Michael James has a fairly good article on why he chose to stop investing in individual securities and instead just go with low-cost index funds (or ETFs).
Putting a long story short, he put in a lot of time into researching the stock market between 2000 and 2008 and failed to outperform his baseline index and then a couple years later made the decision to just give up and index.
Pretty smart, I would say.
When I look at my own performance where I have an 8-year baseline of data, 3 of those 8 years I have underperformed the major indicies. One of those years I definitely attributed to mental stupidity on my part and is a genuine outlier year of profound incompetence (2011). Overall, I am still performing about 12% over the S&P 500, but this could just entirely be luck. Very difficult to say as I do not believe 8 years is a sufficient baseline.
If I was performing at or close to the index average, I would easily say that giving up would be a good option.
The other component of individual equity and bond investing is that it requires a lot of time and mental concentration to be able to pluck value out of the marketplace (and more importantly, to know when to pluck it out!). An index investor just needs to decide what low-cost baskets to put his/her money into (e.g. an all-equity allocation would be 20% TSX, 20% S&P 500, 20% S&P 400, 20% S&P 600, 20% International) and just sit back. Of course, there is a science to this as well that requires a certain amount of research, but the idea is to just set the autopilot switch on and forget about it while focusing on other parts of life.
I have recently reduced my stock picking because it is simply too time consuming. I’ve moved large portion of the portfolio over to a couch potato 60/40 equity fixed income split. It is pretty stressful to invest $x.xx/month of professional corp income.
It takes an enormous amount of effort to properly scrutinize and individual security, and despite all that work there’s always an element of luck involved. Plus, in order to have an impact on the portfolio, there needs to be some degree of concentration – and the risk/ reward that ensues.
It’s actually quite liberating, and there’s alot more to life than money.
I’ve also toured around the stockhouse CSI forums just after the bankruptcy – there are some aweful posts describing horrific losses. No doubt some did their homework, held on too long, and were wrong. If an index fund ever did that, i’d be buying guns and land. The stock market would be the least of our problems.
I completely agree that investing for others is different. It is much more difficult to rationalize risky decisions, especially when they do not work out.
A core advantage of individual investing is the ability to concentrate, especially in less than liquid issues. Why give up these advantages?
As for CSI, I believe shareholders had plenty of time to get out in 2013 when I read their history. Whather they got out at a 25% loss or 90% is another story, but with these speculative mining issues, concentration levels must be kept appropriately low.
I won’t completely give up on concentrating on certain securities, especially news driven large caps (ie BP, Transocean, SNC Lavalin).
However, my days of small cap trading are over. At most, I would only put $5-$10k into such a venture. Given the small amount invested it doesn’t meet the return given the level of effort required to make an informed decision.
Also, the SP for smaller issues are heavily influenced by insider information. I never really knew to what extent this occurs on a day to day basis until I got a magical tip.
If it’s cheap…it’s cheap for a reason!
Take a look at Frontline’s recent documentary on SAC. http://www.pbs.org/frontline