Tag Archives: individual stocks

Invest in the Index, not in individual stocks

Posted By Financial Independence Hub | October 16, 2023

By Alain Guillot

Special to Financial Independence Hub

Every day, there are many companies experiencing significant price drops. There is a section on Yahoo Finance called “Day Losers” where the biggest losers of the day are highlighted.

Are those good buying opportunities?

Maybe.

All of our favorite Blue Chip stocks have been part of this list. Some of those stocks have recovered, while others continued their downward slide. The truth is that we never know for sure which stock will recover and which one will just disappear. Remember Nortel, Nokia, Kodak, BlackBerry, Blockbuster, RadioShack, Toys R Us? These were stock market leaders that never recovered.

On the other hand, for those investors who have bought the U.S. or Canadian index, they have always seen their money coming back after any major drop.

Instead of discussing the pros and cons of buying any individual stock, I think we should look at the big picture and talk about the difference between buying a basket of individual stocks when they are down versus buying the index.

The main difference between buying any individual stock and buying the index when they both go down is that, up until now, the index has always bounced back, while some of the blue-chip stocks that we have learned to love/trust might never recuperate. Kodak, Blockbuster and Nokia never recuperated. They slowly declined into the graveyard of market history.

On the other hand, the S&P 500, which came into existence in 1957, has seen many deep declines and it has always recovered:

Black Monday: Oct. 19, 1987
Dotcom bubble crash: 2000-2002
Global financial crisis: 2008-2009
COVID-19 pandemic: 2020

Why? Because, unlike individual stocks, the S&P 500 is always changing.

S&P 500 from 1927 to 2023 from 20 to 4,090; a 17,620% gain.

Looking at this graph, you might think that you could have invested $20 in the most popular stocks of 1927 and just waited to get rich. But it doesn’t work out that way. The companies that represented U.S. stocks in 1927 are very different from the companies that represent U.S. stocks in 2023. Most of the original companies composing the S&P 500 no longer exist, but the S&P is still going strong.

Regardless of how quickly companies are moving in and out of the index, you can see that owning an index is fundamentally different from owning a basket of individual stocks. While your basket of individual stocks might remain the same over time, the index will not.

There are many benefits provided to index investors.

We get the highest returns and pay the lowest fees. Hundreds of analysts go on a hunt for the best stocks; they spend their time, money, and energy crunching numbers, buying the stocks that are going up and selling the stocks that are going down, and we get to reap the rewards.

According to the SPIVA Report, the S&P 500 index has outperformed 92% of money manager professional over the past 15 years, and the cost to us is usually 0.05%/year. There is no better deal in town.

Alain Guillot is a part time event photographer, part time Salsa teacher, and part time personal finance blogger. He came to Quebec as an immigrant from Colombia. Due to his mediocre French he was never able to find a suitable job, so he opened a Salsa/Tango dance school and started his entrepreneurship journey. Entrepreneurship got him started into personal finance and eventually into blogging. Now he lives a Lean FIRE lifestyle and shares his thoughts in his blog AlainGuillot.com. This blog originally appeared on his blog on Oct. 9, 2023 and is republished here with permission.

Nobody knows what will happen to an Individual Stock

Posted By Financial Independence Hub | November 14, 2022

By Michael J. Wiener

Special to the Financial Independence Hub

When I’m asked for investment advice and I say “nobody knows what will happen to an individual stock,” I almost always get nodding agreement, but these same people then act as if they know what will happen to their favourite stock.

In a recent case, I was asked for advice a year ago by an employee with stock options. At the time I asked if the current value of the options was a lot of money to this person, and if so, I suggested selling some and diversifying. He clearly didn’t want to sell, and he decided that the total amount at stake wasn’t really that much. But what he was really doing was acting as though he had useful insight into the future of his employer’s stock.

He proceeded to ask others for advice, clearly looking for a different answer from mine. By continuing to ask others what they thought about the future of his employer’s stock, he was again contradicting his claimed agreement with “nobody knows what will happen to an individual stock.”

How a seemingly token amount can become a painful loss

Fast-forward a year, and those same options are now worth about 15 times less. Suddenly, that amount that wasn’t that big a deal has become a very painful loss. He has now taken advantage of a choice his employer offers to receive fewer stock options in return for slightly higher pay. It’s hard to be sure without seeing the numbers, but in arrangements I’ve seen with other employers, a better strategy is to take the options and just sell them at the first opportunity if the stock is far enough above the strike price. Again, he’s acting as though he has useful insight into the future of his employer’s stock.

The lesson from this episode isn’t that people should listen to me. I’m used to people asking me for advice and then having my unwelcome advice ignored. What I find interesting is that even if I can get someone to say out loud “I don’t know what’s going to happen to any individual stock,” they can’t help but act as though either they know themselves, or they can find someone who does know.

Michael J. Wiener runs the web site Michael James on Money , where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007. He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Sept. 20, 2022 and is republished on the Hub with his permission.

Should investors buy individual stocks?

Posted By Financial Independence Hub | May 10, 2019

By Steve Lowrie, CFA

Special to the Financial Independence Hub

In most walks of life, rugged individualism is a virtue. No wonder so many investors still seem so determined to beat the odds by trying to pick the very best individual stocks (and avoid the stinkers). Unfortunately, the odds are stacked so high against these sorts of financial heroics, you might as well be buying lottery tickets versus trying to consistently outperform the long-term returns everyone can expect by embracing an evidence-based investment strategy.

I’ve posted on this subject before, in “How understanding statistics can make you a better investor.” Today, I want to take a closer look at why individuals should still avoid picking individual stocks – and, briefly, what you can do instead to come out ahead.

A Grumpy Advisor

There are numerous real-life illustrations that have crossed my path over the years … generally on opposite ends of the spectrum. On one extreme, there is using some mad money to buy shares (usually penny stocks) in an emerging technology or fad. The other extreme is cashing out a well-diversified portfolio and putting everything into one illiquid investment, promising high yields, but with significant hidden risks (mostly private real estate recently).

Often, these individuals would like me to help them with the transaction. I won’t do that. While I can’t stop them from proceeding without me, I can vehemently advise against it. If they’re a client and they still insist on getting in on the deal, they can do so directly, through a discount brokerage account.

Why am I so grumpy about it?

It’s my job

I couldn’t claim to be offering anything remotely akin to best-interest financial advice if I weren’t highly skeptical of investment “opportunities” that conflict with everything I know about how capital markets work. I can assure you, every bit of evidence I’m aware of (based on more than six decades of peer-reviewed, academically grounded research) informs me that dumping your entire nest egg into a single, risk-laden venture flies in the face of good advice.

It’s not even investing

Alright, so maybe you’re already with me on not staking your entire life’s savings on a single bet. But what about that modest stake in a penny stock? Is there any harm done in throwing a bit of fun money at a venture that, at worst, won’t ruin you; and, at best, just may pay off?

The problem is, most investors don’t realize that stock-picking isn’t actually investing. It’s speculating. In practice and expected outcome, it’s no different than gambling in a casino or buying a lottery ticket. As I covered in that past post of mine, the odds are stacked anywhere from mildly to steeply against you, making it far more a matter of luck than skill whether you “win” or “lose.”

This is where I see people running aground, even with seemingly “harmless” penny stock ventures. In my experience, if they happen to lose their stake, they tend to justify it as a “nothing ventured, nothing gained” adventure, especially if they weren’t hurt too badly.

Worse, if someone happens to come out ahead now and then by picking individual stocks, a bevy of behavioral biases (including, but not limited to: confirmation, framing, outcome, overconfidence and pattern recognition biases) tricks them into believing it was NOT random luck. For better or worse, we humans love to conclude we’re somehow smarter than the rest of the crowd. It’s so common, there’s even a name for it: “The Lake Wobegon Effect.”

It’s usually not only incorrect, it’s dangerous to mistakenly assume a successful stock pick happened because you or your stock-picking guru outwitted the entire market. Why is it dangerous? Because it increases the likelihood you’ll try your luck again, potentially with bigger bets. Eventually, you may convince yourself that stock-picking is a great way to invest in general, not realizing how much it’s probably costing you over time. This is especially so if you have no financial advisor to turn to: one who is committed to serving your best interests by showing you how your actual, long-term portfolio performance numbers stack up to a more sensible investment strategy. Which leads me to my final point today …

This rarely ends well

Based on my 25 years of experience, the vast majority of individual stock-pickers not only underperform the general market, they typically lose capital in the long-run. Recalling the casino analogy, even if you win a “hand” or two, the system (capitalism) is essentially set up so the house (the market) comes out ahead in the end, regardless of which players (investors) win or lose along the way. Continue Reading…

Appetite for ETFs to keep rising in 2017: BlackRock

Posted By Jonathan Chevreau | November 25, 2016

members-warren-collier-big — Head of iShares Warren Collier (CETFA.ca)

The popularity of exchange-traded funds (ETFs) in Canada continues to surge and 31% of domestic investors now report they own ETFs, says BlackRock Canada’s first-ever ETF Pulse Survey, released Friday.

Furthermore, 93% of existing ETF owners and 38% of non-owners are interested in buying ETFs in the next 12 months. The survey suggests education plays a big role in the adoption of ETFs: more than half of Canadian investors plan to learn more about ETFs in 2017 and non ETF investors are more than twice as likely to seek out more ETF knowledge next year.

41% are replacing mutual funds with ETFs

Not surprisingly, the survey found that 41% of investors polled are choosing ETFs largely to replace mutual funds while 45% are doing so to replace individual stocks. Improved diversification was cited by 53% while 43% felt ETFs would help reduce their risk profile. BlackRock added that these findings are consistent with a Greenwich Survey of Canadian institutional ETF users, which pointed to a rise in ETF allocations among institutional investors in the coming year.

Are there really no “pure” index investors?

Posted By Jonathan Chevreau | November 20, 2014

A Reuters article I tweeted this morning bears the intriguing title (and assertion) that “There are no pure index investors.”

The key passage is this one:

The big lie about being an index investor, however, is that it is possible to be one in a pure sense, as opposed to an investor who uses indexing as a tool. There are no pure indexers: everyone, like it or not, is an asset allocator, or asset picker if you prefer.

As I noted here last week in Core & Expore Redux, I certainly agree there are very few “pure” indexing investors, whether they use index mutual funds or ETFs (exchange-traded funds). Even if average retail investors “get” the idea of low-cost passive asset-class investing, most of them still tend to mix it up with both indexing and individual securities. This is a strategy called “Core and Explore.” Preet Banerjee wrote an excellent story on this last year in MoneySense magazine.

There are pure indexing purists and pundits

s-CRAMER-SOLIN-large — Spot the indexer: Dan Solin or Jim Cramer (Huffington Post)

However, as I also said at the Motley Fool — Is it Possible to Successfully Blend Stock-Picking and Indexing? — I think there are many indexing “purists” among some financial advisers who “get it.” These tend to be authors and/or pundits who are committed to indexing as a consistent philosophy. Here I’m thinking of authors like Dan Solin or Andrew Hallam, who articulate their philosophies in such books as Solin’s The Smartest Money Book You’ll Ever Read (and others in his “Smartest” series) or Hallam’s Millionaire Teacher. In his book and articles, including one at MoneySense, Hallam memorably describes how he weaned himself off such futile activities as market timing and stock-picking.

Even Jim Cramer says some should index

I find it amusing that even Jim Cramer in his daily Mad Money TV show — he’s the epitome of the belief in stock-picking and the antithesis of Solin — tells viewers who have neither the time nor the energy to pick stocks that they should just stick with an S&P 500 index fund or ETF.

The Reuters piece also touches on a point that has long intrigued me: a global one-stop portfolio, which it describes “only as an idea.” I have long asked the question why the mutual fund industry’s much-ballyhooed “Global Balanced Funds” would not be the only fund you’d need?

Will robo-advisers succeed where global balanced funds did not?

In theory, such one-stop-shopping funds should do what the newer robo-advisers are doing: provide access to all asset classes and securities around the world, with the fund managers (likely co-managers entrusted with equity and fixed income responsibilities) making all the asset allocation decisions and rebalancing.

But show me just one investor anywhere in the world whose only investment is a single global balanced fund. Never mind that their fees are typically going to be high for investors, I’ve seldom seen even the fund companies with big marketing budgets spend even a fraction on advertising the alleged benefits of such one-stop solutions.

Talk about a black swan, finding an individual who puts 100% of their wealth in a single global balanced fund would be a rarer event than locating a pure indexer. If you do know of one, by all means email me at jonathan@findependenceday.com and I will definitely highlight the fact here at the Financial Independence Hub.

It’s still early innings for the robo advisers but I do think we will soon find investors who hand over all their wealth to one of these firms and that these will be the first instances of (the equivalent of) a global balanced fund.

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