facebookIs it true that investing in market index etf will have better return than stock picking in the long run? - Seedly

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Anonymous

11 Oct 2021

βˆ™

Stocks

Is it true that investing in market index etf will have better return than stock picking in the long run?

Market index etf VS stock picking

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Discussion (22)

What are your thoughts?

Billy Ko

Billy Ko

12 Oct 2021

Level 11Β·Financial Analyst at REPE Firm

Is it true that investing in market index etf will have better return than stock picking in the long run?

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No

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Is it true that investing in S&P500 will have better return than stock picking in the long run?

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Yes (most of the time)

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P.S I like how everyone simply linked "market index etf" to S&P500.

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Theoratically speaking, yes, market index etf will generally have better returns that stock picking, eliminating the emotion aspect of investing, being disciplined in selling off the non-performing companies and replacing it with performing ones. Constantly refreshes its constituents to form the best of the best. E.g if Company A is lacking / pulling down the index with its low share price, its automatically kicked out during routine review and replaced with a better company, Company B, naturally pulling up the ETF. It also forces funds which tracks the Index ETF to buy in to Company B, further pushing up the share price of Company B and in turn, the price of the market index ETF.

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HOWEVER

I'll let the statistics speak for itself. Take a look at the attached chart. We see the STI ETF v.s. SPY. If you bought STI ETF the day it was launched, you'd be in the red now. But if you bought SPY ETF instead, you'd be up 2.5x during the same time period.

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This goes to show many things look convincing on paper and in numbers, but in reality, it may not exactly showcase that. Another example is the "myth" of diversifcation by achieving 30 stocks and that any additional number of stocks within the portfolio would not impact diversification / risks. Comparing STI ETF (30-stock constituent) and S&P500 (500-stock constituent), I think the actual performance of both speaks for itself once again.

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  • Yes, statistic has proven retail investors sucks. 1 factor is bad stock pick. But other factors are physcological, when market fall they stop buying, or sell the investment, market timing, so even if you bought ETF you can still have bad returns.

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  • It depends if you are focusing on relative returns or absolute returns

https://seedly.sg/opinions/diversification-or-d...

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  • Regardless which method you choose, always adopt long term, buy and hold.

https://seedly.sg/opinions/what-is-long-term-in...

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  • If beating the S&P is what you want. You can just buy sector ETFs. Certain sector outperform market long term. Or just use sector rotation strategy, not necessary to stock pick.

https://seedly.sg/opinions/beating-the-market-o...

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Tan Choong Hwee

Tan Choong Hwee

11 Oct 2021

Level 13Β·Investor/Trader at Home

There are plenty of studies that conclude many stock pickers perform worse than stock market index, ...

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