As retail investment in the stock market sees renewed interest, more platforms with an aim toward that demographic are emerging. Companies like Robinhood, a newer brokerage specializing in fractional share trading, have added market share through this approach. While stocks, the research done by analysts and firms, and profits can all be fascinating, it has proven best, time and time again, to resist the lure of individual companies or mutual funds in favor of a solid ETF.
The charts of the S&P 500 and similar indices might lead one to believe the market has been shelling out money to investors with incredibly great rates of return in recent years. While the index funds have enjoyed these bull runs, the regular investors of the market, for the most part, have not. Dalbar’s Quantitative Analysis of Investor Behavior of 2014 found individual investors average a rate of return of 2.6% over ten years, which is incredibly unimpressive when compared to the returns of SPY, an S&P 500 ETF that averaged 7.4% in the same period, according to Forbes’ Sean Hanlon. Compound interest amplifies the impact of the return lag to widen the gap further.
Part of the poor returns of average investors may stem from emotional decision-making, which can be devastating for a portfolio. For example, if, during the Great Recession a little over a decade ago, an individual investor liquidated their portfolio to stop the bleeding, not only would the return likely be negative, but a massive bull run follows without any equity in the market to benefit. Trying to time the market can often get in the way of portfolio returns, which is why the founder of Delancey Wealth Management, Ivory Johnson, recommends checking portfolios no more than four to six times a year.
When holding an individual company’s stock, the earnings season is stress-filled. If an earnings report is unsatisfactory, the market reaction can harm retirement savings or nest eggs. ETFs, funds holding a large basket of different companies, experience more minor reactions to isolated corporate disasters. Recent staggering losses in companies like Netflix, down to around one-third of its high, further show why dependence on one earnings report can expose oneself to unnecessary risk.
When considering individual investors’ poor track record of stock-picking compared with the returns of ETFs, the emotional toll of trying to beat the market, and the added risk of overreliance on individual companies’ earnings, the right places to put one’s money are ETFs. It rings true one must not try to beat the market, but rather be it.