I started off 100% in Vanguard funds about 5 years ago. I spent literally a month researching it before I bought as I think through what I’m investing in. I started buying individual stocks about exactly 3 years ago.
I assessed what my stock investing return is compared to the funds. I just did a calculation, my whole portfolio return is 176%. If I take out the funds, then my return is actually 304%, which surprised me to be honest. I’ve got about 50 different investments, I’ve never sold any of them, I generally weight my investing towards where I am having success.
That’s not technically true because of the positive return skew (mean stock return > median return) which is the biggest drag on small portfolio returns.
You’ll achieve average returns but you’ll actually beat most investors.
Nope, very few stocks are responsible for most of the return
The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform,” says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.
Which puts small portfolios (10s of stocks vs 1000s) at a distinct statistical disadvantage.
Our model (which is but one way of looking at the problem) suggests that the much higher cost of active management may be the inherently high chance of underperformance that comes with attempts to select stocks, since stock selection itself increases the chance of underperformance relative to the chance of overperformance in many circumstances. To the extent that those allocating assets have assumed that the only cost of active investing above indexing is the cost of the active manager in fees, that assumption should be revisited. Active managers do not start out on an even playing field with passive investing. Rather, active managers must overcome an inherent disadvantage. The stakes for identifying the best active managers may be higher than previously thought.
The flip side is of course that those who do win, tend to win big.
Thanks - I think his research is at a firm level and I agree they’re positively skewed. At an aggregate I had read that they’re negatively skewed. I think the market-weighted construction of most trackers might get around that however.
This thread was an interesting read. The reasons I stick to one broad index tracker are well summarised in this 2007 WSJ article by John Bogle about the proliferation of ETFs:
Just want to say thank you - I always value your opinion and you post some excellent nuggets of information that push me to research some things further for my own benefit. I am pretty sure I’m not the only person on here that thinks this of course there are many in this community that do, which I and many others are eternally grateful for, but in this moment I just want to note yourself Thank you!
I highly appreciate your comment. ( With gratitude, people acknowledge the goodness in their lives … Gratitude helps people feel more positive emotions, relish good experiences, improve their health, deal with adversity, and build strong relationships.)
Everyone has his own strategy his own way of setting expectations and adversity to risk.
Never take anyones advice, unless its Einstein.
According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” At first this quote might seem like a bit of an exaggeration but the math behind it shows that it is not.
Look it up and apply ir ro your own horizon and aspirations.
Starting with your last point first. It comes down to scale. If you have a large portfolio then adding 1% to your CAGR may be worth more than your salary, if you have a small portfolio then it may not.
With that in mind…
Professional Money Managers:
some won’t be great and will underperform the market (probably sacked at some point)
some will be average and will performing in line with the market
some will be great, and move into leadership/partner roles (further away from the day to day action?)
some will be really great and realise that they can earn more money managing their own private fund than being paid for someone elses (don’t forget, those in firms will be restricted on their own personal trading activity so why stay and earn money for others when they could go off doing what they do best and maximise their own investments)
What does that leave you? It leaves you scrambling about trying to work out which funds are managed by 1s/2s and which aren’t - for me, it’s easier to tell a great stock than a great fund manager so happy to give it a go myself.
I would say stock picking is actually quite hard because you will lose more often than win. The Research above shows that your often looking for a needle in a haystack because only a handful of stocks are responsible for the majority of stock market returns.
I mean that passive investor should not bother too much about proportions or better stocks or even his own valuation over markets.
I feel like real passive investor just put his money in less than 5 ETFs and just buy shares with free money And have additional time for home and family.
of course there are many in this community that do, which I and many others are eternally grateful for, but in this moment I just want to note yourself 
Thank you!
And have additional time for home and family.