Why Stockpicking is Dead

Stockpicking, the practice of selecting individual stocks for investment, is no longer a viable strategy for the majority of investors. One of the main reasons for this is the consistent underperformance of professional stock pickers compared to a benchmark index such as the S&P 500.

A study by Dalbar, a financial research firm, found that from 1984 to 2018, the average stock picker underperformed the S&P 500 by a wide margin. In fact, the average stock picker lagged the S&P 500 by more than 5% per year.

To put this into perspective, let’s say an investor had invested $100,000 in a stock picking strategy in 1984. If the average stock picker underperformed the S&P 500 by 5% per year, by 2018 that $100,000 investment would have grown to only $165,000. On the other hand, if the same $100,000 had been invested in the S&P 500, it would have grown to $956,000 over the same time period.

This staggering difference in performance highlights the importance of considering index investing as an alternative to actively picking stocks. By investing in a broad-based index fund, such as the S&P 500, investors can achieve market returns with significantly lower risk.

In conclusion, the evidence suggests that for most investors, stock picking is a losing strategy. The consistent underperformance of professional stock pickers, coupled with the high costs of professional management and taxes associated with active strategies, make index investing a much more attractive option. As John Bogle, the founder of Vanguard Group, once said: “Don’t try to pick the needle in the haystack, just buy the whole haystack.” By investing in a broad-based index fund, such as the S&P 500, investors can achieve market returns without the added risk, effort, and costs of trying to pick winning stocks.