1

I'm trying to understand the upsides/downsides of investing to an index fund vs. investing directly to stocks of some best-known and well-established large-cap companies. Every single article on investment strategies says that for someone, who does not want to become full-time investor, the best thing is to invest in an index fund and wait 10+ years till your money grows. Let's compare some well-established large-cap companies' performance with performance of well-established index funds.

For instance, let's take average yearly growth percentage for the last 10 years for some companies:

  • Apple - 28.09%
  • Amazon - 33.32%
  • Nvidia - 45.27%
  • Microsoft - 26.66%
  • AMD - 27.94%
  • Mastercard - 31.34%
  • Shopify - 44.50%
  • Square - 32.19%
  • MercadoLibre - 36.98%
  • Netflix - 32.81%

Let's compare them to some well-regarded index funds:

  • Vanguard U.S. Growth Fund (VWUSX) - 18.54%
  • Vanguard Growth Index Fund (VIGAX) - 16.82%
  • Vanguard Total Stock Market Index Fund (VTSAX) - 14.04%

My thoughts:

  • There is a huge gap between growth of the stocks vs. growth of the index fund
  • Yes, I know that index funds are created by smart people/algorithms to be more reliable than usual stocks of several companies and they follow some particular indices for a reason.
  • Yes, I know they include other stocks apart from the ones I mentioned above to balance the portfolio and defend against drops in price of the main stocks
  • Interestingly, the lion's share of the cost of each of the growth index funds consists exactly of the companies I listed above
  • Yes, I know that I included mostly companies from tech and finance sectors. But those are the ones, which are expected to grow best of all anyway, because the whole economy is driven by them. If the economy would collapse, then those companies would collapse with it and vice versa. I don't see any single chance that any other sector can in the nearest future outperform the tech and finance sectors, or that those sectors may fall much more than the rest of the businesses.

My question is: what would I get investing in much worse growing index fund vs. investing to some chosen well-established large-cap companies?

Improve this question
9
  • 1
    Did you make your selection of well-established large cap companies based on the conditions of 10 years ago. For example square was founded 11 years ago.
    – mhoran_psprep
    Dec 14, 2020 at 13:06
  • @mhoran_psprep Yes, I was looking at netcials.com/stock-10-year-history-nyse/SQ-Square-Inc. For Square it probably just takes what it has, 5 years, not 10. But I took 10-year interval for all of them
    – afrish
    Dec 14, 2020 at 13:11
  • 4
    There is no guarantee that these stocks will have growth in the next 10 years. You should have based your examples on what you would have picked 10 years ago, not the stocks you wished you had picked 10 years ago.
    – mhoran_psprep
    Dec 14, 2020 at 13:15
  • 2
    In order to outperform, you must be able to pick the stocks in the index that will outperform over the next 10 years. If you have the ability to do that, buy the stocks.
    – Bob Baerker
    Dec 14, 2020 at 13:19
  • This is a conceptual word-for-word dupe: money.stackexchange.com/a/127868/41786
    – Fattie
    Dec 14, 2020 at 14:35

2 Answers 2

Reset to default
3

You are simply applying confirmation bias.

The same question comes up almost daily on this site.

"Why not just invest in Apple?!"

Here's my Famous Answer which tries and tries and tries to explain to folks what confirmation bias is. But it never helps.

There'll be another "Why not invest in Apple?!" question tomorrow :)

https://money.stackexchange.com/a/127868/41786

Look at the chart of Apple.

Improve this answer
2
  • And your Famous Answer still needs a legend on the chart.
    – user253751
    Dec 14, 2020 at 15:43
  • Or conversely, why not invest in Enron? Or Blockbuster, Borders Books, Sports Authority, or any of the multitude of other companies that went bankrupt in the last decade? businessinsider.com/…
    – jamesqf
    Dec 14, 2020 at 17:08
5

The main highlight of an index fund is that it does not need to be managed. It is very easy to pick stocks after they have grown but impossible to know what will happen in the future. Who is the next Apple? Will Apple continue to beat the S&P?

A big question is you have to decide what are your goals for investing. For many, it is to fund a nice retirement at an older age and provide an advancement for their children by helping with education and an inheritance. For those index funds serve very well, but your goals may be very different.

The key to answering your question is looking at mutual funds run by professional managers. Once fees are included, they rarely beat the S&P 500 over the long haul. Perhaps you can do better, perhaps not.

Personally I do own some single stocks, but not many. I do own some actively managed funds, but not many. The bulk of my investments are in boring old low cost index funds. There is a lot gained by not having to do much to manage one's investments. The time spent either focusing on one's career or at leisure is worth something and perhaps more profitable.

So what is a more profitable activity? Actively managing one's funds or working more/concentrating on ones career? For investors, just starting out, the career choice is a better one.

Say a person has 10K to invest. If they can beat the S&P by 10%, they will earn an extra $1,000. Pretty good. But would they be better served advancing their career? Probably. It is pretty easy to work overtime or more hours and make more than $1K. A more lasting effect is to obtain new skills or a promotion that can lead to higher income now and in the future.

Improve this answer

Not the answer you're looking for? Browse other questions tagged .