WHY YOU SHOULDN’T BUY INDIVIDUAL STOCKS

No one beats the S&P 500 Index funds in the long term

SUMMARY:

We are all suckers for stock tips. People are always trying to tell you about the next Amazon or the next Apple. You must get in early on the next “hot” industries or companies, right?

We are all led to believe that the experts are so good that they can pick the winners of the future. Well, what does the data say? How many of the so-called experts outperform in the long run? Would you invest differently if the statistics said that the answer is none of them?

Stock Picking Gurus

Most investors are familiar with the famous investing legends like Warren Buffett and Peter Lynch. There are many more that appear on CNBC or the best seller lists. In the online world, we all hear about the incredible returns that some investing superstars posted last year or last month or last week. Some of these people achieve rock-star status. They fit perfectly into our celebrity culture. The media loves to promote these investing geniuses. Millions of people follow their trades to duplicate their results. They must have incredible gifts, or they must just work harder than the millions of other investors out there. But when we look at investing results over a long period of time, what does the data say?

How Should We Evaluate Investing Performance

What data should we look at when we want to look at investing performance? What timeline should we use? Should we focus on the last 12 months? Should we focus on the last 5 years, the last 10 years, the last 20 years? Unfortunately, the media focuses too much attention on short-term investing results and that leads to investing mistakes for many people. The isolated examples of 500% returns for some stock for the last six months gets a lot of attention because it generates a lot of views. The options traders promote their extraordinary winning trades for the last week. But investing in the stock market is and should be a long-term thing.

If you are in your early working years (your 20’s or 30’s), you won’t be accessing your 401K investments for another 40 years or more. Even if you are 65 and have recently retired, you still have an investing timeline of 25 years or so. Any money you will need to access in the short-term (then next five years) should not be invested in the stock market. So, the shortest timeline we should be looking at for investing performance is five years, but the most important timeline for investing performance is 20 years or more. Monthly or quarterly or annual investment returns can be interesting, but they should not be what we focus on when evaluating investment performance.

What Does the Data Say?

There have been many published studies that look at the performance of stock pickers over a five-year timeframe. The results have consistently shown that only 8% of stock pickers (mutual funds) outperform the S&P 500 index funds over a five-year time horizon. So, in other words, 92% of these highly paid investment gurus do worse than simply investing in a passive index fund. But, as I mentioned previously, five years is not significant for investing performance. Earlier this year, I ran a report of the top performing mutual funds over the last ten years. Out of the 9,000 mutual funds in the marketplace, I only found ten that performed better than the S&P 500 and they only beat the S&P 500 by about 2 percentage points. So, only 0.1% of mutual funds (the stock pickers) beat the passive index funds over a ten-year period. This happened to also be one of the best ten-year time periods for investing results in stock market history. I then looked at the returns of these same ten high performing mutual funds in the crash of 2008. These top performing funds lost an average of 40% in 2008. So, they performed very well in a long bull market, but they lost a lot of money in the previous bear market. I mentioned Peter Lynch of the Fidelity Magellan fund earlier. The Magellan fund was the top performing mutual fund in the 1980’s when Peter Lynch ran the fund. But after he retired, the performance of the Magellan fund has been below average. The data is very clear. NO stock pickers outperform the market as defined by the S&P 500 over the long term; periods of 10, or 15 or 20 years or more.

Individual stock pickers and day traders and options traders don’t compare their results to the S&P 500 over long time periods. Just like gamblers, you always hear about their winners, and you don’t often hear about their losses. They think that the big winner must more than offset the losers. If you are a stock picker or a day trader, make sure you evaluate your results against the main benchmark (the S&P 500) in all time periods, not just the times you got lucky.

Chasing Investment Returns

A focus on short-term investing results leads to one of the biggest investment mistakes that many people make, chasing investment returns. Chasing investment returns happens when an investor sees a report of the highest performing stocks or mutual funds of the past six months or past year, and they then shift their money from their current stock investment into that high performing fund. They are then disappointed in the performance of that new fund in the following six months or year. This happens because the short-term results that the fund achieved are not sustainable in the long run. Investors who make big bets on individual stocks or stock sectors can get lucky and win big in the short-term, but those results don’t last. No one is clever enough to pick the hottest stocks or hottest sectors for every market cycle over long periods of time.

Picking Stocks is Gambling

It is impossible to predict the direction of the entire stock market in the short-term. In the long-term, the stock market will go up, but there is no way to know how the market might move this week, this month or even this year. There are just too many variables and factors to predict. Everyone has a prediction, but nobody is right all the time. The variables and factors involved with individual stocks is even greater. You could pick a great company in a great industry, but when the market drops it typically takes every stock with it. And even if the market goes up, the stock could get hurt by industry issues, regulatory issues, company performance issues, competition, etc., etc., etc. The stock market in total has never gone to zero, but individual stocks can and do go to zero. Companies go out of business all the time.

But, just like the stock pickers mentioned above, you could get lucky. You could pick the right industry and the right company at the right time, and you could win, and you could win big. This can be very exciting. This can be fun, and it is okay to experiment with money that you can afford to lose. But don’t invest more than 5% of your portfolio in individual stocks at any time. Just be aware that the individual stock segment of your portfolio will underperform your investments in market index funds over the long-term.

Picking Stocks is Hard Work

In addition to being an unsuccessful strategy, it is hard work. Picking stocks involves a lot of research and a lot of monitoring, weekly at a minimum and often daily. If you want to day trade or trade in options, you need to be glued to your computer screen all day. If all this work resulted in superior results and you enjoy this work, then I would say go for it. But it is a lot of work for lower returns compared to buying an index fund. Buying an S&P index fund or a Nasdaq index fund on the other hand is easy. There is very little research involved and much less news to stay up on. And for very little effort, you get better results. The S&P 500 produced annual returns of 15.1% before dividends for the ten years between 2015 and 2024. If you reinvested the dividends, your returns would have been closer to 17% per year. If you invested $100,000 in an S&P index fund at the beginning of 2012 and simply held it for ten years, your money would have grown to over $400,000 at the end of the ten years.

But What About Bear Market Crashes?

Bear market crashes affect individual stocks, but they also impact index funds. Bear market crashes happen about once every seven years on average. And the S&P 500 drops by an average of 37% in these crashes. Until now, you had no choice but to “Buy & Hold” or to simply wait it out. We created the Beyond Buy & Hold system to deal with these bear market crashes. We have created a powerful way to “trade” these inevitable bear markets so that you don’t see your investments drop by 40% or more and, in fact, you can now make trading profits during the bear market cycles. We are so excited to share this investing breakthrough with individual investors. You can now get the best of all worlds. You can avoid the difficulty and the hard work of picking individual stocks or even mutual funds by simply investing in stock market index funds like the S&P 500 or the Nasdaq. And you can use our system to “trade” those same index funds during bear markets (see 2022) to avoid most of the losses and to profit when the bear market rebounds. And because you “own the market” with an index fund, you will get big annual returns in bull markets (roughly 15% per year before dividends). Follow along with our newsletters and we will show you how it’s done. We will walk you through it step by step and you can trade right along with us.

Be well,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.