Why can’t I just pick my own stocks and make the big bucks?

AI images of young freelancers about to make a mess, egged on by Wall Street or some Instagram influencer.

The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!

It’s called stock picking, you try to pick winning companies like Apple and Telsa or some unknown startup. You do your own research and then buy them inside the i401k with Schwab or another provider. Here is the problem and I’m going to shout this:

Almost no one who stock picks, will ever beat a Three-Fund Portfolio long term.

Well, almost no one, there is Warren Buffett and his buddy Charlie (who sadly passed away in 2023). The market is just too unpredictable; it’s very hard to constantly match a low-cost Three-Fund Portfolio using passive index funds. It’s also really stressful putting a lot of money into a few companies and watching some tank.

“Boring!” you may be saying. I’m not suggesting you never buy individual companies, because it can be fun. I would suggest having an allocation of only 1-2% for buying individual stocks to limit damage to your i401k if it goes tits-up.

Here is another dirty secret: even the investment pros on Wall Street that run actively managed funds don’t beat the market average. Actively managed funds have a small army of people in suits and polo shirts try to pick winning stocks, yet only a small percentage of the time beat the S&P 500 index and not regularly. Data as of June 2023 shows that 92.19% of actively managed funds over a 15 year period underperformed the S&P 500.

The funds we use in the Three-Fund Portfolio are passive; they just track an index of companies, which is why they are so cheap.

‘The market’ is what we are buying with our U.S. fund, and it costs us almost nothing, 0.03% with Schwab. Example: $300,000 in an account costs $90 in fees a year.

So why do people try to stockpick?

The Wall Street investment services machine makes money off you when you trade a lot, so it encourages investors to think they can pull it off. It’s also a little like gambling, so you get a rush out if it.

Actively managed funds and investment providers who want to manage and pick your stocks for you charge a fee, typically 1-2% of the amount invested. Guess what, 2% of a $300,000 portfolio is? $6,000 in management fees every year and it’s extremely unlikely they will even match a Three-Fund Portfolio’s long-term performance. As you can see above, why would you pay someone money over a 15-year period when only 7.81% of funds even beat the market?

The Influencers

Internet ‘influencers’ who want your views or clicks (because that’s how they make their money) want you to think you can make the big bucks, too. Then we have the randos on some Reddit groups tell us we can trade and make loads of money, people will brag about how much they made on a trade, but rarely do they tell you when they screwed the pooch and lost big time.

Investor Psychology

Investor psychology also plays with our minds. You see a company’s stock skyrocket and think, ‘I should have bought that!’ But the truth is that for every winner you have, there will be losers in your portfolio, too, that kill those gains. I know; I’ve tried.

Psychologists also call it ‘hindsight bias,’ when knowledge of the outcome alters one's memory of what one was thinking at the time. That’s the ‘I knew that stocks were going to go up’ feeling.

Many services and investment providers see you as a way of charging us fees and making a fortune, that’s their business model. They call us the ‘dumb money’ on Wall Street.

Isn’t this a bit boring then?

Using a three-fund portfolio is awesome because you can relax and watch your money grow over the long term. If you do want to try and pick the odd company and buy shares, go for it. I would suggest making that part of your portfolio around 1-2%. If you have a $200,000 portfolio, use $2,000 to buy some Tesla, Apple, or whatever you like for fun. With most stock brokers now, like Schwab, trading is free, so you can buy just one share if you like.

Don’t get sucked in through because a few of your picks have made some money. Long term, as you have seen above, even the pros can’t beat the stock market average.

Check out The Knowledge post here on what CNBC says about us, ‘Lazy Investors’ at the start of 2024. The market went up 26% in 2023, we captured it all, while the ‘smart money’ misjudged thinking there was going to be a recession and played around on the sidelines.

The Wall Street pro. Yeah, we’re not giving our money to this guy to invest. (Adobe Firefly AI created image for me so I can’t be sued by some Wall Street bully.)