Let’s cut to the chase: I don’t believe in stock picking, and the evidence suggests that most stock pickers will underperform a simple index fund over the long run. While the allure of selecting the next blockbuster stock is captivating, the odds are stacked against you.
Today, I’m going to lay out the data and facts for you to scrutinize, and if you find my argument persuasive, I’ll also share my own investment strategy for the U.S. stock market — one that aligns with this no-nonsense approach to the markets.
Most stocks end up doing terribly
A notable study by Hendrik Bessembinder, a professor at Arizona State University’s WP Carey School of Business, makes a compelling case against stock picking. The study examined the compound returns of over 64,000 global common stocks from 1991 to 2020.
What it found was startling: 55.2% of U.S. stocks actually underperformed one-month U.S. Treasury bills over that 30-year period. Furthermore, a minuscule 2.4% of firms accounted for all of the $75.7 trillion in net global stock market wealth creation during these three decades.
To break it down: over half of the U.S. stocks in this extensive sample performed worse than U.S. Treasury bills, which are considered to be risk-free investments. That’s right –these stocks couldn’t even beat an investment with virtually no risk.
Moreover, the vast majority of the market’s gains were concentrated in a tiny fraction of stocks – just 2.4% of them. Identifying these needle-in-the-haystack winners in advance is, to put it mildly, a difficult task.
So, where does that leave you? If you had simply invested in a broad market index fund, you would have captured the gains from these rare outperforming stocks without having to do any research or take any wild gambles.
In essence, an index fund allows you to ride the wave of the market’s overall upward trajectory, which – as the study demonstrates – is generally a much more reliable strategy than trying to pick individual winners.
Active funds fare no better
You might be thinking, “Well, if picking stocks is so tough, why not let a professional handle it?” It’s a reasonable question, but unfortunately, the data suggests that even the pros have a hard time beating the market consistently.
The latest S&P Indices Versus Active (SPIVA) report drives this point home with staggering clarity. According to the report, a jaw-dropping 93.4% of all U.S. large-cap funds failed to outperform the S&P 500 Index over a 15-year period.
That’s right – nearly all professional fund managers, with their supposed expertise and resources, failed to beat a simple index that you can invest in through any basic brokerage account.
SPIVA undermines the very premise of active management: that skilled professionals can identify market inefficiencies or select stocks that will outperform.
These statistics also underscore the robustness of a broad market index like the S&P 500, which captures the overall trend of the market and includes those rare, high-performing stocks that drive most of the market’s gains.
Buy the S&P 500 Index and call it a day
By now, you’ve seen the evidence: picking individual stocks is fraught with risk, and even professional fund managers often fail to outperform basic market indices. So, why not keep it simple and efficient?
Historically, the S&P 500 has offered an impressive 12% total return over the last 10 years when dividends are reinvested. To put it plainly, you don’t have to be a stock-picking guru to earn solid returns.
This level of performance, if sustained, is more than adequate for a comfortable retirement – especially if you have a long investment horizon and make consistent contributions to your portfolio.
For Canadian investors interested in capturing this kind of growth, the BMO S&P 500 Index ETF (TSX: ZSP) offers an easy, cost-effective way to invest in the S&P 500.
The ETF comes with a minuscule 0.09% expense ratio. To put that in perspective, you’d be paying just $9 in fees annually for a $10,000 investment – far less than most active funds charge for their underperforming services.
