I was smiling a little as I wrote this as I knew many of my clients would read it and think, “Oh no, he is talking about me.” I can assure you I was not calling out any of you.
I understand the desire behind stock picking. Many people reading this are highly intelligent and successful in your field. You wouldn’t think it is that hard to pick an individual stock that is going to outperform. In reality, though, it is.
Close to 90% of professional money managers underperform index funds over 10 and 20 year periods. They may talk to management and listen to earnings calls and pour over financial statements, and still nearly 90% underperform. And don’t assume that just because a manager has outperformed at one point that he will continue to outperform.
For me, it is somewhat of a humility thing. If nearly 90% of fund managers underperform, why would I outperform?
Another reason I shy away from stock picking is because some of the principles of investing do not apply. While past performance doesn't guarantee future results, the general stock market as a whole has recovered from past dips. That isn’t always the case when you look at individual stocks though. It is possible when an individual company's stock goes down that it won’t recover.
What is the alternative to stock picking? Diversify using ETFs or Mutual Funds that employ a low-cost broad-based index or principal-based approach. It is not that buying individual stocks is inherently bad. For example, with direct indexing, you own individual stocks. I just believe in owning a low cost broad diversified portfolio that isn't primarily determined by an individual stock picking.
Quick note - If you are a client, we should talk before you make any trades given the tax ramifications involved.
If you are ever considering leaving your employer, make sure you consider the vesting rules of your company retirement plan. It doesn’t necessarily mean you won’t do it anyway but it needs to be factored into the equation.
Thank you for reading!