Long-time readers and avowed Bogleheads will not be surprised to see the title of this post, however, they may be surprised by the data presented. Way back in 2011 — two months after this blog started — I told you not to take uncompensated risk by buying individual stocks. Here is yet more data that supports that recommendation.
JP Morgan took a look at how difficult it was to pick individual stocks. They looked at data from 1980 to 2014 using the stocks in the Russell 3000 (98% of the US market.) What they found was the following:
Individual Stocks Have a High Risk of Permanent Impairment
40% of stocks would, at some point, suffer a “catastrophic decline.” This decline represents a 70%+ decline in value from which the stock price DID NOT recover. At all. 40%. This isn't like buying the entire market where you wait out the bear market. The company just goes out of business. 40% of companies over a 35 year time period. The percentage was higher than 40% in the Telecom, Biotech, and Energy sectors.
Individual Stocks Underperform, On Average
67% of stocks would underperform the Russell 3000. The index returns (and thus those of a mutual fund tracking the index) heavily depend on the relatively few winners for their gains. By only owning one or a few stocks, your risk of missing out on those winners is quite high. Even actively managed mutual funds do better than 67% underperformance in a given year (although it is even worse over the long term.)
Helping baby sea turtles reach the sea is way more interesting than investing
Lower Returns AND Worse Risk Control?
Wait, it gets worse. It turns out when you start looking at the volatility of the stock prices of individual stocks, that things get even worse. On a risk-adjusted basis, it turns out that 75% of the “concentrated stockholders” they looked at would benefit from additional diversification. I'm surprised the number was that low. So even those who buy a whole bunch of individual stocks, still lack adequate diversification.
Good Investing is Boring Investing
I often run into people who list “investing” among their hobbies. I can't help but think about what a stupid hobby that is. Don't get me wrong. I think many of the financial concepts behind investing are interesting. But the actual activity? You've got to be kidding me. If you're enjoying this, you're doing it all wrong.
I mean, let's think about what I do when I “invest.” I log into my 401(k) and see there's a chunk of money sitting there that has been taken out of my paycheck. I open my spreadsheet and see that I'm a little low on US stocks. So I go back to the 401(k) and place an order to buy as many shares of VTI as that chunk of cash will buy using a limit order at something close to the current price. A few minutes later, I see my order was filled. I update my spreadsheet a few weeks later when I get around to it. What's fun about that? Nothing. It's one of the most boring things I do all week.
So if you're enjoying investing (researching, buying, selling, discussing etc), at least in the stock market, chances are good you're spending a great deal of time and effort engaging in an activity that is actually decreasing your returns. Do yourself a favor and get a hobby that makes money, a free hobby, or at least one that costs you less than stock picking. You know, like boating.
What do you think? Do you buy individual stocks? Why or why not? What percentage of your serious money do you have in individual stocks? Comment below!
Hi Jim and anyone else who has played this or thought about this? Instead of playing single stocks what about playing 20-30 and trying a method that atleast uses some method for trying to find value. In reading some of Jim’s recommended reading Andrew Tobias touched on Joel Gambitt’s calculations (magicformulainvesting) for selected 20-30 under-performing funds. I have not read Joel’s book but I know he says his returns with this method are significantly higher than traditional index funds. I know in other posts this has been touched on and it seems like this goes in line with some of the “small-tilt” stuff Jim discusses and finding hidden value and DFA people discuss.
I know this would a lot more volatile, but Jim being that you do this Website as part of your income and enjoy good discussion–Have you ever thought about taking 100k ( or whatever makes sense to justify the commissions on 40-60 trades/yr)of your portfolio and trying this out for a 10 yr run and see what returns you could make and posting outcomes for ongoing discussion? In the past you have posted your asset allocations and it is very diverse . Have you ever thought about moving a percent out of “emerging markets” or REITs, or whatever you consider a higher risk Asset in your portfolio and giving this a run?
I know your counter question to me is probably.—Why don’t you try? My answer is I am not to that point yet in my wealth building phase to have 100k or more to risk.
Joel basically just tilts to value. You can do that too with a value index fund. Why go through all that hassle to buy 30 when you can buy 3000 in 30 seconds? If you (or anyone else, this isn’t personal) can really beat the market why are you practicing medicine instead of managing billions?
I already tilt to value.
If I’m going to venture into active management I’m going to pick a much less efficient market than US publicly traded stocks–I’d be in real estate or websites.
“If I’m going to venture into active management I’m going to pick a much less efficient market than US publicly traded stocks–I’d be in real estate or websites.”
I think this is a good statement to make and sharp.
I do think the whole “Why aren’t you making or managing billions then”? is a false choice or lazy example to try to prove your point. Curt actually answered that and there are many reasons why that may be.
I think your best advice would be to say, if you have a keen interest and know about valuation, there can be reasons to invest in individual stocks (look at Curt’s comments above if anyone is interested in those reasons). For most people, though, especially doctors, that’s not the case and slow growth with the kind of value they have is more fitting. Just leave it at that.
I don’t know why you think it is a false choice/lazy choice. I think it’s a great question for someone who thinks they can pick stocks well enough to beat an index fund of those stocks. I replied to Curt above with why I thought his argument was not correct. So obviously I disagree with your advice that docs should be picking individual stocks. Maybe you get lucky with them. Maybe the “fun factor” makes up for the lower returns. But if you truly are talented enough to pick them, why do it just for yourself with a few hundred thousand? At least manage money for your friends and family. It doesn’t take any more time to analyze the stocks for a dozen people as for one.
This is good information, that said I only invest in individual stocks. I have very specific requirements including getting dividends to support my retirement. I don’t trade, use options, etc. I have lost money by investing as others think best in say mutual funds. At least if I lose money (I have made a few bad decisions) I made the mistake not some “professional”. I don’t think this is good for others, just me.
Do you track your returns against an appropriate index, including the value of your time? How are you doing over the long run? If you are beating the index, why aren’t you managing the money of others? If you are not, why do you persist in doing it with your money?
I agree with this post with one exception. If one has insider information (by this i mean info that very few other people have) then buying (or shorting) an individual stock might be productive, assuming you do not get caught doing something illegal.
Insider trading is illegal, whether you get caught or not.
The allure of individual stocks is strong indeed. It’s quite hard to resist the allure when everyone has a friend of a friend who invested in Netflix of Facebook early and made a “killing”.
It’s clear from the data that this is the exception to the rule. Thanks for the reminder.
The few stocks that I own individually represent about 3% of our portfolio, and stress me out ten times more than the rest of the portfolio combined. I’m looking for a good time to sell them, but that’s a stressful thought experiment in and of itself.
— TDD
An interesting aside… I’ve noticed a surprising number of people (not huge number, but a handful) in the DIY investment world who seem to index for the most part, but for some reason also include a sizable position with Tesla or Berkshire Hathaway. When pressed, many note the supposed promising future of these companies, and even might point to some data. But in the end, it really strikes me as emotionally or personality-driven. I suppose I’ll continue to be boring with my investing!
Guilty…. my small investment of Tesla has not done so well, and is my most stressful investment.
I bought it, as you said, for their long term potential.
But as Elon himself has mentioned, they were at risk of disappearing as a viable company just last year.
So is the possible reward worth the risk for me? I don’t think so. (But some part of me hopes that they’ll prove me wrong here.)
— TDD
I started buying Individual stocks in the late 1980’s. I had read about about Dividend Reinvestment Plans (DRIPs) and my mutual funds were not doing well. It has turned in to a life long hobby that I enjoy that pays well. Since then I have put 4 childeren through college (1 teacher, 2 nurse’s and a physician) paid off one and half houses and make enought in dividends to retire. That income from dividends will be about $150,000 this year in my wife and myself IRA’S, 401K and taxable account. As mentioned I enjoy it, but can now see the advantage of also having passive manage index funds. The secret is to figure it out yourself, keep fee’s close to zero and buy stocks that make sense. There is aways a line at Home Depot and McDonalds, AT&T and Verizon will both be here in 100 years along with Coke Cola and Pepsi. All blue chips, no junk, just keep an eye on. That’s just me, most people dont want to fool with it.
Interesting prediction about the future. It’s verifiable, but probably not by you or I. I doubt either of those companies will exist in their current form in 100 years given how many stocks have disappeared in the last 100.
Many docs think they can beat the market but if you have read enough you know its a fools game to buy individual stocks
think of all the companies that have left the planet for good
I have a sense that many non-bogley people question the value of low-cost index funds, yet feel more secure in self-selected individual stocks, often with a recognizable household name. The psychology of abstraction tends to produce irrational choices.
I don’t get the logic of “play money”. Children play with toys. People who act like adults do not play with money.
As for Curt’s claim that increases in indexing will lead to impaired price discovery- If they believe that then active managers should do all they can to encourage more people to invest in cap weighted index funds. As price discovery is impaired there will be more mispriced securities for active managers to identify. Their jobs will get easier and easier as more fools go passive.
This will lead to active managers consistently beating the index.
Oh, wait, active managers cannot beat the index. At best SOME active managers will beat SOME OTHER active managers. Those who come out on top of the competition with other active managers may or may not beat the index.
So the trick is not to hire any active manager.
Only hire the good ones.
Those good ones will find it easier to demonstrate performance persistence as the indexes become easier to beat. So sit back, relax, identify some who have beaten the market by enough, long enough, to statistically reject their performance as chance. Then invest with them.
So far, hard to find anyone who passes that test, but it will become easier as indexing spreads.
It is morning in the financial markets for good active managers. All they need to do is push indexing.
I buy individual stocks in my brokerages and index funds in employer sponsored retirement accounts. I don’t know what the big deal is if you find it interesting and are fine with holding fundamentally sound companies for long periods of time through the worst of sentiments and can buy when there are significant drops. I’m not really anxious about how my stocks perform so it’s more of a fun thing. I don’t spend days doing research either…just some high level research and going through a list of factors and reading some reports from my brokerage. I’m probably just lucky as we are in a bull market with occasional corrections presenting great buying opportunities. I’m not trying to beat the market either. As stocks are more volatile in both directions compared to the broader market, I’ve always felt that I get better opportunities during market panic or a sustain bear sentiment. Most of my individual holdings are way ahead of the S&P500 during my holding period except for some positions that I bought over the last two years which are not up by much or are underwater. Even the most dud stocks like McDonalds that went no where for years outperform the S&P500 during my holding period since November 2012. Then you can have a stock like Disney which did great for some time and then went no where suddenly shoot up by some 40% over the last two years compared with the ~10% of the S&P500. And then you could have a stock like Abbvie which grew by some 300% since Jan 2013 giving off growing dividends but collapse by some 50% since last year but you would still be up by ~100% excluding dividends. And then you could hold stocks that were once considered great like Kroger, CVS, Walgreens enter a multiyear period of poor performance even though you would be in the green due to your cost basis.
IF the day comes when I don’t have fun doing this, I’ll start putting new money meant for taxable brokerages into index funds just like I do now for retirement accounts.
So if you can pick stocks well enough to beat the market and expect that skill to continue going forward, why not do it with your entire portfolio and heck, those of other people? It’s not logically consistent. Either you are skilled or you are not. If you are, then make gazillions. If you are not, then join the rest of us trying to get the market return.
But data is not the plural of anecdote. Track your returns, figure out if you’re skilled or not, and proceed accordingly.
>>So if you can pick stocks well enough to beat the market and expect that skill to continue going forward, why not do it with your entire portfolio
I don’t have any particular skill. I think it’s the luck of being in a bull market. I don’t know if I will beat the market going forward and I don’t really care if I do. I’ve made a lot of money for my age so I’m into it for the fun of it at this point. My retirement accounts are tracking the market anyway. I would have gone all stocks with my retirement accounts too if I could but the employer sponsored retirement accounts allow you to just have their pre-selected funds. And I have around a dozen employer sponsored accounts that I manage. There’s one 457 brokerage account though I’ve had for the last four years where I maxed out for only two years and that portfolio has easily topped the S&P500. We’re in a bull market and some very common name large caps have been easy multibaggers. When the downturn comes, we’ll see if they’re worth adding more or whether to book profit and exit. People make it sound harder than it’s supposed to because they are afraid of losing money.
>> why not do it with your entire portfolio those of other people?
Yes, I do it for my wife and my children too. They never bother me with MTD returns and YTD returns and the government doesn’t require I get my licenses, register with SEC, provide documentation and tax returns and a host of other compliance requirements. I don’t have to market to them either and worry about other overheads.
>> It’s not logically consistent.
How so? I’ve done a good job with my mowing my lawn, having a vegetable garden and driving. It’s not logically consistent that I should now start a lawn mowing company, sell produce at a farmer’s market and sign up for Uber and deal with random human beings.
>>Either you are skilled or you are not.
I’m not skilled. It’s mostly the benefit of being in a bull market after a very bad recession. But you don’t need a ton of skill if you have a long term horizon….just basic math, common sense and wherewithal to stomach big downturns. Heard of Peter Lynch right?
>>If you are, then make gazillions.
I’m making gazillions with my day job. Why start a lawn mower company, sell to a farmer’s market and register for Uber and convince strangers to pay me a gazillion more.
>>Track your returns, figure out if you’re skilled or not, and proceed accordingly.
I’m just sharing my experience by looking at most of my equities within their holding period. I track all of them on yahoo finance. When people generally ask me, I recommend index funds. I have no clue what their temperament is when it comes to buying assets and holding them during volatility so I never tell them to go and buy a stock.
I’ll try one more time to explain. You say “I did well because it was a bull market.” That is irrelevant, because your comparison is to the market. Either you’re beating it or you’re not. If you are and you believe it is due to skill, you should at least do it with your entire portfolio, if not billions of investor dollars. If you are not, you should not do it with any of your portfolio. If you are doing it for fun, you should at least calculate out the cost of your fun. Is it fun enough to pay $50K a year in underperformance to do it? Probably not.
>>If you are and you believe it is due to skill, you should at least do it with your entire portfolio
But my portfolio also consists of employer sponsored retired plans which I believe you are aware that most are restricted to some ~25 to 50 funds so you can’t buy individual stocks.
>> If you are not, you should not do it with any of your portfolio.
Why not? It’s been working for me personally since I first started in 2005.
Fair enough on the 401(k) assets.
I am with you Alexander for all the mentioned reasons. Most stocks in a MF are just there doing nothing. I like the stocks that are doing better.
I enjoy following the herd and reinvesting the dividends.
Might be a necropost but….
>>>>>I’m making gazillions with my day job. Why start a lawn mower company, sell to a farmer’s market and register for Uber and convince strangers to pay me a gazillion more.<<<<<<
I am assuming your day job is a doctor but does that really pay as well as a fund manager? I would think it is not close.
The point of being a fund manager is that you would be a legit multi millionaire if you are as good as you say you are.
Mowing a lawn / driving a taxi cab for uber are basically minimum wage jobs. Millions of people can do this job as well as you can apparently. The same would premise hold true if you started a business in said industries i.e a lot of competition.. That is not the same skill set which you claim to have — which puts you ahead of many professional money managers. Something doesn't add up with your story.
Hello!
The “making gazillions” was originally quoted from an earlier response from someone else. The usual argument is that if you are good at X, then go start a business and make “gazillions”. This is just a hyperbolic strawman distraction. We are all good at some things which professionals can also do. That does not automatically imply we need to scale up into a business. Operating a registered business is a totally different ball game. Anyone who tries to start out independently in the financial advisory business knows this now that there are a lot of bogleheads and DIYers who grew up on the internet that can do whatever tasks they once got paid a premium for. WCI himself uses the analogy of lawn upkeep when investment advisors compare their work to the work done by doctors.
I’m not a doctor. My wife is. I’m a software engineer. Our networth is in the mid 7 figures. Market returns have been pretty easy during this bull market. The March lows have made it all the more easier. This old post came back into my email after your post. If you read my earlier posts, I never claim I have a skillset that makes me professionally qualified to do what fund managers do. My main argument was that controlling behavior, doing simple research for long term holds and being in this bull market has made me very lucky with my stock holdings. I’ll also add unprecedented monetary and fiscal policy to that mix which has clearly juiced up returns in the markets. I’ve also said that things could go south any time and that’s not a big deal for me. This has been the best time to be a retail investor where you have a confluence of so many factors working in their favor. Looking back especially after whatever happened from Feb to April and after, following the same approach, this has been a spectacular year for outstanding returns in individual names. 2019 was also a pretty spectacular year. 2018 too because you just had to buy every panic. You just had to zero in on some popular stocks that had stories behind them for the longest times that expanded in market cap quite rapidly when the eventual recovery came. It’s been the story for this bull market with easy money policies.
>>which puts you ahead of many professional money managers
Professional fund managers and institutional investors are a totally different ball game. This shouldn’t even be brought up in this discussion. For eg, bogleheads do better than many professional money managers. Compare passive holders of common index funds to the pathetic returns of the largest pension funds or hedge funds. You can’t even compare them to a retail investor. At the most basic level, they don’t even have the same goals or time horizons with what they do with the money they are responsible for or the freedom to do what they *can* or *should* with that money.
Having said all that, in our estate planning instructions, I’ve advised my wife to transition to index funds if I’m no longer in control. I would advice index funds for everyone including myself if I wasn’t interested which is why we have a mix of ~35% index funds (employer sponsored retirement accounts) and the rest in individual stocks (brokerages).
You keep going back and forth.
First you say you got lucky.
Then you say whooping the market is easy – “You just had to zero in on some popular stocks that had stories behind them for the longest times that expanded in market cap quite rapidly when the eventual recovery came.”
Which is it? If the first, then no big deal and congrats on your luck. If the second, the data suggests it is far harder than you seem to believe to whoop the market and you ought to scale up and help the rest of us out and make yourself a gazillion dollars. There’s no reason you can’t scale up significantly for any publicly traded stock, especially one in the S&P 500.
Trust me, there is plenty of market for a professional fund manager who can actually beat the market over any time horizon.
Are you saying that luck and some leg work don’t go hand in hand? That’s pretty bold. Your guest Morgan Housel gave the example of Bill Gates on your podcast where a bunch of events worked in his favor. There’s also a behavioral role that favors those who don’t panic or chase the latest stock tip. I agree with you that the data suggests it’s far harder.I had the luck of being in a bull market with easy monetary policies and then fiscal policies that favored tech stocks where I was overweight among others. 20% of the S&P500 consists of these megacaps. Every correction was a buying opportunity because the rebound was even faster. Tech stocks have been a no brainer for more than a decade since I work in the industry. They may or may not suck in the next decade. Who knows. If I did this in the late 90s to 2000s, I would have had horrible returns. Microsoft (MSFT) took more than a decade to return to its pre-dotcom shareprice and Cisco (CSCO) still hasn’t. I don’t know why this is so complicated to understand. You only had to overweight a few stocks during this bull market or even halfway into it to get multibagger returns over five and ten year periods and some of those names have been on everyone’s radar every year for the last 10 years.
This whole “if you are good at X, then start a business doing X’ is just a red herring. Like I said before, just because I can do a descent job with my lawn doesn’t mean I’m going to start a lawn mowing business. Which is the same illustration you’ve used when you hear financial advisors compare their professions with what doctors do.
We’re talking about two different things.
When we talk about someone being financially successful there are certainly both elements of hard work and luck.
When we talk about someone successfully beating the market by picking stocks it has nothing to do with being in a bull market or a bear market. The luck we’re discussing is whether someone truly has skill to identify winning stocks or if they just got lucky. Obviously it spends the same either way, but you don’t want to double down on good luck! Yes, it’s easy to identify the “multi-baggers” retrospectively. Not so easily prospectively. But if you want to do it, just list them here and let’s come back to your list in 5-10 years. Every time I keep a journal of my predictions I discover I’m terrible at predicting the future.
Your lawn example is silly. If you can’t already see the difference between managing your portfolio–> managing a portfolio of $1 Billion and mowing your lawn—>mowing 200 lawns in every city in the country I’m not sure anything I can say is going to clarify it.
>>If you can’t already see the difference between managing your portfolio–> managing a portfolio of $1 Billion
That’s funny. You are saying the same thing I’m saying – that there is a big difference between retail investors managing their own portfolio and institutions managing other people’s money. But you had suggested repeatedly that if I’m getting the returns I’m getting managing my money, then I should start my own fund and manage other people’s money. The lawn care example was actually your example from a post when financial advisors compared what they do to what a doctor does.
No, I’m not saying the same thing. I’m saying managing money scales much easier than mowing lawns.
Why do you have to go that extra step white coat? Why can’t picking individual stocks in your own trading account successfully be the end game ? I kind of get what you are saying –to go the extra step but, it sounds like one must go the extra step and do it as a money manager to prove that you are in fact beating the market. Yes I bet most are full of hot air ; like the gambler who only mentions wins and never losses.
However, getting rich off picking your own individual stocks — as hard and rare as that may be ; is still easier than convincing a slew of other individuals to let you invest with their dollars because you can in fact pick individual stocks. I mean what are you going to do…show them your Datek statements for last 7 years? And even then, I am sure you will face skeptics. Although having said all of that ; if I had the confidence I was that good at individual stocks — I would not be investing in a 401k. Not to mention I think you would need to pick fewer stocks as an individual to be good at it compared with a money manager who is picking dozens ; if not hundreds of stocks.
ps- it is all well and good to tout index funds and the returns but, how many of those stocks are still in the same index from 40 years ago?
Your ps point makes my point.
Good luck investing. I can lead you to the data, but I can’t make you believe it, much less incorporate it into your investing decisions.
Not really. My index fund in my 401 k has been tracking th S&P at 23 % less … are going to show me numbers based on the S & P and compound them out like 50 years.
I’m not sue what you are saying.
Long thread, I am changing my thinking on this one. Looking at my kids 401 accounts that are mostly limited index fund choices and comparing to Stocks in IRA accounts. Looks like the index funds are doing better with less work picking and watching. Only minus is the fee’s the 401 plans charge compared with zero fee’s with picking stocks. Saying that index funds still doing pretty good, and I am leaning more towards that route to keep things simple (KISS) as I get ready to retire 🙂
Great website and information, keep up the good work Dr. Jim
401(k)s fees don’t necessarily have anything to do with the investments in the 401(k). That is, if the 401(k) has a 0.5% fee, it’s going to be there even if it let you pick stocks (and some do.) Index fund fees are so trivial these days they can essentially be ignored. You basically get the fund structure for free when the ER is in the single basis points.
You should have reached out to Dr Michael Burry and explained to him that credit default swaps were a foolish investment and to put it all in VTI back in 2005.
Irrelevant to how one should invest today. Lots of “gurus” out there and on average their crystal balls don’t work any better than yours or mine. If you want Burry to manage your money, that’s an option. But you don’t get to use a time machine to go back and do so.
Absolutely relevant to how one should invest today. While indexes should make up a heavy composition of every 401k account, they are blunt force objects and savvy investors can complement them with individual securities and sector weighting.
Buying only indexes misses out on the massive growth opportunities that a company like Tesla in 2015 or Facebook in 2012 would bring. Even worse, when massive bubbles exist in the market (I.e tech right now, real estate in 2007) there is no recourse when you are fully committed to indexes. Small investors like Burry can and absolutely do identify and exploit market inefficiencies. Should everyone attempt to do so? Absolutely not, but with some research in portfolio management and economics many can do it well.
I disagree. All the evidence suggests stock and sector picking is a futile activity for the vast majority, especially after costs. That vast majority certainly includes me and almost everyone in my audience, including most of those who think they’re in the tiny minority of successful long-term stock pickers.
My index fund bought Tesla and Facebook shortly after the IPOs.
I’m not Burry and I doubt you are either. The question with Burry (or Buffett or whoever) is not “What about Michael Burry?” The question is, “Why aren’t there more Michael Burrys than there are?” Because from sheer luck (not even including skill) alone there should be a lot more.
Good luck investing.
I have around 10% of my investments in individual stocks. But the market is down, so it will be closer to 0 when the market goes up.