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All the things I’ve read about passive funds have pointed in the same general direction. I can completely buy the reasoning but I worry I’m missing part of the

All the things I’ve read about passive funds have pointed in the same general direction. I can completely buy the reasoning but I worry I’m missing part of the point, which brings me to my question. In a scenario where passive funds are the best investment vehicle when looking at long term returns, what’s the role of buying and/or trading individual stocks? Are there cases in which you’d prefer stocks over funds? I’ve got some Netflix, Microsoft and Apple stock which I plan to keep for the long term. I could never figure out if that money would’ve been better spent as a fund purchase. What trips me up is stocks tend to lead to bigger earnings (when things go right) and companies like Apple are almost certainly going to remain valuable for a long time. What am I missing? Edit: this has been a recurring theme in discussions I’ve had with my dad (who’s a financial advisor, ironically). I’ve pointed out to him that passive funds seem better but he keeps wanting to put my money into stocks, active funds or sometimes narrow, low(er) cost managed funds (e.g. biomedicine and robotics stuff).

doovd 4y ago
> what’s the role of buying and/or trading individual stocks? Loads of reasons to do so: 1. You might have enough alpha to beat the returns of an index. 2.You prefer a more market neutral strategy and construct your own basket, maintaining it over various timescales. The fact is that most of these reasons don't apply to your average retail investor though.
- terabytest 4y ago
  Would you be willing to go into more detail about those two reasons? I feel I don’t have enough experience to understand the reasoning underlying them.
  - ironSkillet 4y ago
    I can try to provide some additional information: 1. If you have a view of current market dynamics that you think many other investors have wrong, it can be profitable to go long/short an individual stock. E.g. you have some data suggesting that company XYZ is going to have a great quarter relative to market expectations, and buy some of the stock. Hedge funds do this all the time, with mixed success. 2. Some investors don't want to be exposed to the up/down trends in the overall market, and would prefer an investing strategy whose return/risk profile is independent of the general market. You can do this by creating long/short portfolios in individual sectors/stocks. For example, if you are long stock A, short stock B, you can make money if the market rises or falls, as long as you were right about the relative performance of each stock. In a rising market, you would make money if stock A gained more than stock B. In a falling market, you would make money if stock A lost less than stock B.
digianarchist 4y ago
It’s worth reading A Random Walk Down Wall Street. Most actively managed funds fare worse than passive ETFs over a large enough investment timeline. Individual stocks are volatile and shouldn’t be used as the bulk of one’s retirement portfolio. It’s all about risk analysis and mitigation.
- JKCalhoun 4y ago
  Or read anything by "Jack" Bogle (R.I.P.).
samjmck 4y ago
> companies like Apple are almost certainly going to remain valuable for a long time Based on what? At the end of the day, that's speculation. Who's to say Apple and other stocks you're holding won't suddenly stop beating the market?
jt2190 4y ago
> In a scenario where passive funds are the best investment vehicle when looking at long term returns, what’s the role of buying and/or trading individual stocks? Just to be clear, there are two interpretations (possibly more) of “best” in your question: * an index fund is “best” if its returns are greater than picking individual investments yourself. * an index fund is “best” if it is the quickest/cheapest way to balance risk and reward over the long term. I would guess that the majority of investors in index funds are looking for the quickest/cheapest approach. If your appetite for risk is greater and you have some time available time to manage things yourself, you can certainly manage your own portfolio.
lawn 4y ago
> Are there cases in which you’d prefer stocks over funds? They're more fun. > What trips me up is stocks tend to lead to bigger earnings (when things go right) Cryptocurrency investments also tend to bigger earnings when things go right. The crux is the WHEN and IF you buy the right stock at the right time AND IF you sell it at the right time. Which most people cannot do consistently, meaning it's more up to luck than skill. > I’ve pointed out to him that passive funds seem better but he keeps wanting to put my money into stocks, active funds or sometimes narrow, low(er) cost managed funds (e.g. biomedicine and robotics stuff). Your dad sounds like a horrible financial advisor if that's the investment advice he's giving his customers.

doovd 4y ago

> what’s the role of buying and/or trading individual stocks? Loads of reasons to do so: 1. You might have enough alpha to beat the returns of an index. 2.You prefer a more market neutral strategy and construct your own basket, maintaining it over various timescales. The fact is that most of these reasons don't apply to your average retail investor though.

terabytest 4y ago
Would you be willing to go into more detail about those two reasons? I feel I don’t have enough experience to understand the reasoning underlying them.
- ironSkillet 4y ago
  I can try to provide some additional information: 1. If you have a view of current market dynamics that you think many other investors have wrong, it can be profitable to go long/short an individual stock. E.g. you have some data suggesting that company XYZ is going to have a great quarter relative to market expectations, and buy some of the stock. Hedge funds do this all the time, with mixed success. 2. Some investors don't want to be exposed to the up/down trends in the overall market, and would prefer an investing strategy whose return/risk profile is independent of the general market. You can do this by creating long/short portfolios in individual sectors/stocks. For example, if you are long stock A, short stock B, you can make money if the market rises or falls, as long as you were right about the relative performance of each stock. In a rising market, you would make money if stock A gained more than stock B. In a falling market, you would make money if stock A lost less than stock B.

digianarchist 4y ago

It’s worth reading A Random Walk Down Wall Street. Most actively managed funds fare worse than passive ETFs over a large enough investment timeline. Individual stocks are volatile and shouldn’t be used as the bulk of one’s retirement portfolio. It’s all about risk analysis and mitigation.

JKCalhoun 4y ago
Or read anything by "Jack" Bogle (R.I.P.).

samjmck 4y ago

> companies like Apple are almost certainly going to remain valuable for a long time Based on what? At the end of the day, that's speculation. Who's to say Apple and other stocks you're holding won't suddenly stop beating the market?

jt2190 4y ago

> In a scenario where passive funds are the best investment vehicle when looking at long term returns, what’s the role of buying and/or trading individual stocks? Just to be clear, there are two interpretations (possibly more) of “best” in your question: * an index fund is “best” if its returns are greater than picking individual investments yourself. * an index fund is “best” if it is the quickest/cheapest way to balance risk and reward over the long term. I would guess that the majority of investors in index funds are looking for the quickest/cheapest approach. If your appetite for risk is greater and you have some time available time to manage things yourself, you can certainly manage your own portfolio.

lawn 4y ago

> Are there cases in which you’d prefer stocks over funds? They're more fun. > What trips me up is stocks tend to lead to bigger earnings (when things go right) Cryptocurrency investments also tend to bigger earnings when things go right. The crux is the WHEN and IF you buy the right stock at the right time AND IF you sell it at the right time. Which most people cannot do consistently, meaning it's more up to luck than skill. > I’ve pointed out to him that passive funds seem better but he keeps wanting to put my money into stocks, active funds or sometimes narrow, low(er) cost managed funds (e.g. biomedicine and robotics stuff). Your dad sounds like a horrible financial advisor if that's the investment advice he's giving his customers.