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  • Stocks vs ETFs

    Often on social media, people say things like, “Buy X stock, and you’ll make money!” or “Only buy ETFs!”

    I wanted to dive deeper into this topic and analyze the data behind investing in individual stocks versus ETFs (a collection of stocks).

    I recently came across a study from Alpha Architect called “The Risks of Owning an Individual Stock,” where they analyzed the performance of buying one individual stock (from a list of 3,000) versus an index of 3,000 stocks over a 23-year period (1983-2006).

    What they found was that 63% of individual stocks underperformed compared to simply buying an index fund of 3,000 stocks, meaning only 37% of individual stocks outperformed the benchmark.

    Additionally, they found that between 1983 and 2006, around 73% of companies experienced a drop of more than 50%, while the maximum drop for the S&P 500 ETF during that period was around 44%.

    This shows that holding a single stock can be quite risky.

    To illustrate this further, let’s say you bought $10,000 of Zoom stock just before the pandemic, in January 2020. In another portfolio, you also bought $10,000 worth of the S&P 500 ETF $VOO.

    Now, the ending balance of your investment would be $10,250 for Zoom and $19,208 for VOO.

    At one point, your Zoom investment was worth $70,000, but it cooled off over the next few years. Some people might say, “I would’ve just sold it!” But would you? How would you know it wouldn’t go to $100,000? And after the initial drop, some might simply hope it returns to its previous high, ultimately never selling.

    Benjamin Graham, considered the “father of value investing,” once said, “I have little confidence, even in the ability of analysts, let alone untrained investors, to select stocks that will give better than average results.” By “average,” he meant the broad market index, like the Total US Market or the S&P 500.

    If Graham didn’t believe that professional analysts could beat the market, how confident can you be that you could?

    Larry Swedroe, author of numerous investing books, in his article “Stock investing: speculating versus investing” said, “Owning individual stocks is more akin to speculating, not investing.” 

    According to David Swensen, Chief Investment Officer of Yale University, “There’s no way that spending a few hours a week looking at individual securities is going to equip an investor to compete with the incredibly talented, highly qualified, and extremely educated professionals who spend their entire careers trying to pick stocks.”

    And consider this: in the first half of 2024, only 18.2% of actively managed funds outperformed the S&P 500 index, according to data from Morningstar Direct. 

    If even these talented professionals have trouble beating the market, how likely are you to succeed?

    I’m not saying it’s impossible to outperform the market by buying individual stocks in the short term. It certainly is. 

    You could’ve bought $10,000 of Facebook stock in 2020 and be outperforming the S&P 500 by about $8,000. But doing that consistently over a long period of time is extremely difficult.

    Some people say that buying ETFs is very boring. Since these ETFs hold hundreds of companies, you aren’t really personally invested in the news or performance of a specific company. But my personal goal is to build wealth, not be entertained.

    My approach


    I used to buy individual stocks all the time. Companies I’d heard of. Companies I believed in. Companies I thought had a bright future ahead. Companies I’ve researched.

    Guess how they did relative to the market? Underperformed.

    So, some time back I sold all of my individual stocks. I had some gains, so I ended up taking a small tax hit, but my performance significantly improved since then.

    One of the ETFs I started buying is $VTI, the US stock market index fund. Its year-to-date performance is 18%, a much better performance than my previous stock portfolio.

    If you do want to invest in individual stocks, put a small percentage of your investments there. Give it time and analyze how well it does against the ETF portfolio.

    For me, I will just continue buying ETFs.

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