Picking Stocks: Should I Even Bother?

Less is more

Bonjour friends! We had an exciting discussion about retirement accounts last week, but back to regularly scheduled programming now :] One question we get asked a lot at GYW is how to approach stock-picking, because we all have that annoying friend who bought Tesla (or bitcoin) and won’t shut up about it now.

Let’s just say this: good for them, but they got lucky. What are the chances that friend will be able to replicate those returns in such a short time-frame with anything else? Pretty low.

Ignoring that stuff can be challenging, especially if your own portfolio hasn’t done too well, but it’s important to drown it out and focus on finding a process that works for you personally.

Trading vs. Investing

Research shows that individual investors (like you and me) see significantly WORSE results the more often we trade vs. professionals who might trade multiple times a day/week. You can read that study in more detail if you’re interested, but the reason behind it is not hard to deduce. Unlike professionals, very few of us can spend all day evaluating PE ratios, company earnings reports and the latest news to come to an investment decision.

Not relying on those indicators and instead trading frequently to try and make a quick buck is when things tend to go awry. For every win, research shows there’s usually a bigger loss to go with it… and don’t even get us started on trading exotic stuff like options and currencies, which should really be left alone.

So for all of us just beginning to invest, it’s worth thinking about how we’re going to approach the process. As individuals, investing regularly every few weeks to hold for the long-run is much more likely to work for us as compared to trading daily.

Picking Stocks vs. Investing in Funds

Let’s talk about the tough stuff: actually picking stocks and deciding between hundreds of investment options. Is it an art or a science? How come my friend is so much better at it than I am? There’s no easy answer to that, but selecting stocks does involve some research and market awareness.

It doesn’t have to be an all-day task, but knowing the basics (even if it’s just recent performance + news) and having an idea of where the company is headed in the future are important starting points before you invest. That’s not such a high hurdle and shouldn’t dissuade you… but if it sounds like the kind of thing you’re unlikely to spend time on then you’re better off avoiding stock-picking altogether.

And that’s really not a bad thing! Studies show that as individuals, we tend to have low attention spans and invest in only the “popular” stocks everyone else is buying, without realizing if/when the tide turns and the investment no longer makes sense.

Enter ETFs and mutual funds. We talk about these a lot at GYW and at the cost of sounding repetitive, make ETFs your friend! There’s none of the pressure involved with picking stocks and you can think more big picture. Reckon tech in China will do well? There’s an ETF for that. Think renewables are the future? Google “renewable energy ETF”. It’s literally that simple.

While ETFs require a little less effort than single stocks, be careful not to think of them as a magic solution that can be completely hands-off. You will still have to do some thinking about why you want to invest in a particular industry or country, and check the news every once in a while to make sure your investment thesis still holds up.

Note, for our readers outside the U.S. - America is a much more highly-evolved marketplace for ETFs than most other places, so chances are you’ll be investing in a U.S.-listed ETF at some point. That’s totally fine (you just have to convert your money to USD with your broker) but also make sure to check if there are any local options, just in case. Vanilla funds like an S&P 500 index tracker are usually available in all currencies, but more niche stuff is likely to only be listed in the U.S.

---

So what we’re saying is, investing really doesn’t have to be as complicated as most people make it sound. It’s certainly not something you need to worry about daily - and should never keep you up at night. If you’re stressing, it’s probably because you put a lot of your savings in one stock or an idea you didn’t fully understand.

It’s a lot simpler to just invest every once in a while in companies that you really believe will do well in the long-run. Or you can simplify it even further by not picking individual companies at all, and sticking with ETFs. A bit of both is always an option too!

Remember, there’s no “right” way to invest… different strokes for different folks, and that’s totally okay.