Stock picking vs index investing

Just read Goh Yang Chye's Simply Invest, which advocated for enhanced index investing over long term horizon with zero stock picking. His advice seems sound and has made me waver abit since I have a larger allocation in stocks (70% in tsla and pltr) than my etf allocation (30% syfe equity 100).

What do u guys think? Is zero stock picking really the way to go for someone who has a long term horizon and wants great returns? Sure, 95% of investors fail to beat the market but is there really no merit in stock picking backed by thorough research?

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Jared Lee

Edited 08 Oct 2021

Finance at Murdoch University

Stock picking is still the way if you want outsized returns. BUT, you can't do it without breaching one of the rules in finance & portfolio management 101:

If you want higher return, you must be willing to take on higher risk. (Capital asset pricing model)

A well diversified portfolio (i.e ETF) will lower correlations between each of the component, which lowers the standard deviation (risk) of each of the stock because it's now weighted lower within the portfolio.

Hence lower risk = lower return because you didn't take on higher risk.

If i were a beginner stock picker, i would pick stocks that are within some kind of market index (i.e S&P) and then overweight them in my portfolio if i believe they are going to do well. (This has done well, at least for me)

Once you're comfortable with that, you can then play/think 'outside the box' and hit small caps, mid caps, cyclicals, growth.

One surprising trivia that you may not know about stanley druckenmiller (i.e the man who broke the bank of england by shorting the pound) is that one of his strategy was to make concentrated bets in his high conviction stocks. this could mean betting 50% of your money in a single thesis/stock.

cheers!

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Arman Mohamad

Edited 08 Oct 2021

Seedly Student Ambassador 2021/22 at Seedly

Hi Anon, if I may add on to what YJ said, is to believe in what you're investing in and to invest long-term.

Yes it's true that 95% of investors fail to beat the market but if you notice that your personal stock portfolio outperforms the market, then sure, go ahead to transition a bulk of your investment into your own personal portfolio. It'll take up more of your personal time, but if you want to grow your money at a faster rate then go for it.

On the other hand, if you go for a 100% ETF/market-tracking investment vehicle then you would need need to be even more invested and conscientious in your DCA. In addition to that, you may not have the freedom to get into 1-2 stocks that have huge potential and growth rate's that blow the returns of ETFs/Mutual Funds out of the water.

So yes, take your pick! It's all about your priorities.

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