The stark reality is that even professionals, let alone average punters, have great difficulty putting together a portfolio that can perform better than a market index, such as the S&P/ASX 200 Index (ASX: XJO).
It's just mathematics.
If one genius stumbled upon a formula that can win all the time, then everyone would start doing it and the whole index would be dragged up. Most people are then back to average performance.
US buy-and-hold expert Brian Feroldi mentioned how his colleague Brian Stoffel disclosed his stock portfolio on social media recently.
"Stoffel shared his portfolio with the Twitter-verse. He does this every month. He also includes his overall performance," Feroldi said to his newsletter subscribers.
"Over the past five years, he has doubled the S&P 500 Index (SP: .INX)'s returns. But when compared to the Nasdaq Composite (NASDAQ: .IXIC), it's break-even."
Of course, this provoked the Twitterati to question why he's picking individual stocks in the first place.
"That led many to (correctly) claim he could have saved himself a lot of trouble by just buying a NASDAQ index fund."
Feroldi and Stoffel actually agree with this conclusion.
Even celebrity investor Warren Buffett once agreed most punters would be better off just putting all their money into index funds.
"A low-cost index fund is the most sensible equity investment for the great majority of investors," he said.
Is making money the only objective in your investment experience?
For many investors financial performance is the biggest — if not the only — priority when investing.
And there is absolutely nothing wrong with that.
But if you crave something more out of your investing experience, perhaps index funds aren't for you.
"Picture someone you care about — a child, a friend, your spouse," said Feroldi.
"Now imagine this person has found an activity that: quenches their intrinsic curiosity, leads to a deeper understanding of the world around them, helps them connect with others who have a similar passion, is not inherently toxic or unhealthy, and makes them money."
If they were fulfilled by all of the above, would you tell them to stop doing what they're doing?
"We hope the answer is 'of course not!'. We want what's best for those we love."
Individual stock picking offers investors an experience beyond mere financial gains. So whether you choose index funds or a hand-made portfolio really depends on your personal priorities.
"If investing is stressful, boring, myopic, or… unhealthy for anyone, we heartily encourage them to simply dollar cost average into index funds. There is, truly, nothing wrong with that," said Feroldi.
"But if you consider investing to be intellectually fulfilling — and you expand your network, mindset, and wealth along the way — then we think it can be an intrinsically worthwhile pursuit."
