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 Market Mysteries of the week

  Should I be trying to pick my own stocks?

Answer: It’s extremely difficult to pick which companies will perform better than the rest. We like to spread our money across all of them to get the average return, then add investments in a few companies we really believe in. Will listening to “experts” help me pick which stocks will outperform?Probably not.The financial industry gets paid to give advice. They get paid to make new investments. They get paid to give recommendations. That means they have to stay active to make money. It’s not ill-intentioned. It’s just ingrained in the business model. They're always analyzing, projecting, and strategizing to try and find ways to beat the average. It's just really hard. If you were paying for someone to oversee your money and every year they just told you to be patient and keep adding to the same basic investment fund, you'd probably stop paying them, despite the quality of the advice. Sadly, even the best professional investors are not getting it right. Over the last 15 years, only 11% of US Large Cap professional fund managers survived and outperformed the average index fund.Professional fund managers are the best stock pickers there are. They build such strong expertise evaluating stocks that people start giving them money to invest on their behalf and pay them millions each year in fees. These investors have teams of full-time analysts researching every available stock to pick which one might be the best. And still, 89% of them fail to perform better than the average return of an index fund that just holds all of the available companies. US Large Cap refers to the biggest public companies in the US. Cap=Market Capitalization, aka size. Think S&P 500 index.And that’s not just picking a random time period. It’s only 13% over 20 years, 8% over the last 10 years, 17% over the last 5 years, and 31% in 2020. So it’s not worth it to invest in individual companies?Not exactly.It isn’t easy to pick great companies consistently. But it’s definitely fun to try. In our experience, it’s easier to pick above-average companies if you’re buying and holding for the long term. Professional portfolio managers often trade a lot. Trading more isn’t positively correlated with better performance. Over the last 40 years, 66% of stocks performed worse than the Russell 3000 index, the main index used to represent the “total market.” There have usually been about 3,000-4,000 public companies in the US at a time, hence the “3000”. So over the last 40 years, essentially 34% have grown faster than the average. Those are still pretty good odds to pick one or two good ones in your portfolio.Over that 40-year period, about 10% of stocks have been those “mega winners,” outperforming over 5x the average. So 1 in 10 can be those lottery-ticket kinds of stocks. Those are better odds than the lottery, for sure.How do I invest in all of the companies at once?You can buy total market index funds. An index is just a number. The S&P 500 Index tracks the prices of the 500 biggest public companies in the US. As we mentioned, the Russell 3000 tracks the biggest 3000 public companies, which is most of them. There are endless indexes.A fund is a pool of money. A financial institution like Vanguard or Fidelity will pool together billions of dollars and buy stock in every company in an index. That way, Vanguard’s S&P 500 index fund owns all the same stocks in the S&P 500 index, and the fund's performance tracks the performance of the index.When you buy a share of the fund, your money gets invested across all of the companies in the fund. So as the companies grow, your money grows with them.Average returns aren’t bad. As mentioned above, most professional investors are working long hours and failing to deliver average returns. For example, the Vanguard Total Market Fund has had an average annual return of 17% for the last decade. It’s hard to say whether that return will continue, but $10,000 invested in that fund 10 years ago would be $48,000 today.Can you just tell me what to invest in?We’re not able to give financial advice in a forum like this because that would be irresponsible. Everyone’s financial situation is different, so investing in the stock market might be suitable for one reader but not for another. If you’re ready to set up your portfolio, we made you a video outlining how the typical Scoop Investor sets up their investments.You can absolutely handle investing. Participation is 95% of the battle. As always, we’re here for your questions. Make sure to join our new Slack Channel and drop some questions in there!Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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