Why I’m doing more Index Investing & Less stock picking

Why I’m doing more Index Investing

I’ve always known the odds of beating the market were slim, at least long-term. I’m talking 10 years or more. However, this article by John Rekenthaler entitled, “How many stocks beat the index.” really was the final nail in the coffin for me. By the way, he writes some really great articles, I suggest checking others out.

A quick summary (data is from Jan 2011 until Dec 2020)

  • Only 42% finished in the black
  • 36% posted 10 year losses
  • 22% vanished
  • Larger companies fared better-77% of largest 1000 companies had a positive total return
  • Below those top 1000 companies, only 33% of the next 4000 had positive gains
  • Only half of the biggest 1000 stocks beat the bond index
  • 4% of US market companies account for the entire market’s gains

He goes over more stats in other articles. However, the data is clear; you have a very small chance of beating the market and a high chance of underperforming. You may be able to outperform over the short-term; however, over 10 years or more, the odds aren’t in your favor.

At the same time, this doesn’t mean I’m throwing the baby out with the bathwater. I do have individual stocks and I do still buy new shares of those. I just don’t buy into new positions these days. I have high conviction individual stocks and I keep those or I sell them using a method described below.

What ETF’s or Mutual Funds do I invest in?

  • ITOT
  • VTSAX
  • IJJ
  • IYW

I prefer total market funds as opposed to those who hold only the S&P 500. I also tilt towards small and mid cap value, hence the IJJ. IYW is a tech fund that represents a much smaller percentage of my portfolio.

So, those are the funds I invest most of my new money in. This allows me to capture market returns for my retirement with less volatility than individual stocks.

New Individual Stock Strategy

How has this affected my strategy? As far as an individual stock holder; I’m devising a new technique. I don’t always stick hard and fast to it; it depends on the stock and situation. Using the rule of 72, we see you can double your money in just over three years with a 20% return. So, any time I have a stock up 20% or more, I sell some of it. It is not a regular occurrence for the total market to increase over 20% in one year.

I decided that if I could double my money in three years, that would get me extremely close to my goals. 20% is a huge amount relatively speaking; at the same time, I’m not looking to take huge bets with leveraged ETF’s and so forth, nor do I use margin.

I’m not looking to do that with all of my account, or even the majority of it. For starters, most of my accounts are in index funds, so it likely isn’t going to happen. However, if I could have multiple individual stocks that increased at a faster rate, then it makes sense to take some off the table and then put those gains back into index funds. This allows me to reach my goals faster. Like everyone, I’ve had some stocks that are serious winners (up over 300%) and I’ve had some losers.

There really isn’t a science to knowing when to sell a stock and when to keep holding one that’s performed well. Yet, if I can have a working strategy of always selling some when I get to 20% gains, this pushes me to my goals faster. Once I hit 20% I re-evaulate the stock after selling a portion of it.

I have to fight the urge to look back at old stocks I’ve sold and play a game of “What If’s” in my mind. I also have to fight the urge of thinking-it went up 20%, it will go up 30% fast. Why? I’ve had stocks go up 20%, only to turn around and fall 30%.

I think this mixture of Market ETF’s, Index Investing, and a specific stock strategy will help me reach my retirement goals even faster.

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