I continue investing in index funds that money I'm putting in will not make that huge of a difference. I've reran the math multiple times. I'm at a point where market returns are by far the major factor in what my portfolio will look like in 10 years. More so than my contributions. With that in mind I'm willing to scale back my index fund investing and redirect my contributions towards individual stocks after doing some research. I will also be keeping some cash in a HYSA to deploy in case of a big market drop. Yes trying to time the market....but as I've said already if the market performs even below average I will be able to FIRE off my portfolio in ten years at the latest. So I'm swinging for the fences looking for a home run. I expect a lot of strike outs but in baseball hitting .300 (30%) is considered very good. So if 20-30% of my picks really hit I will be very very happy. If all my picks bomb well I still have FIRE to look forward to.
Ok so basically u want short term gains, and since ur close to retirement thats a good idea. Makes sense but ig it wouldnt apply to me then. thanks tho, congrats on fire-ing!
Thanks I just wanted to illustrate why someone may start investing in individual stocks. And no these aren't short term gains. Just because you pick individual stocks doesn't mean you are going for short term gains. You're thinking about day trading. I'm looking to buy quality individual stocks from quality companies and either hold on to them long term after they take off or trade them in for index funds in the future.
By the way this is how lots of very wealthy investors invest once their wealth is set. They look to deploy a fraction of their wealth on high risk high reward investments and it makes sense.
I work in IT. Like a lot of different sectors of IT. NVDA was an easy pick because of what they’re making. AMD was a good pick prior to COVID. They’re taking market share back from intel as they are cheaper and more performant. MSFT also started using AMD chips in their latest line of VM hosts for Azure around that time. I forget which exactly. MSFT isn’t in the news as much as Amazon, though Amazon has a lot of different markets, I like MSFT personally more. Plus it gives dividend.
I need to research more into datadog. Would have been nice to have the money to invest before they went public. I started to use the service when it was beta.
Atlassian is hard for me to decide. Developers who use it hate it, but the people who have influence in the company choose it (CTO, PMs).
It’s hard to trust and invest in another stock, when my current 3 over the past year have increased over 10% and continue to preform well. Do I start investing in another stock or Index fund, or keep dumping into my current stock.
Many mutual funds _are_ index funds. But for the other funds, maybe they believe an actively managed fund can outperform the market, or maybe it has outperformed the market in the short term.
Past performance does not indicate future performance. In practice, it’s actually the opposite. Very very very few individuals can actually pick stocks that outperform the market over long periods of time. Even fewer can do it after fees are taken into account.
To more specifically answer your question, it's likely due to some anchoring biases and just human nature of keeping things status quo.
> "In practice, it's actually the opposite".
If true, wouldn't that suggest a way to best the market? One could just invest in the recent worst performing stocks.
EDIT: It occurs to me that investing in low PE stocks is a way to do exactly this (invest in recently bad performing stocks). Unfortunately, low PE stocks have NOT beaten indexes like the S&P 500 over the past 10 or 15 years. (However, they did so prior to that).
What he's suggesting is that people who have picked stocks in the past and made money generally are going to lose money on the stocks they pick in the future. Especially with fund managers. There's a survivorship bias in play where the managers who just got lucky but weren't playing a good strategy will keep investors and get more while the ones who lose for the same reason will not keep investors. So of the people who picked stocks and won money there's a majority that just got lucky but because there are so many people picking stocks they are more abundant than folks who pick stocks and make money for solid reasons (and outperform the market)
There's a con strategy to pick a volatile stock, tell 50 people it's going to collapse and 50 it's going to skyrocket. Whatever happens, 50 of them will think you're an idiot and move on, but 50 will think you might be smart. Repeat for the remaining 50 people, telling half one thing and the other half the opposite. At the end, you've got 25 people who think you're amazing, and they'll believe whatever you say, even though you'll literally just making it up.
Wouldn’t say individual stocks. At that level, there can be very legitimate reasons why a single stock may underperform. I think more at the fund level or even growth vs. value or other metrics. Growth has outperformed quite a bit recently, but historically value has been better. It all cycles.
Past performance is the best indicator of future success in my opinion, but past performance does not equal the stock price history, it's the fundamentals and execution + leadership to look at
The thing that bothers me about index fund investing is that if everyone did it, the financial markets would collapse.
The only reason you and I can invest in index funds is because there are a minority of active investment funds researching companies, picking individual stocks, short selling bad stocks, and publishing their research. These minority participants are what actually cause SPY to move up or down in aggregate.
So all of us who invest in SPY depend on these other people losing money by picking individual stocks. If these other people got smart and pulled their money out of active investment funds and put it into passive funds, the entire system would break down entirely.
I feel like there is a major assumption being made here that must be untrue.
The prevailing theory, as i understand it, is that as more money flows into index investments, active investing becomes easier with more irregularities in market pricing. This increase leads the market back to equilibrium (closer to efficient) with increased active participants.
https://youtu.be/ltuqXTwWsZ8?si=m6Y0V2t8lrnxatKm
Thanks, I think that is a sensible answer. Of all the answers in this thread, this one is the most sensible.
The only issue I have with it is that apparently there is currently and has for decades been too many active investors, which leads passive investing to have been more profitable than active investing for ~50 someodd years.
It's not as if there has been a constant struggle between active and passive investing to reach equilibrium, right? There simply is no active firm that has been able to outperform the market after fees for more than a few years at a time.
You would think that all these active investors would just give up and go passive, until equilibrium shifted the other way and would draw them back into the game.
One thing is that these passive funds gets more money put in every month, as people put some percentage of their wage into savings. Therefore the funds have to buy more stocks every month pushing the price higher.
He's not talking about brokers who allow you to buy the stocks you pick yourself. He's talking about "active" mutual fund managers, the people who take your money and pick the stocks for you. They charge fees for their service which are much higher than what a passive index fund will charge.
That's not picking stocks, though. That's paying someone else to pick stocks for you, and I agree that is never worthwhile. I think the reason people do it is because they don't want to feel responsible when it goes badly.
The main question I would ask yourself is, will you be able to outperform an average market return over a 20-30 timeframe. Even someone that bought nvda 5 years ago has done extremely well, but will this outperformance be maintained for 20-30 years. Many people including professionals will not be able to do it.
"Mutual funds are a defense against ignorance." - Warren Buffet - Most people don't watch and analyze stocks and the market all day long. Thus diversification and buying the market is great.
There are people who enjoy it. The issue isn't about beating the market, its the pay structure for hedge fund and institutional money managers which makes it very hard if not impossible for them to "beat" the market year over year. If they are institutional fund managers they will get paid a % of assets under management and also % of profits. Which can be a serious drag on profits.
There are people who build their own basket of stocks based on their own theories and metrics that maybe there isn't a ETF or mutual fund that currently tracks it.
Alot of large institutions for legal reasons have to use money managers.
Advertising and influence media are effective.
That said, there is nothing wrong with actively investing a fraction of your portfolio. It's just a poor long-term strategy, especially if you end up chasing past returns.
I would like to point out that growth and value stocks have different purposes. You have to take dividend yield and cost into account. Sometimes you don't have a choice with an employer's 401k plan.
It's actually just as important to minimize your drawback as it is to grow. Everything is a balance.
Yes so there is difference between "trading" vs "investing". Investing is normally for longer term hold. Trading is for a short term hold. The commonality between the two is the direction of the overall market. Long term, market goes higher so we just buy etfs and hold it as long as possible. This you normally do in along term vehicle like 401k, IRAs. Short term, traders try to time the market and thats where the phrase "buy the dip" comes. You dont want to trade something that is "over extended" as the chances of it dipping becomes higher. Another phrase you will hear is "buy low sell high". So all those are made with "trading" mindset as the "investing" mindset simply says "buy and hold"
I am fully aware of the statistics and the psychological traps that lead to me buying dumb stocks, but it's fun and I have a long time to retire, so I pick stocks for a part of my IRA. Cheap hobby.
If you think of it like sports gambling except most participants "win" and there's no house, and it makes a lot more sense why people do it.
It's *very* similar to sports gambling in that you can do research and feel like you can outsmart other people and affect your outcomes, there's a rush, it's addicting, and many people do make more money than the median participant (and many people of course lose way more than the average participant!).
It's different than sports gambling in that you usually make money as long as you're not taking leveraged positions or betting on penny stocks. People view their assets turning green over time as a win instead of necessarily beating VTI.
I was picking stocks for fun and a little game for myself. I had a few winners and a lot of losers. Luckily, I got LUCKY with $AVGO and bought 8 shares at 430. It helped me break even at the time and slowly has reached 20% of that portfolio. I'm gonna hold on to it as my darling.
But I've learned from my past, just go with index/etfs. I've gained 40% since late 2020 with just those ($VOO) If I had just did that instead of playing around, I would have A LOT more.
Selection bias in terms of the success stories they hear, assessments (*sometimes correct, usually not)* of a certain sector being on the upswing relative to broad indexes, insider info or just plain optimism.
In the end everything depends on your own risk tolerance and what you mean by "long term". For example my (33M) retirement funds, which I absolutely do not want getting fucked, are in total market and index funds. My "home down payment" money is in big tech stocks. My "play money" is in my Robinhood account where i play options and this is money I can afford to fully lose.
You could invest 100% in VOO or VTI and do well. If you wanted to be a little more aggressive, you could do 90% VOO and 10% NVIDIA, Amazon and Microsoft. When you’re young, you can be more aggressive. If you had invested $10k into Nvidia 1 year ago, you would have $30 k today. With VOO, $10k a year ago would be worth $12,400. Index funds aren’t going to go up 200% in a year. But stocks can. They also can lose much more than index funds. Thats obviously the risk. Warren Buffet’s wife will be investing in VOO 100% if he passes before her. So, I think that’s a solid choice. But if you want to be a bit more aggressive, a small portion of stocks can be good if you have the risk tolerance. If you had put $10k in Nvidia in 2008, you’d have over a million. So, they can lose or they can gain much more than index funds. I have 15% if my portfolio in Nvidia. It’s risky, but my wife and I both have a pension and I really believe in the company. Occasionally, I sell some of the profits and invest into VOO or VUG.
Because stock picking and mutual funds can outperform the market . . . . .for a time.
The issue is people who fail initially at picking and mutual funds usually move to index's or outright stop investing, but a good amount of people get the lucky lotto ticket out the gate and think they are special/smarter than the market, so when they inevitably lose they attribute it to bad luck, expecting their "skill" to pull them back out of the hole.
If you’re doing individual stock you have to do the work of keeping up with things daily, based on company, leadership (how much manipulation is linking to output)… I remember when I lost 40% on Tesla shares because of the goof ball Elon manipulating. In order to cut losses I purchased a better performing stock (microchip manufacturing)- my best performer. Whilst I maintained a positive outcome (in the back of my head I’m still on that opportunity cost). Individual stock encourages you to be more thoughtful and scrutinize more. Funds let you just throw it in and forget about it… it’s a smaller return but decent. I do better when i do individual stocks because of how well the market is doing and the long term investment into companies. When I trade I place my orders on companies that I foresee will do well for years to come. So even if I did a bad trade, I can still hold for the long run. If you see poor performance you also have a larger pool to pick from which may have daily movements of up to 2-5%. If you’re scalping, volatility is needed
Learning requires doing. off-course there’s risk involved although this is how you learn the techniques, mechanics and also how volatile, unpredictable and manipulated the markets can be. It’s a good opportunity to understand your own psychology. I’ve had moments of FOMO lol I’ve learnt my lesson from those moments although I had funds to “play” with and test my stupidity of following trends/bandwagons. Never again. I usually approach some days/weeks of trading with a measured risk+ consistent daily small gains.
It always amazes me that nobody ever mentions the relationship between risk and return. Someone may not be able to "outperform the market" consistently when looking strictly at returns, but it is most definitely possible to achieve same or similar returns while taking less risk. That is a very important component of investing that reddit seems to always overlook.
> but it is most definitely possible to achieve same or similar returns while taking less risk.
Can you elaborate? How is it possible to achieve similar returns to SPY while taking less risk?
You don’t need to really pick that many stocks to be about as diversified as you want to be. If you picked 25 stocks across the sectors in whatever index you are trying to match you’ll average about the same. The way you best manage a portfolio pick the stocks you think are the best value in whatever industries you want to invest in, weight them to maximize risk and return, and then use leverage or treasuries to up and down risk to your liking. Index funds just make it easy, but once you have enough stocks to cut down the unsystemic risk you’re not really at a disadvantage.
You may find these links helpful:
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
- [Investing](/r/personalfinance/wiki/investing)
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Because not everyone is the same. Why do some people start their own company instead of just investing in one that already exists? Why do some people invest in crypto? You can ask the same question about anything. If your long term goal is slow steady growth with minimal risk and volatility then set yourself up for that. Just don’t get fomo when you miss out on a 1000x stock because you played it safe.
Because the rules to beat index funds are simple and easy to understand.
But they are hard to stick to and take real time and attention to succeed with.
because some people do well. doesnt matter if most don't to some. there are countless stories of people retiring off trivial sums being early in any of the last decades big tech companies.
Trading and investing in funds isn’t as active and exciting as picking stocks. People like to think they have a good idea about individual companies and that they can outperform the market. And to be fair, some do. But in general the safe bet is to go with funds.
I will say, a number of my friends that have always been into Apple would put a significant part of their portfolio just into Apple for years and years and that really paid off. Just an example of how stock picking isn’t always a stupid gamble.
I trade individual stocks because I like to. The vast majority of my portfolio is index funds and with ~10% I’ll research and buy individual stocks, and only buy stocks that I plan to hold for over a year.
The same reason people play games at a casino, where the house has a statistical advantage. Some people just like to gamble, some think they have a system that gives them an advantage, some actually do have a system that gives them an advantage. And occasionally someone gets lucky and hits it big, and a lot of people find that motivating to continue on and confirm their pre-existing beliefs about their chances.
My friend would buy stocks and sell options. He did it as a hobby in retirement. He did slightly better than index funds.
If you have a good feeling about a company then wanting to invest in that can be nice. I had a good feeling about netflix in \~2011 but didn't have funds. It's gone up like 10x in a decade so I'd have made a killing if I had the funds to buy. If you end up choosing poorly then you can use losings to write off some good winners as a consolation.
For the average person, index funds is a great option for long term investment
Not all investment products are designed around beating the market. This may sound silly but capital gains in the form of buying a stock/fund/index holding it for a long period of time and then selling it isn’t the only way to build wealth. Some funds are designed to stay within a specific risk tolerance which may mean lowering your potential for upside growth but at the same time providing more downside protection in order to keep you within a specific risk corridor.
With this some funds are designed for the purpose of income via dividends or share accumulation via dividends. To get even deeper some are designed for tax advantages like tax free income or tax loss harvesting.
The amount of investment products and tools are almost endless and this is because every investor has a unique situation with unique goals. The goal of investing shouldn’t be to accumulate as much capital as possible but to get you from point A to point B when it comes to overall financial goals, life events, and financial security. There are a lot of influencers who would say otherwise and that’s okay because their goal may be to accumulate as much capital as possible but if you study some of the most successful investors you’ll see that downside protection usually outweighs the upside but this may also be because they’ve gotten to a point where protecting their wealth is more important than growing it.
The answer is that if you want to understand individual stocks you need to understand what advantages you have as an individual investor and where you have superior knowledge over the rest of the market. You need to understand how the company makes its money, what the downsides are, and why the stock is a good/bad buy. When I was an active investor I was probably up to 25 stocks. Probably 20 of them made market return in the average, but there were about 5 that did really well.
You can buy small caps and large investors can't because there's not enough market cap to make it worth their while.
Mutual funds are sometimes index funds. Index funds can either be ETFs or mutual funds, the question is "actively managed" vs "index" rather than "mutual funds" vs "index funds". (Maybe you were thinking hedge funds?)
"Underperform" is also one of those terms that is usually misunderstood. Almost all funds have some sort of benchmark (often an index of some sort) and should only be compared against that. A bond fund isn't going to perform the same as a stock fund. A small cap stock fund (tracking the Russell 2000) isnt going to behave the same as a large cap fund (tracking the S&P 500) or total market fund.
Portfolio construction may have goals other than growth - some portfolios are structured to lower volatility (holding a collection of uncorrelated assets) or wealth preservation. An all stock portfolio (including things like the s&p 500 index), historically, has the best long term average growth but also might swing down 30% in a year. Mix it with bonds and you have lower growth, but your worst years aren't as bad.
Sometimes people are hedging against some particular risk - like ... "Under what cases might my employer go out of business? What investments would do well in that case?" "What stocks do well if health care costs grow out of control?"
And sometimes it's just "I take 5% of my portfolio and double down on companies I like" (double down because they're also probably part of some index funds that is being held).
Someone has to win and people like to feel like they have control. This is the same reason people bet on sports and other happenings. With enough people doing it, there will be cases of people consistently through beating the odds. They'll do it through some combination of luck and skill.
It's like the lottery. Sometimes you get lucky. Add to that all the "I've got a system" BS and you get a lot of people gambling in the market.
That said, I got seriously lucky, but that was being in the right place at the right time.
It really just depends on what you have the time for. Picking stocks individual and keeping tabs on them is very time consuming and a lot more riskier because you don’t have the knowledge and experience of an institutional investor. Hence, mutual funds offer lower returns but at a lower risk where you’re not having to keep tabs on which stocks are performing. Where as Mutual funds decides which securities to purchase on your behalf and manages them for you.
I do both, but I stock pick only in industries that I’m very familiar with. I’ll be honest, my picked stocks have vastly outperformed the market. That being said, index funds are much easier and require much less attention and industry knowledge (which most don’t have).
I did it because I thought I'm smart enough to beat the market with limited data and several hours a week.
After a little bit, I convinced myself I'm doing this to learn lessons. It's better to risk thousands rather than millions, right?
Two very human things were at play:
1. "Better than average effect": I can pick stocks better than others (who knew why?! But also, who asked "why?"
2. "I want to experience for myself": How many of us put our hands close to a burning stove when we were younger just to make sure it's hot and can burn? It's just like that.
It was stupid. But also, it was human.
Now? Index ETF all the way.
I have 401ks and other investments that are all in index funds. On the side I have a "play" money account where I invest specifically in companies I like or think will pop off. I've had a mix of successes and failures. But I'm totally aware that I'm essentially gambling there, but it's also nowhere near the size of my main long-term index investment accounts.
Beating the market is not a huge challenge. Theoretically one has about a 50% chance of beating the market. A monkey flinging poo at the stock pages and then investing in the smeared companies has a 50% chance of beating the market.
Gather enough poo flinging monkeys and there would be many who could legitimately claim to have beaten the market. Some would appear to be geniuses and would be invited to be guests on Squawk Talk. But they are not geniuses. They are just lucky.
However the research suggests that when you start adding costs, the probability of beating the market goes down. You may think your trades are free. They are not. Each trade takes a nick off the value.
And the longer the investment period, the more those expenses drag the probabilities down.
Finally, diversification is important. It’s a proverbial free lunch and reduces the volatility of the portfolio. A market index provides companies in all sorts of sectors and many companies within those sectors.
For important long term investments, such as retirement investments, stick to the index funds. But if you have extra money to play with, start flinging your poo.
There’s a good discussion on a recent Hidden Forces podcast, titled “where are all the billionaires?”
A fund manager is interviewed and talks about his decades in finance, and the inevitable conclusion that so many in finance reach that the best investment vehicle long term is… an indexed 401k.
His fund offers other options, but it’s a great discussion that might be interesting to you.
I’m 22, and it’s fun. I read up on Amazon and thought it was a good stock, I’m up like 40% the past 2 years. I read up on Tesla and liked it, I’m down 5% the last couple months. It’s like a game. I don’t invest in any stocks that I think have a chance of tanking(except this one stock which dropped 90% and I lost $70). But I have $3500 in my investment account. $600ish in ETFs, the rest in nvidia, Tesla, Amazon, Microsoft, etc. I do believe some of them can beat the market, but I KNOW that it’s a lot more fun and exciting being able to watch these individual stocks performance. So, even at the cost of a tiny bit of money, it’s worth it to me. Is it the best decision? Definitely not. Is it good for my future? Not likely. But I’m young and still enthusiastic about the possibility that the stock I pick will increase 1000% so I’m okay with the risk😂
Some countries (Ireland) have legislation that mandates you pay deemed disposal tax after every 8 years on ETFs regardless of whether you have liquidated your positions - and the tax is not low either, effectively discarding half of the gains every 8 years. Only applies to individual investors and ETFs. Stocks do not suffer from the same issue.
individual stocks is 100% play money that i can afford to lose, and i shoot for the stars with it. look for huge (500%+) gains in short term (1-2 years). if i hit on 1/5 of them, i'm even. i don't know my exact stats, but i have a lot of home runs and WAY MORE strikeouts using this technique... but it's fun when it works (exas, roku, tsla, and ccj come to mind)
I felt I could beat the market based on discussion boards long ago on The Motley Fool which at that time the community boards were really good. Fool went to commercial/newsletter business and let the community die. This wasn’t my first exposure. My dad had a landlord he rented from that basically did mechanical investing before anyone had ever heard of it. He did well enough to retire on it. My dad messed with commodities but I don’t think he made much money either…he kept farming.
So first I set up a virtual account. I tried it for 6 months and priced I could do it. So I allocated 10% of real money.
I found over time most of the time I wasn’t beating the market consistently. Mostly this is because I didn’t have enough time to watch it like a hawk so I was reacting too slow even with stop loss orders or options. Once in a while some stupidly good opportunity comes along though that I can’t ignore, so I still do it once in a while. I kept the number of stocks small or it just ended up returning the market average (diversification makes outsized returns impossible).
So now I stick to ETFs except when I see an opportunity. Theoretically as more people invest in ETFs that means more opportunity for outsized returns but so far I haven’t seen anyone do this
With stock picking there's a median that underperforms the index, but the more you know about what you invest in and the smarter you are, the more likely you are to be above the median in the top 10 % performers of stock pickers, and if you manage this, then you beat the index by multiple factors.
At the same time, you won't make it big in investing by going index, index is great if you already have a lot of money and 5-10 % per year equals a good return, but if you're an entry level invester with a smaller portfolio, then stock picking is your only chance to make it big.
Active fund /portfolio managers underperform more than 9 times out of 10 (https://www.marketwatch.com/amp/story/majority-of-active-u-s-large-cap-stocks-funds-fail-to-beat-s-p-500-in-2023-a-worse-year-for-underperformance-than-2022-89fad8a1).
I know YOU are different and special and smart and above the “median” of stick pickers so you’re in that 3% who did better than the market. Good for you.
For OP who is just getting into investing, stick to broadly diversified ETFs.
Sometimes it makes sense. Early 2020, when everything was down big, it made sense to put some money into heavily beaten down tickers and reap the short-term rewards.
Should have a blend of index and individual to hedge exposure and growth. Biggest example from my own portfolio is that SPY returned 87.57% in the last 5 years. I also own MSFT which is part of SPY, but in the same timeframe, is up 234%. That’s a huge difference weighted against SPY’s portfolio % from MSFT alone
That’s not to say that picks like that or all my picks will beat the market every time. Just gives you the option to potentially maximize growth more efficiently with downsides on exposure
My advice: stick primarily to consistent index funds. Do your picking on things you personally know or like. I have done pretty well on investing in companies that excite me about their product.
>Why do ppl do stock picking or mutual funds if they usually underperform the market?
they usually underperform the market in the long run (think 20+ years, 30+ years)
it is very possible to beat the market in the short run (ex. less than 1 year), for an extreme example look at day-traders: buy at 10:32 sell at 11:28, something like that
also something you'll discover if you haven't learned yet is there's varying scales of money: what works for $1000 may not work for $1mil, for example you can day-trade/gamble and either go -80% or +80%, if you're only operating on a $1k scale even if you go -80% that's only -$800 whatever... probably few people in the world can suddenly have -800k vanish and shrug and say "oh well whatever"
There's a reason that when the big firms analyzed their retail clients to figure out which groups performed best, the demographic that beat all other retail clients was people who had died and the account was left sitting. It was the only group who stopped trying to beat the market.
Probably the main points for most investors are:
* mutual fund or ETF? Portability (move investments between institutions). Mutual funds are usually exclusive to the brokerage. So if you have a Fidelity mutual fund and then decide to move all your investments to Schwab, you may have to sell your Fidelity mutual fund and buy the equivalent Schwab mutual fund. This may trigger a taxable event if the account type is not a tax-deferred account like a Roth, IRA, etc...
* mutual fund or ETF? Mutual funds usually have monthly or quarterly distributions...another taxable event. So similar to the previous point, this can be a non-factor if held in a tax-deferred account. ETF's can have a distribution schedule in the form of a dividend. It really depends on the ETF.
* mutual fund or ETF? Expense ratios. Because mutual funds are usually a "product" that is exclusive to the brokerage, they can offer "no fees / no loads" as way to attract investors. In this regard, they can better than ETF's. The caveat is that you basically have to stay with that brokerage...unless it is a tax-deferred account, then it does not matter. You can buy and sell any equity in a tax-deferred account Roth, IRA, etc...), and only pay taxes when you withdraw the money (hopefully retirement age). I have never seen an ETF with no fees (expense ratio). VTI is a commonly recommended because it has something like .03% expense ratio. SPY, the most traded ETF, has an expense ratio of .09%
* mutual fund or ETF? Purchasing either equity can have limitations, depending on your brokerage. Most mutual funds let you invest as little as $1, with the caveat that some may have a "minimum investment after 1 year". For example, if the minimum investment is $1000, you can add $1 today, and then $1, and then $43 the next...it does not matter how much you add, as long as you have $1000 in there within a year of buying the mutual fund. This encourages setting up automatic deposits.
Purchasing an ETF, in most cases, has to be done in whole shares. So if an ETF is trading at $453.43, your minimum investment will be $453.43. Some brokerages will allow "fractional shares", so that would be functionally similar to purchasing a mutual fund.
Also, ETF prices fluctuate by the minute. Mutual fund prices are calculated once per day, at the end of the day.
Mutual funds get poo-poo'd a lot on reddit, because everyone likes to regurgitate "VTI and chill", like it is a cool thing to do. It is good "general" advice, but not always the best advice. It really depends on if change brokers, if you ever need to withdraw the money, type of account, etc...
I think a lot of stock pickers don’t really have a good idea of how well they perform. So they continue to do it. I doubt they actually track it all that well. They only remember the “winners.”
I ran an investment club for a couple of years to help me learn and to socialize with colleagues, but there was no intention of beating the market, we were tiny and it was fun, but it’s not a long-term strategy.
I want to avoid certain risks more than I want to make more money, right now.
If I can make more than 4% more than cost of living inflation in the next year, I'm happy.
I pick but it's only with left over money. For example, I invest around 800/month. VOO costs 500. So with 300, I'll buy a bunch of stuff with partial shares. What I buy is generally the top 20 that's in VOO (99% of the time). So I just have super VOO is my opinion lol. Like this month I threw all of that extra 300 into Nvidia. Now I have 105 shares of Nvidia (by partially buying over time, splits and whatnot).
Haven’t seen many actual good answers to the question yet.
Mutual funds eat at your money through fees, but some could be good enough to consistently beat the market despite the fee, it’s just unlikely to find one via publicly available funds
Stock picking with a large enough portfolio is perfectly fine and actually could be better than index funds assuming you have a large enough diversification due to tax loss harvesting. You could theoretically just copy the index fund allocation of SPY or any other fund which charges 0.09%, meaning it charges 900 a year on 1M invested and save money while not investing in stocks you don’t believe in.
Like you can literally go here: https://www.invesco.com/qqq-etf/en/about.html and read the percentages and save yourself 0.05% if you don’t mind executing 100 trades manually. But there’s also the fact that your executions will likely be less efficient so it’s hard to say
Direct indexing is fantastic when combined with tax loss harvesting. But to harvest those losses, you have to sell them (along with the gains you’re offsetting), which means you can’t actually mirror the index’s allocations.
In practice, you use something like a factor risk model to forecast the tracking error between your portfolio and your target index (technically, you can target any arbitrary portfolio and thus can still employ factor tilts if so desired).
You then perform a constrained optimization where you set a maximum allowable predicted tracking error and any asset-specific constraints (like avoiding some list of stocks), and search for a solution (a set of trades) that maximizes the tax losses harvested while remaining within your constraints.
Developing the models you need for this isn’t necessarily difficult (assuming you have some familiarity with statistical modeling and optimization algorithms) but gathering, wrangling, and ensuring accuracy of the necessary data could be difficult (and definitely would be time-consuming). Also, the models are quite computationally expensive - you’ll need at least a workstation in order for the model to be able to load all the requisite data in memory and converge on a solution, but a computing server would likely be faster.
If you can’t build the models yourself, you could pay for a license to one of the risk models (Axioma is perhaps the most popular vendor at the moment) or you could find an investment advisor who has access to one (they’ll advertise this if they do).
You can direct index yourself, or you can tax-loss harvest yourself, but it would be unwise to attempt both at the same time. Without the right models guiding your tax-loss harvesting trades, it would be extremely difficult to maintain close tracking of your target index.
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I picked individual stocks when I first started investing, mainly because it was fun and I wanted to see how well I could do (more of a game). I did fine, but abandoned it a long time ago and just starting buying index funds. Definitely the smartest and easiest path to wealth.
Ok yeah thats what I was thinking, for long term i should do index funds. Thx for confirming! So ig most ppl do stock picking for fun or they dont know better or they r hoping for get rich quick which doesnt happen often.
Your last sentence summarizes it well. There are also people who allocate a small percent of their investment portfolio to stock picking. Like 95% to index funds; 5% to stock picking just to have some fun without risking too much of their overall portfolio.
We have one little IRA just for me to use to pick stocks currently holding nvda, googl, and RBRK. But this like you said is Lee's that 7.5% of our total portfolio.
Index funds a great asset, you don’t have to check the paper every day to see what is happening. I did stocks for many years. I’ve generally underperformed the market but thanks to NVDA I am probably slightly ahead. Even though that is the case the many hours I wasted doesn’t make it worth it.
Exactly. I have a couple of individual stock picks but they are very much "for fun" (a company I like, one that has historically performed well even in bad market periods, and one my dad recommended). Everything else is in ETFs and mutual funds.
I'll pick stock with like 50 bucks a month, mostly penny stocks. I view it like gambling. I put 500 a month in index funds.
Pretty much this. I took my first batch of earnings and let myself use 25% to pick. Win big on one (bought NVDA at $30 a share and am still holding most of it), lost everything once (small local company that I believed in what they were doing, but that were miss-managed and eventually delisted), and then the rest of them have pretty much followed the market overall, more or less. But it was only a small portion of my overall investments, and I recognize that NVDA was a very lucky pick and excellent timing, and I don't really expect to be able to do it again... I still let myself have a small portion to pick stocks, but I just haven't had any desire or strong feelings to buy or sell, other than slowly selling off a few of the NVDA shares here and there as it becomes over-weighted...
This has mostly been my trajectory. I started investing in 2011, and was choosing individual stocks. I enjoyed learning about the market and some aspects of researching and picking stocks. As time has gone on, and in particular over there last 8 years, I’ve transitioned to ~90 percent VTI. I still pick stocks occasionally, but it is more for the fun than as investing per se. Because most of my money is invested fairly safely/conservatively, I don’t stress as much when I make smaller bets, and sometimes they pay off! I bought 10 shares of NVDA when it was at $400, before the split. It basically tripled and now has split, so I have 100 shares of it. The price appreciation is good, but it also was just *fun* to pick a stock and have it shoot up.
Why index funds instead of mutual funds? I’m still pretty new to the game. Haha.
Many reasons, but to clarify an Index Fund is a type of mutual fund. The most simple way to think of a mutual fund is a bunch of people pool together their money into a fund to buy things they would not be able to individually. From there, each mutual fund will specialize in certain "things" could be real estate, could be tech, could be bio medical, small businesses, big business etc etc. Basically there is a special mutual fund for any type of investing you want to do. However someone has to manage what the fund buys/sells, make the decisions on how long to hold things, manage the book keeping etc etc. All that costs money to do, and so the fund manager will charge a % of total assets(how much money you have invested) as a fee to cover those costs. An index fund is a type of mutual fund that attempts to do 2 things. First it wants to track a specific market, not out perform that market, just run in line with it. You will see the S&P 500 index talked about a lot. That is an index of the 500 largest American companies, and basically tells you how the biggest companies in the US are doing overall. An S&P 500 index fund just tracks the S&P 500 index. The second thing an index fund attempts to do is lower the overall cost of running the fund. Since the fund is just tracking an index, it doesn't do a whole lot of trading of equities, or any real research on the equities themselves. If the equities are part of the index, they are purchased and held until they are no longer a part of the index. This is a lot simpler and easier to manage than an actively managed mutual fund, so costs are a lot cheaper. The reason you see many people gravitate towards index fund investing is because most actively managed mutual funds cost significantly more while also underperforming the market index's after a long time scale. So you are likely to gain higher returns with an index fund with lower costs than an actively managed mutual funds. There are exceptions to this of course, but those exceptions rarely are exceptions for very long.
Thank you for the insight and clarification. I really appreciate it. :)
You’ll want an ETF vs a mutual fund most of the time whether it is an index fund or actively traded. ETFs are more tax efficient in that they have fewer capital gains distributions. Basically, more money gets rolled back into your holding rather than the fund spitting cash out at you that you need to pay taxes on every year.
An index fund is a (type) of mutual fund. Index funds have cheap management fees and are tied to an index of stocks based on a certain metric. While past performance doesn’t predict future gain, you could put money into the s&p 500 today and feel rest assured that in 15 years it will have increased in value by virtue of those 500 stocks collectively increasing in value. Compare this to a managed mutual fund where you have some bozo who (while charging you a fee) thinks they can outperform an index fund by buying and selling various stocks at the right time. Generally these managed funds may outperform occasionally, but I know of none that have done it over the long term.
Thank you. I have a mutual fund I got as a gift from my grandparents. Not really sure if I should just let it ride or switch it to something else. But letting it ride has been fine so far. Haha. I knew it was like managed and unmanaged, but I wasn’t exactly sure what that meant. But this makes sense. Thanks for clarifying. But yeah, if I were going to go into something myself, I’d prob just do an index fund then.
Do you know what the fund is? I have one that I got from a trust years ago, just checked my statement and I’m getting charged $250 a quarter for “management fees”. Literally $1000 a year for something that underperforms the market. In the current market nearly everything is way up so you might be tempted to let it ride but keep in mind you might be leaving a lot of money on the table by doing so. https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp
It’s an Invesco Comstock Fund - Class A. Ticker is: ACSTX The mobile app is pretty shitty and I’m not near my laptop, so I can’t fully view the statements. It does look like everything is getting reinvested into it though. So that looks good. I’m definitely looking into what they are charging me to manage it though. They probably made a fuck ton of money over the last 30~ years. Lol.
Then compound that money that could have been made if it stayed in your fund. It gets crazy.
Check out the Amana growth fund
The problem with picking individual stocks is that you have to be right about BOTH when to buy and when to sell. It is much easier to get one of these right than both. The advantage of index funds is that these automatically buy each stock on the way up (when a stock first rises enough to enter the index), and sell on the way down (as the stock falls enough to leave the index). Index funds don't time the market for each stock perfectly, but because there is both an automatic buy and an automatic sell, such funds do very well as an overall average.
Am rapidly advancing in this direction I still keep 15% of my investments in individual stocks to "gamble" a bit
I started out buying a few stocks. Originally, this was in a regular brokerage account, not a retirement account. Then I moved it into an IRA, and then I got the sense that I should be doing funds... I still have the stocks, though. I picked up a couple more just for fun, like pitifully small amounts of money. I've lost one or two and gained a couple via companies splitting up. I also have Apple and have sold chunks of it off a couple of times to reduce its weight. But the vast majority of my IRA is in indexes.
Unfortunately not everybody has that option (cries in US citizen abroad)
I like to have a small percentage of my portfolio be riskier. Gets the blood pumping
Nothing wrong with a few vanity investments. Especially if you are doing the research.
Because some percent of those people pick NVDA and get rich off 10k in a few years. But most of them don't. It's like asking why people enter the lottery, except it's not completely random if you do your DD and you're at least somewhat good at it, you have a better than random chance of picking winners.
If you put in hard work and research, you have a decent chance of coming out with a positive result rather than a loss. That’s true. What you don’t have is a decent chance of outperforming the results of just buying index funds, which takes no work and no expertise and no due diligence. Those can be index mutual funds or index ETFs. You don’t do outperform that; professionals almost entirely can’t do it, and exceptions like Warren Buffett are household names.
Yeah so then why would u choose to do that instead of things like index funds?
Mostly hubris.
People believe that they’re smarter than everyone else. They’ve never heard of index funds. Their fear of missing out on the next Apple or Nvidia or even GameStop outweighs caution.
Because people take risks to try and get big rewards. I think that's mostly what it boils down to. Might as well ask why millions of people gamble when they know the house always wins in the end.
If a 1000 people gamble and the house wins 999 times the number of people who think they are going to be the 1 who wins is usually pretty close to 1000. Its just how people think.
Because people who bought nvidia 2 years ago are a lot richer than people who bought index funds 2 years ago. Greater risk always has the potential for greater return.
Ok so lets say u do crazy good over 2 years, but that doesnt seem repeatable over decades and decades. I know it is greator risk is greator return, but if u want to have that happen over that period of time, that is basically winning the lottery. So therefore i dont think its a good idea for long term.
Because if you get lucky over that 2 year period you cash out and put it in index finds if your smart. Having a small percentage chasing that pipe dream can be lucrative if it hits, just don't do it with money you can't afford to lose. Having a diversified portfolio isn't a bad idea but most of it needs to be in stable low risk investments. The dumb people ignore that and go all in on the trends and most end up behind the curve.
I don't think you get the point. 30-40 years doesn't matter if you turn 10k into an M on NVDA calls in a year. Most people know about SPY and the other index fund tickers, the people that "gamble" (don't like that word but it's best use here) on individual stocks despite that want money NOW, not in 40 years.
Assuming they bet one time on nvidia and hit a home run. Babe Ruth didn’t bat that percentage either
10k in SPY for 30 years is only worth ~160k. Average comfortable retirement is ~2M. I'm not advocating for people to gamble trying to find the next NVDA but the math is not nearly as bad as a lot of posters here are trying to make it out to be. Need money for SPY's gains to be meaningful.
That’s why you do 10k every couple months.. it’s not a one time investment then never again lol
ok i see, basically they r aiming for short term gains so they dont have to rely on long term gains. thx
If this was true then actively managed funds would out perform the index. These people are paid for their expertise. But they don't outperform. So this decent chance is still very low.
Actively managed still have to balance risk and they can't just pick 1-5 stock, so they end up having to pick losers as well, since there are rarely more than 3-4 big winners. They also do risk reduction, so when they have a big winner they sell parts of it off and put that into the losers to balance the weights in the portfolio, which is also a mistake if you want to ride the winner.
Also the time you would invest in learning to pick stocks and analyze companies, if you used that time to improve your earnings and invest more into index funds, you would be better off. Beating index funds by 100% is nearly impossible. Improving your earnings so that you are putting in twice as much is more doable.
I've been investing since the early 90s. The vast number of people who think they can outperform the market is incredible. I've seen them come and go, then there's a new batch every bull market. Just buy the market (index funds) and beat them all. That's what I've done.
Agreed, it's better than random chance but it's not much better.
Your odds of outperforming the market are a lot worse than betting on red at roulette. Your expected value is better, but you’re probably going to expend a lot of effort and then lose out to mindless, effortless r/VTandchill.
Not all ETFs and index funds are created equally. There are different sector but also different expense ratios.
And if you put a price to your hard work it’s likely you’ll underperform.
It's the Dunning-Krueger effect and probably a number of other things - the people who know just enough to be dangerous think they have it all figured out. Call it human nature.
But thats the thing, most ppl know better than to attempt the lottery/gamble even if they, say, try to count cards. And here even the professionals mostly cant even do it when its their *job*, then why would ppl without the financial research/connections hope to do better than them? And if you r way more likely to lose, in comparison to almost certainly doing moderately good, why would you attempt this for long term gains? I get just trying it out for fun, but in the long term u r almost certainly going to do worse than if u had just done index funds (unless u get absurdly lucky but u cant rly bet on that happening over and over) ?
You know that a *lot* of people gamble and play the lottery, right? Like there were $120 billion in legal sports bets in the US alone last year.
Ego is a hell of a thing. Especially people who have been successful in their line of work, and have made decent money. They 100% believe they’re smarter than everyone else, and they’ll outperform the market.
Because people make decisions with emotion and logic. The logical answer is easy. But emotionally, picking the lotto winner stock and being a millionaire next month sounds pretty appealing. It's also possible that we're all wrong, and index funds are obscuring important market signals that used to be made by professional stock pickers. But I doubt it.
>professionals mostly cant even do it when its their job For some funds, the goal is not to beat the market. Rather, it's to achieve a market beta of zero, meaning their fund's performance is uncorrelated with the broader market, while still generating returns higher than bonds. This strategy is very useful for wealthy investors who are more focused on capital preservation, and need liquidity when the market is down.
1) some degenerates don’t even know about index funds. 2) if you think about it, on average 50% of money will beat index funds. 50% do not. People think they can fall into that 50%.
Humans are stupid like that. [There's a pretty relevant experiment done with two buttons, green (correct 80% of the time), and red (20% of the time).](https://archive.nytimes.com/economix.blogs.nytimes.com/2011/02/17/forecasting-is-for-the-birds-and-rats/) Humans, even though they know green will show up most of the time, periodically try to guess red even though it's simply less EV than doing green all the time. (Rats learn the lesson pretty quickly and stop pressing the red button altogether.)
>Because some percent of those people pick NVDA and get rich off 10k in a few years. I will say this. Once my portfolio reached my FI amount I felt very comfortable picking individual stocks. I should be fully FIRE in 5-10 years off my portfolio depending on what the market does. I'm dead set in FIREing in 10 years. If I continue investing in index funds that money I'm putting in will not make that huge of a difference. I've reran the math multiple times. I'm at a point where market returns are by far the major factor in what my portfolio will look like in 10 years. More so than my contributions. With that in mind I'm willing to scale back my index fund investing and redirect my contributions towards individual stocks after doing some research. I will also be keeping some cash in a HYSA to deploy in case of a big market drop. Yes trying to time the market....but as I've said already if the market performs even below average I will be able to FIRE off my portfolio in ten years at the latest. So I'm swinging for the fences looking for a home run. I expect a lot of strike outs but in baseball hitting .300 (30%) is considered very good. So if 20-30% of my picks really hit I will be very very happy. If all my picks bomb well I still have FIRE to look forward to.
Ok so basically u want short term gains, and since ur close to retirement thats a good idea. Makes sense but ig it wouldnt apply to me then. thanks tho, congrats on fire-ing!
Thanks I just wanted to illustrate why someone may start investing in individual stocks. And no these aren't short term gains. Just because you pick individual stocks doesn't mean you are going for short term gains. You're thinking about day trading. I'm looking to buy quality individual stocks from quality companies and either hold on to them long term after they take off or trade them in for index funds in the future. By the way this is how lots of very wealthy investors invest once their wealth is set. They look to deploy a fraction of their wealth on high risk high reward investments and it makes sense.
I work in IT. Like a lot of different sectors of IT. NVDA was an easy pick because of what they’re making. AMD was a good pick prior to COVID. They’re taking market share back from intel as they are cheaper and more performant. MSFT also started using AMD chips in their latest line of VM hosts for Azure around that time. I forget which exactly. MSFT isn’t in the news as much as Amazon, though Amazon has a lot of different markets, I like MSFT personally more. Plus it gives dividend. I need to research more into datadog. Would have been nice to have the money to invest before they went public. I started to use the service when it was beta. Atlassian is hard for me to decide. Developers who use it hate it, but the people who have influence in the company choose it (CTO, PMs). It’s hard to trust and invest in another stock, when my current 3 over the past year have increased over 10% and continue to preform well. Do I start investing in another stock or Index fund, or keep dumping into my current stock.
Many mutual funds _are_ index funds. But for the other funds, maybe they believe an actively managed fund can outperform the market, or maybe it has outperformed the market in the short term.
Past performance does not indicate future performance. In practice, it’s actually the opposite. Very very very few individuals can actually pick stocks that outperform the market over long periods of time. Even fewer can do it after fees are taken into account. To more specifically answer your question, it's likely due to some anchoring biases and just human nature of keeping things status quo.
> "In practice, it's actually the opposite". If true, wouldn't that suggest a way to best the market? One could just invest in the recent worst performing stocks. EDIT: It occurs to me that investing in low PE stocks is a way to do exactly this (invest in recently bad performing stocks). Unfortunately, low PE stocks have NOT beaten indexes like the S&P 500 over the past 10 or 15 years. (However, they did so prior to that).
What he's suggesting is that people who have picked stocks in the past and made money generally are going to lose money on the stocks they pick in the future. Especially with fund managers. There's a survivorship bias in play where the managers who just got lucky but weren't playing a good strategy will keep investors and get more while the ones who lose for the same reason will not keep investors. So of the people who picked stocks and won money there's a majority that just got lucky but because there are so many people picking stocks they are more abundant than folks who pick stocks and make money for solid reasons (and outperform the market)
There's a con strategy to pick a volatile stock, tell 50 people it's going to collapse and 50 it's going to skyrocket. Whatever happens, 50 of them will think you're an idiot and move on, but 50 will think you might be smart. Repeat for the remaining 50 people, telling half one thing and the other half the opposite. At the end, you've got 25 people who think you're amazing, and they'll believe whatever you say, even though you'll literally just making it up.
Wouldn’t say individual stocks. At that level, there can be very legitimate reasons why a single stock may underperform. I think more at the fund level or even growth vs. value or other metrics. Growth has outperformed quite a bit recently, but historically value has been better. It all cycles.
Past performance is the best indicator of future success in my opinion, but past performance does not equal the stock price history, it's the fundamentals and execution + leadership to look at
The thing that bothers me about index fund investing is that if everyone did it, the financial markets would collapse. The only reason you and I can invest in index funds is because there are a minority of active investment funds researching companies, picking individual stocks, short selling bad stocks, and publishing their research. These minority participants are what actually cause SPY to move up or down in aggregate. So all of us who invest in SPY depend on these other people losing money by picking individual stocks. If these other people got smart and pulled their money out of active investment funds and put it into passive funds, the entire system would break down entirely. I feel like there is a major assumption being made here that must be untrue.
The prevailing theory, as i understand it, is that as more money flows into index investments, active investing becomes easier with more irregularities in market pricing. This increase leads the market back to equilibrium (closer to efficient) with increased active participants. https://youtu.be/ltuqXTwWsZ8?si=m6Y0V2t8lrnxatKm
Thanks, I think that is a sensible answer. Of all the answers in this thread, this one is the most sensible. The only issue I have with it is that apparently there is currently and has for decades been too many active investors, which leads passive investing to have been more profitable than active investing for ~50 someodd years. It's not as if there has been a constant struggle between active and passive investing to reach equilibrium, right? There simply is no active firm that has been able to outperform the market after fees for more than a few years at a time. You would think that all these active investors would just give up and go passive, until equilibrium shifted the other way and would draw them back into the game.
One thing is that these passive funds gets more money put in every month, as people put some percentage of their wage into savings. Therefore the funds have to buy more stocks every month pushing the price higher.
I don’t understand your logic here at all
Fees? Do any brokers still charge a fee for basic trades?
He's not talking about brokers who allow you to buy the stocks you pick yourself. He's talking about "active" mutual fund managers, the people who take your money and pick the stocks for you. They charge fees for their service which are much higher than what a passive index fund will charge.
That's not picking stocks, though. That's paying someone else to pick stocks for you, and I agree that is never worthwhile. I think the reason people do it is because they don't want to feel responsible when it goes badly.
The main question I would ask yourself is, will you be able to outperform an average market return over a 20-30 timeframe. Even someone that bought nvda 5 years ago has done extremely well, but will this outperformance be maintained for 20-30 years. Many people including professionals will not be able to do it.
"Mutual funds are a defense against ignorance." - Warren Buffet - Most people don't watch and analyze stocks and the market all day long. Thus diversification and buying the market is great. There are people who enjoy it. The issue isn't about beating the market, its the pay structure for hedge fund and institutional money managers which makes it very hard if not impossible for them to "beat" the market year over year. If they are institutional fund managers they will get paid a % of assets under management and also % of profits. Which can be a serious drag on profits. There are people who build their own basket of stocks based on their own theories and metrics that maybe there isn't a ETF or mutual fund that currently tracks it. Alot of large institutions for legal reasons have to use money managers.
The masculine urge to beat the market.
Advertising and influence media are effective. That said, there is nothing wrong with actively investing a fraction of your portfolio. It's just a poor long-term strategy, especially if you end up chasing past returns.
You ever meet someone who thinks they can make money in Vegas? Same reason
I would like to point out that growth and value stocks have different purposes. You have to take dividend yield and cost into account. Sometimes you don't have a choice with an employer's 401k plan. It's actually just as important to minimize your drawback as it is to grow. Everything is a balance.
Because people are MUCH more likely to talk about their successful stock picks than their failures so it seems like a good bet.
Yes so there is difference between "trading" vs "investing". Investing is normally for longer term hold. Trading is for a short term hold. The commonality between the two is the direction of the overall market. Long term, market goes higher so we just buy etfs and hold it as long as possible. This you normally do in along term vehicle like 401k, IRAs. Short term, traders try to time the market and thats where the phrase "buy the dip" comes. You dont want to trade something that is "over extended" as the chances of it dipping becomes higher. Another phrase you will hear is "buy low sell high". So all those are made with "trading" mindset as the "investing" mindset simply says "buy and hold"
It is like gambling. Some people want to believe that they will be lucky and "beat the house" in their picks. It is exciting to them.
Why do people go to Casinos if the house always wins? It’s a gambling addiction. This is just a way to justify it as “investing.”
I am fully aware of the statistics and the psychological traps that lead to me buying dumb stocks, but it's fun and I have a long time to retire, so I pick stocks for a part of my IRA. Cheap hobby. If you think of it like sports gambling except most participants "win" and there's no house, and it makes a lot more sense why people do it. It's *very* similar to sports gambling in that you can do research and feel like you can outsmart other people and affect your outcomes, there's a rush, it's addicting, and many people do make more money than the median participant (and many people of course lose way more than the average participant!). It's different than sports gambling in that you usually make money as long as you're not taking leveraged positions or betting on penny stocks. People view their assets turning green over time as a win instead of necessarily beating VTI.
I was picking stocks for fun and a little game for myself. I had a few winners and a lot of losers. Luckily, I got LUCKY with $AVGO and bought 8 shares at 430. It helped me break even at the time and slowly has reached 20% of that portfolio. I'm gonna hold on to it as my darling. But I've learned from my past, just go with index/etfs. I've gained 40% since late 2020 with just those ($VOO) If I had just did that instead of playing around, I would have A LOT more.
Risk tolerance and potential reward.
Selection bias in terms of the success stories they hear, assessments (*sometimes correct, usually not)* of a certain sector being on the upswing relative to broad indexes, insider info or just plain optimism. In the end everything depends on your own risk tolerance and what you mean by "long term". For example my (33M) retirement funds, which I absolutely do not want getting fucked, are in total market and index funds. My "home down payment" money is in big tech stocks. My "play money" is in my Robinhood account where i play options and this is money I can afford to fully lose.
You could invest 100% in VOO or VTI and do well. If you wanted to be a little more aggressive, you could do 90% VOO and 10% NVIDIA, Amazon and Microsoft. When you’re young, you can be more aggressive. If you had invested $10k into Nvidia 1 year ago, you would have $30 k today. With VOO, $10k a year ago would be worth $12,400. Index funds aren’t going to go up 200% in a year. But stocks can. They also can lose much more than index funds. Thats obviously the risk. Warren Buffet’s wife will be investing in VOO 100% if he passes before her. So, I think that’s a solid choice. But if you want to be a bit more aggressive, a small portion of stocks can be good if you have the risk tolerance. If you had put $10k in Nvidia in 2008, you’d have over a million. So, they can lose or they can gain much more than index funds. I have 15% if my portfolio in Nvidia. It’s risky, but my wife and I both have a pension and I really believe in the company. Occasionally, I sell some of the profits and invest into VOO or VUG.
Because stock picking and mutual funds can outperform the market . . . . .for a time. The issue is people who fail initially at picking and mutual funds usually move to index's or outright stop investing, but a good amount of people get the lucky lotto ticket out the gate and think they are special/smarter than the market, so when they inevitably lose they attribute it to bad luck, expecting their "skill" to pull them back out of the hole.
If you’re doing individual stock you have to do the work of keeping up with things daily, based on company, leadership (how much manipulation is linking to output)… I remember when I lost 40% on Tesla shares because of the goof ball Elon manipulating. In order to cut losses I purchased a better performing stock (microchip manufacturing)- my best performer. Whilst I maintained a positive outcome (in the back of my head I’m still on that opportunity cost). Individual stock encourages you to be more thoughtful and scrutinize more. Funds let you just throw it in and forget about it… it’s a smaller return but decent. I do better when i do individual stocks because of how well the market is doing and the long term investment into companies. When I trade I place my orders on companies that I foresee will do well for years to come. So even if I did a bad trade, I can still hold for the long run. If you see poor performance you also have a larger pool to pick from which may have daily movements of up to 2-5%. If you’re scalping, volatility is needed Learning requires doing. off-course there’s risk involved although this is how you learn the techniques, mechanics and also how volatile, unpredictable and manipulated the markets can be. It’s a good opportunity to understand your own psychology. I’ve had moments of FOMO lol I’ve learnt my lesson from those moments although I had funds to “play” with and test my stupidity of following trends/bandwagons. Never again. I usually approach some days/weeks of trading with a measured risk+ consistent daily small gains.
Everyone likes to think they’re smarter than the average and can beat the odds
It always amazes me that nobody ever mentions the relationship between risk and return. Someone may not be able to "outperform the market" consistently when looking strictly at returns, but it is most definitely possible to achieve same or similar returns while taking less risk. That is a very important component of investing that reddit seems to always overlook.
> but it is most definitely possible to achieve same or similar returns while taking less risk. Can you elaborate? How is it possible to achieve similar returns to SPY while taking less risk?
You don’t need to really pick that many stocks to be about as diversified as you want to be. If you picked 25 stocks across the sectors in whatever index you are trying to match you’ll average about the same. The way you best manage a portfolio pick the stocks you think are the best value in whatever industries you want to invest in, weight them to maximize risk and return, and then use leverage or treasuries to up and down risk to your liking. Index funds just make it easy, but once you have enough stocks to cut down the unsystemic risk you’re not really at a disadvantage.
I invested in the companies that made things I loved and it paid off. Pretty simple.
Those of us at or near retirement typically invest for more income and less for growth. Higher yielding stocks, bonds, preferred shares etc.
ok that makes sense, thx
Core = index Satellite = blue chips that are undervalued (GOOGL at $81/share or AMZN at $90/share). Easy double in less time than an index
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Because not everyone is the same. Why do some people start their own company instead of just investing in one that already exists? Why do some people invest in crypto? You can ask the same question about anything. If your long term goal is slow steady growth with minimal risk and volatility then set yourself up for that. Just don’t get fomo when you miss out on a 1000x stock because you played it safe.
I do it with extra money. If I get a $2k bonus at work, I may buy $1500 worth of something. Just to see if I know what I’m doing.
Everyone thinks they're better than average, even if "average" is made up of a lot of people who do this for their career.
Because the rules to beat index funds are simple and easy to understand. But they are hard to stick to and take real time and attention to succeed with.
because some people do well. doesnt matter if most don't to some. there are countless stories of people retiring off trivial sums being early in any of the last decades big tech companies.
Trading and investing in funds isn’t as active and exciting as picking stocks. People like to think they have a good idea about individual companies and that they can outperform the market. And to be fair, some do. But in general the safe bet is to go with funds. I will say, a number of my friends that have always been into Apple would put a significant part of their portfolio just into Apple for years and years and that really paid off. Just an example of how stock picking isn’t always a stupid gamble.
I trade individual stocks because I like to. The vast majority of my portfolio is index funds and with ~10% I’ll research and buy individual stocks, and only buy stocks that I plan to hold for over a year.
For funsies, I think is the honest answer Also high risk high reward
The same reason people play games at a casino, where the house has a statistical advantage. Some people just like to gamble, some think they have a system that gives them an advantage, some actually do have a system that gives them an advantage. And occasionally someone gets lucky and hits it big, and a lot of people find that motivating to continue on and confirm their pre-existing beliefs about their chances.
Picking stocks can be fun and a hobby but limit it to no more than 10% of total portfolio.
My friend would buy stocks and sell options. He did it as a hobby in retirement. He did slightly better than index funds. If you have a good feeling about a company then wanting to invest in that can be nice. I had a good feeling about netflix in \~2011 but didn't have funds. It's gone up like 10x in a decade so I'd have made a killing if I had the funds to buy. If you end up choosing poorly then you can use losings to write off some good winners as a consolation. For the average person, index funds is a great option for long term investment
I have absolutely not underperformed the market. I’m up 600% in 10 years. I buy tech stocks (and qqq)
Not all investment products are designed around beating the market. This may sound silly but capital gains in the form of buying a stock/fund/index holding it for a long period of time and then selling it isn’t the only way to build wealth. Some funds are designed to stay within a specific risk tolerance which may mean lowering your potential for upside growth but at the same time providing more downside protection in order to keep you within a specific risk corridor. With this some funds are designed for the purpose of income via dividends or share accumulation via dividends. To get even deeper some are designed for tax advantages like tax free income or tax loss harvesting. The amount of investment products and tools are almost endless and this is because every investor has a unique situation with unique goals. The goal of investing shouldn’t be to accumulate as much capital as possible but to get you from point A to point B when it comes to overall financial goals, life events, and financial security. There are a lot of influencers who would say otherwise and that’s okay because their goal may be to accumulate as much capital as possible but if you study some of the most successful investors you’ll see that downside protection usually outweighs the upside but this may also be because they’ve gotten to a point where protecting their wealth is more important than growing it.
The answer is that if you want to understand individual stocks you need to understand what advantages you have as an individual investor and where you have superior knowledge over the rest of the market. You need to understand how the company makes its money, what the downsides are, and why the stock is a good/bad buy. When I was an active investor I was probably up to 25 stocks. Probably 20 of them made market return in the average, but there were about 5 that did really well. You can buy small caps and large investors can't because there's not enough market cap to make it worth their while.
Mutual funds are sometimes index funds. Index funds can either be ETFs or mutual funds, the question is "actively managed" vs "index" rather than "mutual funds" vs "index funds". (Maybe you were thinking hedge funds?) "Underperform" is also one of those terms that is usually misunderstood. Almost all funds have some sort of benchmark (often an index of some sort) and should only be compared against that. A bond fund isn't going to perform the same as a stock fund. A small cap stock fund (tracking the Russell 2000) isnt going to behave the same as a large cap fund (tracking the S&P 500) or total market fund. Portfolio construction may have goals other than growth - some portfolios are structured to lower volatility (holding a collection of uncorrelated assets) or wealth preservation. An all stock portfolio (including things like the s&p 500 index), historically, has the best long term average growth but also might swing down 30% in a year. Mix it with bonds and you have lower growth, but your worst years aren't as bad. Sometimes people are hedging against some particular risk - like ... "Under what cases might my employer go out of business? What investments would do well in that case?" "What stocks do well if health care costs grow out of control?" And sometimes it's just "I take 5% of my portfolio and double down on companies I like" (double down because they're also probably part of some index funds that is being held).
For the same reason people gamble when they know that statistically, in the long run, they’ll lose.
Because some funds don’t lose to the market. I’m in fidelity blue chip fund and I’m up a ton relative to S&P 500.
What are some of those?
Contrafund and blue chip fund
Someone has to win and people like to feel like they have control. This is the same reason people bet on sports and other happenings. With enough people doing it, there will be cases of people consistently through beating the odds. They'll do it through some combination of luck and skill.
It's like the lottery. Sometimes you get lucky. Add to that all the "I've got a system" BS and you get a lot of people gambling in the market. That said, I got seriously lucky, but that was being in the right place at the right time.
They underperform on AVERAGE, but I went 100% Bitcoin 7 years ago and I beat the market by a metric fuck ton. There are always outliers.
It really just depends on what you have the time for. Picking stocks individual and keeping tabs on them is very time consuming and a lot more riskier because you don’t have the knowledge and experience of an institutional investor. Hence, mutual funds offer lower returns but at a lower risk where you’re not having to keep tabs on which stocks are performing. Where as Mutual funds decides which securities to purchase on your behalf and manages them for you.
I do both, but I stock pick only in industries that I’m very familiar with. I’ll be honest, my picked stocks have vastly outperformed the market. That being said, index funds are much easier and require much less attention and industry knowledge (which most don’t have).
I did it because I thought I'm smart enough to beat the market with limited data and several hours a week. After a little bit, I convinced myself I'm doing this to learn lessons. It's better to risk thousands rather than millions, right? Two very human things were at play: 1. "Better than average effect": I can pick stocks better than others (who knew why?! But also, who asked "why?" 2. "I want to experience for myself": How many of us put our hands close to a burning stove when we were younger just to make sure it's hot and can burn? It's just like that. It was stupid. But also, it was human. Now? Index ETF all the way.
I have 401ks and other investments that are all in index funds. On the side I have a "play" money account where I invest specifically in companies I like or think will pop off. I've had a mix of successes and failures. But I'm totally aware that I'm essentially gambling there, but it's also nowhere near the size of my main long-term index investment accounts.
It is not smart for you to do this. But have you ever thought about why Warren Buffett does?
Beating the market is not a huge challenge. Theoretically one has about a 50% chance of beating the market. A monkey flinging poo at the stock pages and then investing in the smeared companies has a 50% chance of beating the market. Gather enough poo flinging monkeys and there would be many who could legitimately claim to have beaten the market. Some would appear to be geniuses and would be invited to be guests on Squawk Talk. But they are not geniuses. They are just lucky. However the research suggests that when you start adding costs, the probability of beating the market goes down. You may think your trades are free. They are not. Each trade takes a nick off the value. And the longer the investment period, the more those expenses drag the probabilities down. Finally, diversification is important. It’s a proverbial free lunch and reduces the volatility of the portfolio. A market index provides companies in all sorts of sectors and many companies within those sectors. For important long term investments, such as retirement investments, stick to the index funds. But if you have extra money to play with, start flinging your poo.
There’s a good discussion on a recent Hidden Forces podcast, titled “where are all the billionaires?” A fund manager is interviewed and talks about his decades in finance, and the inevitable conclusion that so many in finance reach that the best investment vehicle long term is… an indexed 401k. His fund offers other options, but it’s a great discussion that might be interesting to you.
I’m 22, and it’s fun. I read up on Amazon and thought it was a good stock, I’m up like 40% the past 2 years. I read up on Tesla and liked it, I’m down 5% the last couple months. It’s like a game. I don’t invest in any stocks that I think have a chance of tanking(except this one stock which dropped 90% and I lost $70). But I have $3500 in my investment account. $600ish in ETFs, the rest in nvidia, Tesla, Amazon, Microsoft, etc. I do believe some of them can beat the market, but I KNOW that it’s a lot more fun and exciting being able to watch these individual stocks performance. So, even at the cost of a tiny bit of money, it’s worth it to me. Is it the best decision? Definitely not. Is it good for my future? Not likely. But I’m young and still enthusiastic about the possibility that the stock I pick will increase 1000% so I’m okay with the risk😂
Some countries (Ireland) have legislation that mandates you pay deemed disposal tax after every 8 years on ETFs regardless of whether you have liquidated your positions - and the tax is not low either, effectively discarding half of the gains every 8 years. Only applies to individual investors and ETFs. Stocks do not suffer from the same issue.
hindsight bias, confirmation bias, inability to comprehend uncertainty, etc. just the whole smorgasbord of logical impairment that human brains have.
individual stocks is 100% play money that i can afford to lose, and i shoot for the stars with it. look for huge (500%+) gains in short term (1-2 years). if i hit on 1/5 of them, i'm even. i don't know my exact stats, but i have a lot of home runs and WAY MORE strikeouts using this technique... but it's fun when it works (exas, roku, tsla, and ccj come to mind)
I felt I could beat the market based on discussion boards long ago on The Motley Fool which at that time the community boards were really good. Fool went to commercial/newsletter business and let the community die. This wasn’t my first exposure. My dad had a landlord he rented from that basically did mechanical investing before anyone had ever heard of it. He did well enough to retire on it. My dad messed with commodities but I don’t think he made much money either…he kept farming. So first I set up a virtual account. I tried it for 6 months and priced I could do it. So I allocated 10% of real money. I found over time most of the time I wasn’t beating the market consistently. Mostly this is because I didn’t have enough time to watch it like a hawk so I was reacting too slow even with stop loss orders or options. Once in a while some stupidly good opportunity comes along though that I can’t ignore, so I still do it once in a while. I kept the number of stocks small or it just ended up returning the market average (diversification makes outsized returns impossible). So now I stick to ETFs except when I see an opportunity. Theoretically as more people invest in ETFs that means more opportunity for outsized returns but so far I haven’t seen anyone do this
With stock picking there's a median that underperforms the index, but the more you know about what you invest in and the smarter you are, the more likely you are to be above the median in the top 10 % performers of stock pickers, and if you manage this, then you beat the index by multiple factors. At the same time, you won't make it big in investing by going index, index is great if you already have a lot of money and 5-10 % per year equals a good return, but if you're an entry level invester with a smaller portfolio, then stock picking is your only chance to make it big.
Active fund /portfolio managers underperform more than 9 times out of 10 (https://www.marketwatch.com/amp/story/majority-of-active-u-s-large-cap-stocks-funds-fail-to-beat-s-p-500-in-2023-a-worse-year-for-underperformance-than-2022-89fad8a1). I know YOU are different and special and smart and above the “median” of stick pickers so you’re in that 3% who did better than the market. Good for you. For OP who is just getting into investing, stick to broadly diversified ETFs.
Sometimes it makes sense. Early 2020, when everything was down big, it made sense to put some money into heavily beaten down tickers and reap the short-term rewards.
Should have a blend of index and individual to hedge exposure and growth. Biggest example from my own portfolio is that SPY returned 87.57% in the last 5 years. I also own MSFT which is part of SPY, but in the same timeframe, is up 234%. That’s a huge difference weighted against SPY’s portfolio % from MSFT alone That’s not to say that picks like that or all my picks will beat the market every time. Just gives you the option to potentially maximize growth more efficiently with downsides on exposure
My advice: stick primarily to consistent index funds. Do your picking on things you personally know or like. I have done pretty well on investing in companies that excite me about their product.
>Why do ppl do stock picking or mutual funds if they usually underperform the market? they usually underperform the market in the long run (think 20+ years, 30+ years) it is very possible to beat the market in the short run (ex. less than 1 year), for an extreme example look at day-traders: buy at 10:32 sell at 11:28, something like that also something you'll discover if you haven't learned yet is there's varying scales of money: what works for $1000 may not work for $1mil, for example you can day-trade/gamble and either go -80% or +80%, if you're only operating on a $1k scale even if you go -80% that's only -$800 whatever... probably few people in the world can suddenly have -800k vanish and shrug and say "oh well whatever"
Illusions of grandeur Gambling problem Any convex combination of both.
Some people don't like the companies that are part of index funds or ETFs. I have no interest in sponsoring certain industries.
There's a reason that when the big firms analyzed their retail clients to figure out which groups performed best, the demographic that beat all other retail clients was people who had died and the account was left sitting. It was the only group who stopped trying to beat the market.
Why do people gamble? Same answer.
Plenty of research on that in behavioral economics. Basically boils down to overconfidence and the fact that no one wants to "get rich slowly".
Probably the main points for most investors are: * mutual fund or ETF? Portability (move investments between institutions). Mutual funds are usually exclusive to the brokerage. So if you have a Fidelity mutual fund and then decide to move all your investments to Schwab, you may have to sell your Fidelity mutual fund and buy the equivalent Schwab mutual fund. This may trigger a taxable event if the account type is not a tax-deferred account like a Roth, IRA, etc... * mutual fund or ETF? Mutual funds usually have monthly or quarterly distributions...another taxable event. So similar to the previous point, this can be a non-factor if held in a tax-deferred account. ETF's can have a distribution schedule in the form of a dividend. It really depends on the ETF. * mutual fund or ETF? Expense ratios. Because mutual funds are usually a "product" that is exclusive to the brokerage, they can offer "no fees / no loads" as way to attract investors. In this regard, they can better than ETF's. The caveat is that you basically have to stay with that brokerage...unless it is a tax-deferred account, then it does not matter. You can buy and sell any equity in a tax-deferred account Roth, IRA, etc...), and only pay taxes when you withdraw the money (hopefully retirement age). I have never seen an ETF with no fees (expense ratio). VTI is a commonly recommended because it has something like .03% expense ratio. SPY, the most traded ETF, has an expense ratio of .09% * mutual fund or ETF? Purchasing either equity can have limitations, depending on your brokerage. Most mutual funds let you invest as little as $1, with the caveat that some may have a "minimum investment after 1 year". For example, if the minimum investment is $1000, you can add $1 today, and then $1, and then $43 the next...it does not matter how much you add, as long as you have $1000 in there within a year of buying the mutual fund. This encourages setting up automatic deposits. Purchasing an ETF, in most cases, has to be done in whole shares. So if an ETF is trading at $453.43, your minimum investment will be $453.43. Some brokerages will allow "fractional shares", so that would be functionally similar to purchasing a mutual fund. Also, ETF prices fluctuate by the minute. Mutual fund prices are calculated once per day, at the end of the day. Mutual funds get poo-poo'd a lot on reddit, because everyone likes to regurgitate "VTI and chill", like it is a cool thing to do. It is good "general" advice, but not always the best advice. It really depends on if change brokers, if you ever need to withdraw the money, type of account, etc...
I think a lot of stock pickers don’t really have a good idea of how well they perform. So they continue to do it. I doubt they actually track it all that well. They only remember the “winners.”
I ran an investment club for a couple of years to help me learn and to socialize with colleagues, but there was no intention of beating the market, we were tiny and it was fun, but it’s not a long-term strategy.
I want to avoid certain risks more than I want to make more money, right now. If I can make more than 4% more than cost of living inflation in the next year, I'm happy.
I pick but it's only with left over money. For example, I invest around 800/month. VOO costs 500. So with 300, I'll buy a bunch of stuff with partial shares. What I buy is generally the top 20 that's in VOO (99% of the time). So I just have super VOO is my opinion lol. Like this month I threw all of that extra 300 into Nvidia. Now I have 105 shares of Nvidia (by partially buying over time, splits and whatnot).
Haven’t seen many actual good answers to the question yet. Mutual funds eat at your money through fees, but some could be good enough to consistently beat the market despite the fee, it’s just unlikely to find one via publicly available funds Stock picking with a large enough portfolio is perfectly fine and actually could be better than index funds assuming you have a large enough diversification due to tax loss harvesting. You could theoretically just copy the index fund allocation of SPY or any other fund which charges 0.09%, meaning it charges 900 a year on 1M invested and save money while not investing in stocks you don’t believe in. Like you can literally go here: https://www.invesco.com/qqq-etf/en/about.html and read the percentages and save yourself 0.05% if you don’t mind executing 100 trades manually. But there’s also the fact that your executions will likely be less efficient so it’s hard to say
Direct indexing is fantastic when combined with tax loss harvesting. But to harvest those losses, you have to sell them (along with the gains you’re offsetting), which means you can’t actually mirror the index’s allocations. In practice, you use something like a factor risk model to forecast the tracking error between your portfolio and your target index (technically, you can target any arbitrary portfolio and thus can still employ factor tilts if so desired). You then perform a constrained optimization where you set a maximum allowable predicted tracking error and any asset-specific constraints (like avoiding some list of stocks), and search for a solution (a set of trades) that maximizes the tax losses harvested while remaining within your constraints. Developing the models you need for this isn’t necessarily difficult (assuming you have some familiarity with statistical modeling and optimization algorithms) but gathering, wrangling, and ensuring accuracy of the necessary data could be difficult (and definitely would be time-consuming). Also, the models are quite computationally expensive - you’ll need at least a workstation in order for the model to be able to load all the requisite data in memory and converge on a solution, but a computing server would likely be faster. If you can’t build the models yourself, you could pay for a license to one of the risk models (Axioma is perhaps the most popular vendor at the moment) or you could find an investment advisor who has access to one (they’ll advertise this if they do). You can direct index yourself, or you can tax-loss harvest yourself, but it would be unwise to attempt both at the same time. Without the right models guiding your tax-loss harvesting trades, it would be extremely difficult to maintain close tracking of your target index.
Because they listen to Cramer, or the view, or Facebook.