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Honored Social Butterfly

WHY DOES AARP GO OUT OF ITS WAY TO PROVIDE A DISSERVICE TO ITS MEMBERS?

Just read an article on the web site, written by a supposed financial analyst, touting that people SHOULD NOT invest in individual stocks.

 

What a disservice to AARP members.

 

Investing in individual stocks, properly vetted, appropriately diversified, result in excellent returns over time.

 

Financial analyst are likened to vultures, feeding on the carrion of their clients, hunting the almighty dollar.

 

I have decided what individual stocks I choose to own making sure I was diversified by sectors, industry, products, and services and over time, those stocks have provided a 400% return.

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@nctarheel 

Most of us don't know enough to duplicate your success. My money is in index funds because I know from experience that I'm bad at picking stocks. Most of the people I've talked to don't know that much about it. I don't think becoming an expert investor is that easy.

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@nctarheel 

If your investments returned 400% over a period of many years, An index fund might have similar returns.

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https://www.investopedia.com/articles/personal-finance/022216/put-10000-sp-500-etf-and-wait-20-years...

Bronze Conversationalist

@DirkB349973 and @nctarheel Competitive measurement is a skill that some avoid for one reason or another. A  mutual fund, EFT, or an individual investor may use a simple average or average return to measure results/performance over various periods of time. This approach, generally, provides a greater percentage (yield). If one is selling mutual funds or EFTs, the numbers look better. However, using the Compound Annual Growth Rate (CAGR) is, IMO, the better approach to measuring results/performance. Based on the math, it will always result in a smaller percentage (yield) than a simple average or average return. Considering other factors for risk (i.e., standard deviation, weighing the components of the portfolio, etc.) may add value especially when comparing multiple investments. In other words, are you receiving an appropriate return for the risk you accepted for your investment. Remember, in the very short run, returns may be negative. So, for folks investing for retirement, measuring over longer periods such as 20 to 30 years makes sense. Moreover, using a low cost index fund such as the S & P 500 (approximately 70% to 80% of the market) or a Total Market Index fund will outperform about 85% of investment managers over the long term. There are investment managers that have an outstanding performance over short periods of time. However, that requires over weighing a sector (i.e., tech, consumer discretionary, etc.) which increases portfolio risk; and, begs the question if the results are positive, did the returns compensate you for the amount of incurred risk. I am sure we all know that it is difficult to diversify risk with a small selection of individual stocks. This is probably why financial advisors steer folks into mutual funds and EFTs. The amount of concentration using 10 to 15 individual stocks may provide an outstanding return over short periods and will require changes every now and then. Most financial advisors do not spend the required amount of time to study and research individual stocks. IMO, folks should use the index approach for retirement accumulation. As I understand the index approach, it is weighted by market capitalization or equal weighted and managed by a computer program with very little human interaction.  

Conversationalist

@Tonster521 

I agree with your post and especially your suggestion that an index fund is probably a better choice for most of us.

Bronze Conversationalist

@DirkB349973 Thanks for your positive comment. I am providing a link from slickcharts that indicate the current stocks that are included in the S & P 500 Index. https://www.slickcharts.com/sp500  Please note the applicable percentage for each company in the Index. So, if you invest with a S & P 500 Index mutual fund or Exchange Traded Fund (EFT), you are investing in at least 500 companies. I suspect that most folks are aware of the top 10 to 15 companies. However, not many folks will know all 500 companies. So, the Index approach provides diversification which eliminates concentrating in just a few companies. Moreover, it is easy to invest with a low cost S & P 500 Index Fund.

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The article may not be fully balanced for sure. It is true that it is a bit more effort to properly research and monitor individual stocks initially and over time. But one should also properly research and monitor funds and fund management, too. Fund managers can change or even fund goals can shift over time, too. One should remain on top of those things for funds and make choices as to when to get out of a fund, too. There are risks and benefits to both. I would not want an entire portfolio to be based on a bunch of individual stocks, though. I find one advantage of having some individual stocks - at least in my taxable account - because they are more 'tax-efficient' - you don't incur surprise imbedded taxable capital gains each year like many mutual funds do.  Also, there are no annual management fees or expense ratios to eat into the dividends earned each year. But, that said, I do not have to time or interest to try to self-manage more than 6-10 individual stocks. And since that is not enough to have a sufficiently diverse portfolio, it is good to also have funds for most people.

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