Index Funds or Individual Stocks?

Ever since I started investing in 2013, I have been using passively managed, index funds or mutual funds (occasionally in the form of lifecycle/target retirement date funds) to build my nest egg. In fact, I have been continually dollar-cost averaging into them over the last few years and can vouch for their amazing returns. Though, after nearly 7 years of religiously pouring my money into index funds, I finally caved in picking up some shares of Apple when I heard about their 4-for-1 stock split in August 2020. Fast forward 1 year later and I have contributed about $17,000 across nearly 150 individual stocks.

So….what changed and why did I do it?

Reason 1: Excitement

Photo by Micah Tindell on Unsplash

Despite the fantastic returns I have had from my index funds (~30% annualized across all accounts), consisting typically of a total US stock market ETF and a total international stock market ETF….

I just…got bored.

The pandemic certainly didn’t help either coupled with the lack of travel, so the split of Apple’s shares seemed like a sign to add a bit of excitement to my life. Not only that, but I also invested using Robinhood, which was quite addictive with all the congratulatory animations they had whenever you funded your account, traded stock, or received a dividend payment.

Reason 2: Mirroring an index

Photo by Vince Fleming on Unsplash

The advent of fractional shares was also quite attractive and the ease of Robinhood made me wonder:

What would my returns look like if I just mirrored an index fund?

I typically buy an ETF that tracks an index anyway, why not just purchase the same stocks in one of the indexes I already track? Well, that’s exactly what I did and ended up spending every week purchasing a new stock by pulling up the makeup of the S&P500 and just picked companies that I thought would be valuable purchases — especially the ones that I thought would perform well during the pandemic (e.g. zoom, pharmaceutical companies) and post-pandemic (e.g. airlines, hotels). Unfortunately, the reoccurring investments capped out at 50 stocks and the individual withdrawals started to get annoying to reconcile on my budgeting app: YNAB. I ended up switching to another investment platform and continued my individual stock picks.

Reason 3: Meme stocks :)

Photo by Clay Banks on Unsplash

Yep, I was one of those apes (or rather wannabe apes) as I was a newly minted WallStreetBets Reddit member in January 2021 that started talking about how we plebs could stick it to those major hedge funds by shorting Gamestop (GME) and how it was going to the moon. I’m not going to lie, it was rather dumb, but also quite exciting (see reason 1 above). I ended up purchasing shares in Gamestop (GME), AMC Entertainment (AMC), and BlackBerry (BB) at the height of that chaos and have mostly sold all of it (#paperhands) and broke even.

My thoughts now?

It is very strange to me in that the vast majority (>90%) of my current contributions towards taxable investments now consist of individual stocks. I have always believed, and still believe, that actively picking stocks will always underperform the market index over the long term. There’s plenty of research that talks about it — just google it if you’re interested. However, now I’m genuinely curious about the performance of dollar-cost averaging into individual stocks, primarily blue-chip stocks, and whether they could outperform the market. I’m guessing my way of picking stocks probably wouldn’t, but surprisingly, it currently is.

You see, I’ve started a little experiment this past year in January 2021 where I picked a handful of individual stocks to dollar-cost average into and also set aside a group of index funds I typically use as a comparison. What’s also nice is that I can set aside an automatic, reoccurring withdrawal from my checking account every week to pull a set amount of money and have it automatically distributed into my group of individual stock picks and also my group of index funds. Since the volatility of individual stocks is more exciting, I currently have it set at a ratio of 92% blue-chip stocks, 5% speculative stocks, and 3% total stock market ETFs to see how it performs over time. My alpha usually ranges between -1% to 4%, but has averaged to be about 3% over the last 10 months. I don’t imagine I’ll end up beating the market in the long term, but it is still very entertaining to watch. Given the issues I’ve had with Robinhood above (e.g. limited to 50 reoccurring stocks and individual withdrawals in checking account), I’ve been doing this on my new favorite investment platform: M1 Finance. If you’re interested, given them a try and we will both get $30. Here’s a screenshot of my current account as of today after an amazingly green day — a far cry from the red bear market in September and October.

My M1 Finance Portfolio

Aside from my individual stock vs. index fund experiment, I have a few other personal finance comparisons I’m running that I’ll probably share in a future post. My hope is that the transparency I provide in how I manage my personal finances, or rather investments, in this case, will help others in learning what to do (mostly what not to do).

The views expressed in this post are my own and do not reflect the views of my employer. This post contains affiliate links. If you click on one of them, I’ll receive a commission.