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EverydayInvestor (100.00)

64% of stocks underperformed the Russell 3000 since 11980

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19

December 02, 2008 – Comments (11) | RELATED TICKERS: VTI , VEU , VEA

Take a look at this article and see for yourself how poorly most stocks do. First, some other interesting facts from the study:

"39% of stocks had a negative lifetime total return
(2 out of every 5 stocks are money losing investments)

18.5% of stocks lost at least 75% of their value
(Nearly 1 out of every 5 stocks is a really bad investment)

64% of stocks underperformed the Russell 3000 during their lifetime
(Most stocks can’t keep up with a diversified index)"

These data support my thesis that index investing is a very good thing. A small investor who buys only a few stocks greatly increases her risk of extreme unpleasant outcomes. Buying the index reduces those risks.

 

11 Comments – Post Your Own

#1) On December 02, 2008 at 2:25 PM, hansthered0 (< 20) wrote:

word is born...

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#2) On December 02, 2008 at 2:28 PM, socialconscious wrote:

Agreed most people should have all of their money go to indexes in lieu of mutual funds. That is more true than ever in this volatile market. IMHO If you are a seasoned investor and wish to invest in a portfolio of diversified individual holdings you should still have the lion's share of your money in indexes, limit it to 5-7 stocks,committ yourself to real extensive research and understanding market trends which will become in itself a full time job. Again IMHO.

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#3) On December 02, 2008 at 2:56 PM, thecage41 (96.01) wrote:

Any preference between VTI, VEU, and VEA (or other similar ETFs)?  I think I like VEU or VEA since VTI is around 50% US (more diversity).

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#4) On December 02, 2008 at 3:44 PM, EverydayInvestor (100.00) wrote:

socialconscious - 5 to 7 stocks is not enough. That is the main point of this article. Because most stocks underperform, you need to have more stocks to catch the few big winners.

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#5) On December 02, 2008 at 4:09 PM, DemonDoug (99.85) wrote:

index investing is good if you can time the market and get out near market tops.

Otherwise you run the risk of losing big time if you get in near the market tops.  (I continue to say "look at a long-term chart of the Nikkei" for a good example.)

Otherwise, you're better off buying a company like JNJ.  Why?  Because it is a diversified company, pays a dividend, has been around for a long time (through multiple recessions/depressions), has needed products, and when you look at it, it's basically like a mutual fund, a diversified portfolio of separate companies.  One reason I got out of VIVAX in 2007, for example, was that it was heavily weighted in financials.  Looks like a damn good decision now - I actually made a good profit on that one (bought in 2006, sold one year later and profited).

But yes, indexing is a great way to go if you want a good long term steady play on the market.

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#6) On December 02, 2008 at 4:46 PM, johnw106 (30.60) wrote:

Another general rule that I like and seems to make a lot of sense for ETF index investing is the "age" rule.
Bonds. Not risky junk bonds but a solid ETF like AGG or BND invested at a % equal more or less to your age.

So if you are 20 you could be 80% index stocks/ETF and 20% bonds ( or something similar like CD's ). I am 49 today so I should be around 50% or  a bit less in bonds. I am not. So my near term investing is into the BND ETF until I get to 40% to add to my 10% in Cd's.

These are not hard and fast rules of course. You may feel more comfortabl going higher or lower on the ratio. So at 30 you may have 40% in bonds or 25% in bonds etc.

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#7) On December 02, 2008 at 5:58 PM, dexion10 (28.13) wrote:

very insightful - A rec for you sir!

 

BUT... do you have any individual stock tips - ha ha ha!

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#8) On December 02, 2008 at 9:30 PM, Tastylunch (99.53) wrote:

I knew it was bad, I didn't know it was that bad. Thought it was more like 55-60%. Kinda funny how a group can move faster than an individual over long distances, it's a bit like a flock of birds.

explains a lot about mutual funds doesn't it? Fees + odds + sheer size = recipe for underperformance...

It does bolster your theory about index funds especially for passive/typical investors, but I still think proper risk management can enable a talented stock picker to outperform indexes over humanly significant periods of time.

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#9) On December 02, 2008 at 10:21 PM, kfisherprotege (32.40) wrote:

deworsification!

No seriously, it's an interesting article.  But I can't entirely agree with the conclusion: that an index fund will often outperform a bunch of carefully selected picks.  It takes just one multibagger to more than make up for several losing picks.  Admittedly, they're harder to find, especially in this bear cycle.

I like the article's explanation of the common traits of the winning stocks.  They're out there.  It's a Fool's job to find them.

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#10) On December 03, 2008 at 8:55 AM, abitare (99.59) wrote:

Good post. How about a donut sandwich?

 

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#11) On December 03, 2008 at 10:19 AM, EverydayInvestor (100.00) wrote:

Demondoug - the problem with your argument is that the same thing could have been said for Enron, or GE, or any number of large companies that have underperformed. By buying one company you increase your risk of significant underperformance.

kfisherprotege - do you seriously believe you can outperform the market? Have you done so? Can you do so after tax costs? Let's say you outperform the market by 2% a year in a taxable account and you have turnover of 100% a year. In year one you are up by 10% versus 8% for the market. Let's say your combined state/federal tax rate is 30% and all your gains are short term. After taxes you have underperformedby 1% (because the index fund has negligible turnover). If all  your gains were long-term you still only equalled the index. And let me say that to beat by even 2% per year is very, very hard.

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