2/15/2013 7:30 PM ET|
The end of an investing era
There’s mounting evidence that individuals have abandoned individual stocks as their preferred form of equity investing. Mutual funds and ETFs are where the action is now.
Someone must have sounded an all-clear signal on New Year’s Day because in January, after five years of fasting and penitence in the bond market, investors poured money into U.S. stocks.
But much of that money probably went into stock funds and exchange-traded funds, not individual stocks. Though few statistics are available, there are many indications individuals have abandoned individual stocks as their preferred form of equity investing. Remember how people worshipped Cisco Systems (CSCO), Qualcomm (QCOM) and JDS Uniphase (JDSU) back in the 1990s?
Now they’re buying target funds, index funds, and their close cousins, ETFs, instead of individual stocks. With one big, bright red exception, which we’ll get to later, individual stock investors may be a dying breed.
Nothing brought that out more starkly than an article last week in The Wall Street Journal, which dealt with the demise of investing clubs, that former pop-culture icon. (Remember the Beardstown Ladies?)
Investment clubs flourished in the era of do-it-yourself investing, when every man and woman was his or her own stock picker. Who needed professional managers when all the data was right at your fingertips? Especially when friends and neighbors could help each other find winning stock ideas.
Well, it didn’t quite work out that way. As The Journal reported, BetterInvesting (formerly the National Association of Investors) has seen membership at investor clubs plummet from 400,000 at its peak in 1998 to only 39,000. That’s a plunge of 90% and reflects the ravages of a decade that saw two major bear markets. The problem, The Journal wrote: “Stocks aren’t fun anymore; they are scary.”
Especially individual stocks. Yes, anyone who stuck with equity funds through the Lost Decade lived in a world of hurt. But owning the wrong stocks -- like, say, Citigroup (C) or Akamai Technologies (AKAM) -- was pure torture. And investment clubs that tried to go against the tide were doomed to fail, as many of them did.
The American Association of Individual Investors, another organization that focuses on investor education (of which I am a member), saw a more modest decline in its membership, between 10% to 15% from before the financial crisis. It now has around 150,000 members, president John Bajkowski wrote in an email.
But AAII members have changed their behavior, too.
Surveys of members’ asset allocation show a big drop in how much they put into individual stocks. In March 2000, AAII members had 41% of their portfolios in individual stocks. That hit a decade low of 16.7% in February 2003 and last month rested at 29%.
Stock fund holdings also fell from 41% of members’ portfolios in January 2000 to 32.5% last month. So, they’ve come back a bit more from their lows than individual stock holdings have -- and in an organization that emphasizes disciplined stock picking.
Therein lies the problem. Anyone can buy a set-it-and-forget it target-date fund and get decent exposure to equities or put together a reasonably diversified mix of index funds or ETFs and participate nicely in bull markets.
But picking winning individual stocks takes work, time, and skill, a skill which only a small number of even professional managers have -- and the vast majority of individuals don’t.
The research on individual stock ownership is voluminous and overwhelmingly damning. For example, Brad Barber and Terrance Odean of the University of California showed in a 2011 study that individual stock pickers, who underperformed index funds, made every mistake in the book: selling winners, keeping losers, failing to learn from past errors and holding undiversified stock portfolios.
If individual stock pickers keep letting their emotions get the best of them, there’s a reason for it: People get attached to individual stocks in a way they don’t to, say, the Vanguard Total Stock Market (VTI).
Exhibits A, B, C and D: Apple (AAPL), of course.
Last October, USA Today reported that nearly 17% of all individual investors owned Apple stock, more than four times the number who owned the Dow Jones Industrial Average ($INDU). And that one stock comprised 17% -- yes, you read that right -- of the portfolios of individual Apple shareholders.
“’I don’t want to diversify that much when I have one stock doing just fine,’” said one Apple shareholder, whom I mercifully won’t name and had 38% of his portfolio in Apple shares.
That’s the problem with falling in love with individual stocks -- they don’t love you back when you really need them to.
As I wrote a couple of weeks ago, Apple shares fell more than 37% from their peak, wrecking the portfolios of true believers (who attack anybody who writes a critical word about Apple but conveniently don’t disclose their own stake in the stock).
Only a very small number of individual investors can invest successfully in individual stocks -- and if you have any doubt about it, you’re not one of them. Even they should limit individual stock holdings to no more than 10% of their total portfolio.
As for me, I do believe in actively investing with 10% to 20% of my holdings, but I do it mostly with ETFs. I gave up on individual stocks a long time ago. Give me the boredom of an index fund over the drama of an Apple or whatever the latest highflier is. I’d prefer to get my entertainment elsewhere.
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These people who wish for a depression should be carefull what they wish for.It`s not like
"April showers bring May flowers"I had older relatives that told me first hand how awful the
great depression was.It hit in 1929 and got worse in 30,31,32.When FDR took office the
first thing he had to do was secure the banks.That`s when FDIC started because no one
trusted the banks.Programs like WPO and CCC built DAMs,bridges and roads that still stand
today.It was a long way back.Lives were ruined.Today it would destroy the country.It took
years to recover then and it wouldn`t be repaired a second time for decades.
I thought an opinion expressed recently in an MSN article was on the money;
If you are counting on stocks to get you in proper financial shape for retirement you are not ready.
This WAS the big move; thank the Fed if you rode it up.
If not, think about getting some decent yield, re-investing dividends and working to add to get your numbers in line...
You guys are the best...
I believe that many investors have learned very hard lessons from the recent past, and have finally realized that anything that sounds too good to be true probably is. Nothing in life comes easy, even if you are born into it. Mutual funds and EFT's can be boring, but they typically represent a fair market return over time. It's not rocket science to appreciate that a well adjusted diversified mutual fund portfolio realizes 8% on average per year. Sometimes more, sometimes less, but historically out performed those who have managed funds for us. The world, thanks in part to the internet has taught us a great deal about costs and hidden fees that we pay to traders and fund managers. In my opinion, the key to responsible investment requires three fundamental requirements 1) responsible asset allocation, 2) reasonable return expectations, and 3) time. In fact, I believe that most of us can obtain a fair share of the market if we stick to fundamental principals. The data is out there, you just have to look for it. For those who have the time and knowledge base to track, analyze, and are willing to place that wisdom on a particular stock (s) and profits extensively from it, deserves it....they probably worked hard for it, or maybe not. Sound investing expects reasonable returns on a diversified portfolio of stocks and bonds that overtime will pay a fair share. The market hurt but didn't crush me in 2007-2008, because I stuck to the fundamentals. Three point shots beyond the arc are wonderful to watch....... but can be costly if taken at the wrong time, by the wrong player, or if in desperation !
Investing in individual stocks is like alot of DIY activities, If you know what you are doing and have the time you can make a good return. But those are two big ifs.
1. Part of my business background meant I had a very good understanding of a businesses qrt reports,budgets, growth projections etc etc if you cant understand all the data you see dont bother
2. I have a pretty good feel for macro economics I get what the fed is doing and how itll effect companies I own.
3 I have/take the time to moniter my investments daily.
If this honestly is not you, dont bother get a good investment Broker to help you of course finding good mgt is a whole other problem.
Whether you are doing it yourself or getting the help of a Manager ask yourself this simple question: The market has returned close to 2007 levels have I. If the answer is yes you are doing fine if not, something is wrong.
1) investment advice used to be to buy a Blue Chip and hold it IF fundamentals said so. Today, investment advice is short-term oriented and determined by technical means, causing people to churn their accounts and make less in profits.
2) Wall Street brazenly passes intentionally bad advice on to the media who report as if it was written in stone. Merrill Lynch alone has paid nearly $200,000,000 in fines for intentionally misleading investors in order for a few of their wealthy clients benefits, and a J.P. Morgan VP said it also mislead customers intentionally. So people have GOOD reason not to trust brokerage advice.
3) the market in any one stock is so technically influenced that it doesn't follow logical movements over short periods, so people feel more comfortable putting money in funds representing large numbers of stocks.
"But picking winning individual stocks takes work, time, and skill, a skill which only a small number of even professional managers have -- and the vast majority of individuals don’t."
That is because no one wants to take the time, work and build the skill necwessary - we want it easy, now and free if possible. That is why so many fail and why so many stay out of the market.
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