Navigating the Down Market: A Diversified Approach to Medium-Term Investing
Despite some of the compelling arguments made by M. Devlin Alet regarding stock selection, my current stance is that picking individual stocks as a primary investment strategy is not the best approach. However, understanding the nuances and risks involved is crucial for informed decision-making.
Why Avoid Stock Picking in the Short Run?
First, it's important to acknowledge that I might be mistaken. The stock market is inherently unpredictable, and making a public recommendation could expose me to personal and financial risks. Furthermore, if my advice is correct and others act on it, the market may rapidly correct itself, thereby reducing the potential gains for everyone involved. This is especially relevant for large-cap stocks like Apple (AAPL), where price movements can be driven by broader market forces.
Second, the decision to buy is only half the battle. Just as critical is the decision to sell. This timing is far more difficult than the initial purchase. Studies have shown that most retail investors consistently underperform the market average, which includes broad market indices like the SP 500. Retail investors typically see returns of only 3-4%, compared to the index's average of 9-10%. This difference is substantial and highlights the challenges retail investors face.
Third, even professional investors often underperform the market indices. While they may not underperform by as wide a margin, their underperformance is unnecessary and can be avoided simply by sticking to index funds. Investing in the SP 500 index, for example, has historically provided significant returns without the increased risk of individual stock selection.
A Case Against Medium-Term Stock Investing
Given the above points, I strongly advise against selecting a small basket of stocks if your intention is to hold them for a medium-term period of 1-3 years. During this time frame, the market is highly volatile and unpredictable. The idea that you can successfully time the market on your own, as a retail investor, is fraught with difficulty.
Instead, a diversified portfolio of index funds is the recommended approach. Why? Because if you're looking to invest for a period of 5 years or more, diversification is key to smooth, steady returns. Index funds, or ETFs (Exchange-Traded Funds), provide exposure to a wide range of assets, thereby spreading risk and potentially improving performance.
When Might Individual Stocks Make Sense?
That said, there are instances where a focused selection of individual stocks might make sense. Large-cap energy companies like ExxonMobil (XOM) and Apple (AAPL) have shown resilience even during market downturns. Solar-focused companies like Sunrun (SUNE) and more stable, value-oriented firms like Berkshire Hathaway (BRK.B) are also worth considering. These stocks, while underperforming during the market downturn, may still offer attractive opportunities for long-term investors.
Nevertheless, unless you feel confident that you are outperforming the average institutional investor in terms of research, analysis, and market timing, it is advisable to stick with index funds. Over many years of trading, I have developed this sentiment, recognizing the complexities and risks associated with individual stock selection.
Conclusion
Overall, it's essential to navigate the market with a cautious and informed approach. Avoid diving into individual stocks for short-term gains, given the inherent risks. Instead, focus on long-term strategies that leverage the power of index funds for consistent returns and a reduced risk profile.