A lot of people are drawn to the idea of picking individual stocks. I hear this question all the time:
Why should I invest in index funds when I can potentially make so much more by buying individual stocks?
And then there’s this follow-up question:
What if I only buy the winners and avoid the losers?
Many people offer examples like, I could just own Apple, Google, Amazon, Alibaba, etc.
In several of my interviews, some participants mentioned their preference for individual stocks, particularly dividend stocks. Others talked about buying “cheap” stocks, based on their own definition of cheap.
One person I coach couldn’t understand the logic of index investing when her Apple stock had made her over 40% that year. Another client told me he wanted to make “real” money, not just that 8% return from index funds.
It’s true—some individual stocks do have spectacular gains. If you read the “Top Performers” section in any financial news source, you’ll see stocks that have skyrocketed.
There’s also the idea that you can make even more money by avoiding the “bad” companies in an index, focusing only on the winners.
But the key question is: How do we know which company will be the best performer tomorrow?
The Case for Index Investing
The reality is, we don’t know. Every day, thousands of full-time, highly educated investors—armed with MBAs and CFAs—sit at their computers trying to identify the next market-winning stock, and most of them fail. Year after year, about 80% of professional mutual fund managers underperform the market index. If they can’t beat the index, what are the odds that an average investor can?
Picking the next big winner is incredibly hard. And avoiding the big losers is just as challenging. Do you remember Enron, Kodak, Nokia, Blockbuster, Blackberry? These companies were once market darlings, but quickly fell from grace.
Index Funds Have a Built-In Self-Cleansing Mechanism
When you invest in an index fund, you’re not trying to pick winners or avoid losers. You’re buying all the stocks in a specific asset class, relying on the natural course of capitalism. Companies are constantly striving to succeed, and those that fail get removed from the index. The index automatically adjusts, kicking out the losers and keeping those that meet its criteria. All you need to do is consistently contribute to your investment account and let time work in your favor.
Don’t Waste Your Time and Energy
Another major advantage of index funds is the simplicity. Index fund investors don’t need to spend countless hours analyzing portfolios, watching the news, or staring at screens tracking stock movements. They avoid the stress of reading financial statements, interpreting graphs, and endlessly second-guessing themselves. The worst part of picking individual stocks is how mentally consuming it can be—you end up thinking about it constantly, worrying, dreaming about it. It can keep you from fully enjoying life or focusing on more productive pursuits that could yield a better return on your time and energy.
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Comments
2 responses to “Picking individual stocks is the fastest way to go broke”
Mt Guillot. Your book here link, is not redirecting us properly. It is actually redirecting us to a scam phishing. If you don’t mind to explain that 1st & we see if we keep going. Thank you.
Thank you for pointing this out. I was unaware of it. I will replace all those links in my other posts.