Should you ever pick individual stocks?

You might have read claims that the broader stock market regularly beats active fund managers who pick stocks and funds. While that’s true on average, I’ll explain why “don’t pick stocks” is a binary argument that’s more useful as a scare tactic than an actual investing lesson. But first, a reality check.

In the last 5 years, the S&P 500 beat 3 out of 4 of large-cap funds (SPIVA, 2020). That’s for cushy fund managers who do this for a living. This next table, which I’ve roughly translated from an Evidence Investor post, says more about the prospects for retail investors trying to pick stocks.

YearS&P 500 PerformanceStocks that lost money
2020+18.4%203 stocks lost money
2019+31.5%55 stocks lost money
2010 – 2020+13.9% annually51 stocks lost money
2009+26.5%40% of 7,608 U.S. stocks lost money

Certainly the odds look better than putting it all on black at a Vegas casino. But these numbers hide the fact that you have to be right twice to make money in stocks—when you buy and sell. Unfortunately, most investors try to time the market and end up losing.

Nick Maggiulli, one of my favorite financial bloggers, recommends against picking stocks from the angle of avoiding existential dread:

Did the stock go up because of some change you anticipated or was it another change altogether? What about when market sentiment shifts against you? Do you double down and buy more, or do you reconsider?

These are just a few of the questions you have to ask yourself with every investment decision you make as a stock picker. It can be a never-ending state of existential dread. You may convince yourself that you know what’s going on, but do you really know?

This is the psychology of playing an open, fluid game. As Maggiulli says, investing doesn’t have the short feedback loop of sports other skills where it’s immediately clear how good you are at something.

Does this mean you shouldn’t invest in individual stocks, ever?

These critics have good intentions; they don’t want you to lose money. They concede that outsized returns can be earned with individual stocks. It’s just that the chances are pretty low, especially over long periods of time. But they leave you without much direction other than “don’t invest more than you can afford to lose.”

Dig deep enough, and you’ll find that many financial pundits have a guilty pleasure holding, or have more skin in the game in a stock more than they’d like to publicize. Instead of just telling you to be a stoic investor and avoid stocks altogether, I’d rather present you options for how to build your own strategy.

Haters gonna hate, traders gonna trade.

Given that investors will do what they want with their money, I think there’s a strategy to maximize optionality.

Third path: invest in the market and do some stock picking

The problem with the prior critique lies in its binary framing that investors should only invest in the S&P 500. But buying index funds is not mutually exclusive with stock picking.

In the world of venture capital, VCs spread out their bets over several companies. The logic goes that picking one huge winner will make up for the rest of their losses in the portfolio.

  • Start with $1 billion
  • Investments #1-49: lose $900 million on hopeful duds
  • Investment #50: make $10 billion on the next Google, AirBnB, etc

We can borrow this strategy at a smaller scale by containing it to one “stock picking” portfolio.

In my M1 finance portfolio, I’ve allocated 50% of my stock picks to the S&P 500, and carved out 37% towards my own stock picks.


This is not a recommendation; just an illustration of what’s possible. As I mentioned last week, my “stock bets” were handily beaten by the market. Even so, I’m comfortable with the small amounts in this particular portfolio, and have a long time horizon (5+ years) for all the stocks I’m holding.

Roll your own portfolio

They say don’t have all your eggs in one basket; I say don’t have all your money in one account. Here’s my laddered setup:

  • Yolo stock picks: Robinhood, Webull, etc
  • Long term stock picks + index funds: M1 Finance
  • Safer, boring index funds: retirement accounts like Vanguard

By pairing a barbell strategy with a free investing service, investors can have their stocks and index too. You can adjust your allocation not only within each portfolio, but across all portfolios too. This makes it so that you’re containing “money you can lose” to one account while protecting your long term investments.

The extra psychological distance (even if it’s a digital one) helps with financial discipline.

What do you think about the merits of stock picking versus only using index funds? I’d love to hear your approach.

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