ETF Investing Guide: Measuring Stock Pickers’ Underperformance

The bottom line is that for most individual investors, stock picking is not an option for a core investment strategy:

• It’s hard to beat the market.
• You risk correlating your investment risk to your job risk.
• Over long periods capital gains taxes can cripple your compounded performance.

To put hard numbers on this: on average, investors who pick stocks underperform the market by about 2 percentage points a year, according to professors Barber and Odean at the University of California at Berkley (research paper here).

If you’re still not convinced that this applies to you, go back and compare your stock picking performance to the performance of the S&P 500 index over the last 5 years.

If you soundly beat the market after you paid taxes and fees, keep picking stocks.

If not, you’ll need to rethink your core investment strategy. At the very least, resolve to pick stocks only when market inefficiencies justify it, if you have an edge, and only in a small part of your portfolio.

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