One of the key criteria in my investment process is to make sure that for every strategy I employ, I have the basic probabilities for success in my favour. (See: 4 Criteria and examples of useful strategies)
One statistic* I came across quite regularly recently, has caused me to switch all the individual stock holdings I had in my portfolio to index ETF some time ago:
About 65% of stocks underperform their index and more than half actually lose money over their lifetime. The chance that a random stock pick will beat the market is only 35%.
What does that imply? You would have to consistently be in the top 35% of all stock pickers out there to avoid that approach to be underperforming a simple index ETF. That includes Warren Buffett and a plethora of highly skilled professionals in a very competitive environment – unsophisticated individual investors are a minority nowadays. Even professional fund managers employing concentrated, active strategies most often underperform.
On top of that the fees would be much higher, if you want to hold any kind of diversified portfolio.
That definitely doesn’t fit my screen.
In short: individual stocks are very risky, the equity risk premium of the entire universe of stocks is much more reliable. That´s the camp I want to be in.
Taking this path has given me a lot of clarity and freedom. I just ignore all books and articles that deal with stock picking ideas. I can avoid media noise causing performance chasing as well as value chasing (which has actually been the greater problem for me, as every cheap stock I ever bought just kept getting so much cheaper) and am able to concentrate on broad portfolio strategies as well as very detailed alternative strategies.
As is well known, a good asset allocation is the major factor influencing investing outcome.
*an interesting paper going back to 1926 is “Do Stocks Outperform Treasury Bills?” by Hendrik Bessembinder