That research isnāt really relevant to individual stock picking especially on freetrade where there arenāt any fees.
If you assume the efficient market hypothesis is correct (I donāt think it is but it helps simplify things), then youāll actually get higher returns on average investing in 5 stocks cus you like the tickers than investing in a index fund. Obviously it would involve a lot more risk and it would be a terrible idea but itās just to show beating the market isnāt impossible.
I think a HUGE benefit to picking is motivation I find it highly motivating to āplayā the markets so end up depositing more than I might of had it been in a fund. That being said I think I bet on relatively safe bets that I expect to make around 5-10% on. Maybe this time next year I will be a champion of funds
Yeah but thatās after fees are taken in account, if youāre picking your own stocks and not paying fees then a more appropriate comparison would be how many people beat the market before fees are taken into account.
Most of my money is still in cash as I put in the full Ā£20k before the end of the tax year, but Iām dollar cost averaging it in (which might be a bad strategy unless there are some bigger dips soon)
I think since March 2020 after the Covid crash it has been easy to beat the market as there were so many recovery stocks. I was late to the game and started in February 2021 but thereās still some decent recovery plays out there. Iām moving more into growth stocks lately with the likes of DDDD, SNG and RMM. All have potential to double their share price this year. But those kinds of stocks donāt come without risks. They can spike and Iāve been caught out with bad entry points in the past.
I donāt think you need million pound salaries and teams of resources and analysis to beat the market. For day trading maybe, but for medium to longterm investing no. Just proper research is enough.
For argumentās sake, look up the statistics and remove the fees of the active management and that should give you a guide on how well they track it? If, 92% of active funds for the S+P trail the index with fees, I canāt imagine that removing fees would push too many of them into finally matching or exceeding the S+P.
I think it would be difficult to analyse individual stock picking portfolios though, I canāt imagine too many people would willingly divulge the information (outside of when they are beating the market!) over a 15 year period? I think most places online that tried to emulate these things have mostly admitted failure, with the ones claiming success always conveniently being hidden behind paywalls and subscription access, which makes me somewhat suspicious of them, alternatively they spam so many picks that one or two winning bets covers up the 95 bombed picks.
I found this article from last year, which seems to say that on āaverageā retail investors sell too early and buy too late;
Admittedly, I havenāt looked too much indepth for the research though, mainly because Iām content that lots of websites and analysts seem to be singing from the same hymnsheet about active/passive, and because I simply donāt have the money to jump into individual stock picking myself anyway!
Iām in agreement with @Brap_the_younger that in the long term things level out and most people will lose out, but that aside itās fun to do, so like him, I have 5% of my portfolio to individual stock picks. I only actually have two picks look at me go! But one of them is already ābeating the marketā at 10% growth in a month, so everyone, nominate me as your active manager for this month, Iāll make you rich! Whatās that, the other one I picked? Oh, never mind that one, look at this wonderful 10% growth. >_>
Iām not against passive investing at all, a significant amount of my portfolio is in index funds. However, the pros and cons of active funds vs passive funds and choosing your own investments vs passive funds are very different.
Passive investing can get better returns than active funds because of lower fees. That is by far the biggest contributor to its outperformance but that doesnāt apply to choosing your own stocks.
Passive investing is a great way to reduce the risk in your portfolio but I canāt see much credible evidence it would boost your expected return. I think the suggestion that 90% of investors get below average returns before fees is a bit far fetched.
Iām not disputing at all that actively managed funds fail to beat the market most of the time. Iām just saying thatās because of fees rather than underlying performance. If you ignore fees thatās basically saying most people canāt beat the market by 1-2% a year which is not surprising really.
If the vast majority of active investors are getting below average returns and passive investors are getting average returns then whoās getting above average returns? And why are above average returns more concentrated than below average returns?
Agreed, I think active funds gross returns are close to average and the underperformance is a result of fees.
Fees may not directly apply to retail investors, but the biggest driver of their underperformance is high frequency of trading. As well as increased exposure to biases this reduces returns through slippage. Which answers your next question:
The people who provide liquidity and can trade without human biases (or even take advantage of them) by taking the human out of the equation; HFTs & Quants.
People who donāt trade arenāt funding this outperformance, thatās passive funds and very disciplined individual investors - which also explains the popular anecdote that when retail investor performance is reviewed the top performers tend to be dead.
I donāt know if thereās been any misunderstanding or not but my basic point is thereās no reason to suggest that the expected returns from an index fund would be any higher than from picking your own stocks and if anything theyād actually be slightly lower due to fees. Picking your own stocks however does come with a much higher risk
I agree with all that tbh but I do think if you actively try to reign in your biases (obviously you canāt get rid of them) and limited how often you trade I think your chance of underperforming an etf would be much closer to 50% than 90%.
One factor that surely contributes to the reasons why most investors receive below-average returns is that most stocks produce below-average returns. The distribution is skewed: the huge majority of stocks produce below-average returns, while a small number go to the moon. One study, for example, says that 4% of the universe of (US) stocks is responsible for essentially all the gains in the market: https://www.kiplinger.com/article/investing/t052-c007-s001-why-most-stocks-are-stinkers-and-what-to-do-about.html
Yeah thatās a very good point. However, even ignoring the return distribution the risk is still important to consider:
Even if you could hypothetically pick 5 stocks that have a 60% chance to outperform the market it could still be bad from a risk-adjusted perspective. Thereās going to be much more volatility and non-systematic risk - what if a natural disaster, fraud, or self-destructive trade policy impacts 1 of those 5?
You can diversify away the non-systematic risk, but that means finding more companies from a diverse range of sectors and backgrounds, which increases effort and the chance of outperforming.
Itās an interesting article, however I think itās flawed in that the essential gist of the article is that because most companies eventually fail, most stocks do too. Whilst this is true, these arenāt the companies that people are investing a lot in on the whole.
Sure, there will be a lot of people betting on niche companies, and yes these are likely to have a very high risk of failure.
But on the other hand, if you look at the most traded companies, theyāll probably be those in the S&P 500 because they are by definition among the 1000 companies that are mostly likely to succeed out of the 26000 you could choose from (and in fact more likely to succeed long term because itās the top 500 not 1000). The same thing applies to the FTSE 100.
Probably if you have any specific interest in any of the companies that are represented in the S&P 500 or FTSE 100 and so you have more information than most about that company, if you invest in that company as well as an ETF, Iād imagine you have more chance of beating the ETF in general.
If you invest in lots of risky companies, you really need to invest in a lot of risky companies to have a chance of finding the one that doesnāt fail.
Itās not that most companies or stocks eventually fail, itās that most produce below-average returns. The distribution of returns is not symmetrical; most stocks are down at the low-returns end of the curve with a long tail of a very few stocks that produce high returns. The downside for all stocks is limited (they can go to zero) but the upside is unlimited.
Thatās not correct āby definitionā (thatās not how the S&P 500 are defined or chosen), and itās not true by stock market returns, either: this fellow for example finds that the US total stock market return was better than the S&P 500 return in all recent time periods. Granted, in the stock market data game you can prove almost anything you want to by choosing your preferred start and end dates ā in this case the data are from 2019 ā but I think this suggests that itās far from certain that S&P 500 stocks are dramatically better than the rest of the market:
I find it highly motivating to āplayā the markets so end up depositing more than I might of had it been in a fund. That being said I think I bet on relatively safe bets that I expect to make around 5-10% on. Maybe this time next year I will be a champion of funds 
look at me go! But one of them is already ābeating the marketā at 10% growth in a month, so everyone, nominate me as your active manager for this month, Iāll make you rich! Whatās that, the other one I picked? Oh, never mind that one, look at this wonderful 10% growth. >_>