The Market Is Smarter..than Most of Us

I've gotten many messages over the past few months from people asking to look at their porfolio. Usually when I see a portfolio I see many individual stocks making up a large % of a porflio, my first response is always to buy low cost index funds.

I dont want to come off harsh but I feel the definition of investor arrogance is believing you're smarter than the market.

Believing you can consistently pick winning stocks while outperforming millions of other investors including professionals with teams of analysts and access to far more information than you.

The data says otherwise.

• Around 80–90% of actively managed U.S. equity funds underperform the S&P 500 over a 15-year period.
• These funds are run by professionals with teams of analysts, company access, and institutional research, yet most still fail to outperform a simple index fund.

One thing you'll notice on social media: people love posting their biggest stock winners. Far fewer people post the stocks they lost 50%, 80%, or even 100% on.

There's a reason why mutual funds and actively managed funds have historically underperformed against index funds..because even well paid fund managers with their teams cant beat the market overtime.

For the record, I still own some individual stocks. My portfolio is roughly 93% ETFs and 7% individual stocks. I enjoy researching companies, but I also recognize the odds are stacked against consistently beating the market.

That's why the foundation of my portfolio is broad-market ETFs not stock picks.

4,064 views

15 Comments

Eze @eze1234 · 15h

lol brave post. The challenge is, beating the market short term gives people the belief they can maintain that for 15 years. It is quite deceptive.

Kyle Garrett

@kgcottawa · 9hEdited

As someone who invests in individual stocks, I still completely agree.

I own numerous individual stocks, for a few reasons, however $XEQT is the majority of my RESP, and 20% of my SmothManouvre account.

I use individual stocks because I think they will out perform, true, however I also want to highlight a few additional reasons I like them;

- tax efficiency. My wife and I are both high income earners, our tax rate is high, and CAD eligible divs are a nice way for the portfolio to deliver cash (if we want it)

- diversification! I know this seems silly, because XEQT is so diversified, but it’s not always where I want it.

and a bonus reason- XEQT and all broad indexes must hold companies that are objectively trash, holding them as they slide out of the index they’re in but losing value the whole way out. I hate that I need the whole basket of stocks, and individual holdings help soothe that part of me. Aka “If I’m forced to hold stocks I don’t like, I can balance it by holding more of the stocks I do like”

Thanks for attending my Ted talk 😊

Gerald @aetos · 4h

Also realize just because you're uncomfortable with risk does not mean individual stocks are the enemy. My individual stocks surpass my index fund 100x. They take more focus, but they should not be feared.

Dividending

@dividending · 6hEdited

Something I’m always curious about when I read these type of pro-index ETF posts is;
- what is ‘the market’ they are referring to exactly?
- how do the EFT indexers returns actually compare to said market

Blind faith in an approach even simple index ETFs without sharing comparative personal DIY data could also be construed as arrogant and naive because any strategy needs to work well in the real world for the particular investor.

I am, generally speaking, a stock picker and have been for over 25 years but also believe in the steady returns of index ETFs are an excellent strategy to compound wealth.

Matt @tissuet · 7hEdited

I believe there's a time to lean into ETFs and a time to focus on individual stocks. Individual names require far more work you need to constantly stay on top of the business, follow the news, do your research, and make sure your original investment thesis is still intact.
But when many of the world's greatest CEOs, running the largest and most valuable companies, are all pointing in the same direction, it makes me wonder..... what if they're right?
Investing in individual stocks is definitely more challenging and carries more risk, but if your research is sound and your thesis plays out, the upside can be significantly greater.

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