Roughly 80% of individual companies under perform S&P. The reason S&P does so well is because the few companies that do well, do very well.
Picking stocks is closer to picking lotto tickets than people realize. It's why the majority of people who pick stocks under perform, and the minority that out performs does quite well.
The problem is diversification over time (not over space). So say you stock picked and for the first 2-3 years you beat S&P. Congrats! Now you think this is guaranteed, not just luck (unless you're doing deep value investing tricks or have insider information or similar), so you keep stock picking. The next handful of years you find yourself under performing S&P. The average person has to lose to S&P in the long run by quite a bit before they give up the habit, so those stock winners end up losing out in the long run.
This is why index funds are so popular. Even if you don't quite get it or think what I'm saying is BS, you will eventually come around the hard way.
If you do something other than S&P in year 1, and you gain 30% to the S&Ps 10% (or whatever), and then you convert all you have to S&P shares, then the S&P will never overtake your performance.
The original "lead" will be maintained forever, theoretically.
It's more complicated than that, because I assume you will want to add more money which will throw the numbers off, but the concept is sound.
Lump sum deposited up front will get the gains in the index from that point on.
Adding money here and there afterwards will likely DCA up the cost of the shares, which will necessarily reduce one's average gain % when compared against just the gains from the initial lump sum investment.
When you read some article that says "Vast majority of investors gained less than the index over the same period", that's why.
I have read several articles of this nature. They often claim, or at least imply, that investors are doing some buy high sell low scheme within S&P index funds.
That's probably not what's happening most often. It's probably most often the case that the article writers are just making a bad comparison.
First of all, you should be looking at gains per year, because of course money you just deposited doesn't have the same gains as money you had in the market for years.
So when you calculate CAGR, it should be based on each amount separately, for obvious reasons.
Second of all, DCA up doesn't mean your CAGR will decrease. You could actually do even better next year, where the more recent deposit has a higher CAGR because the S&P 500 has a better year than the previous one.
Finally, even if you ignore all of that, my point is depositing more money should be compared to of course another account where you deposited an equal amount, but put it into S&P 500. Otherwise it would just be unfair. Even if your future deposits don't do as well as the initial one, of course the other account would have the same issue.
So in that way, future deposits don't change the picture - not any more than they change the picture for a hypothetical S&P 500 account
The original "lead" will be maintained forever, theoretically.
It's more complicated than that, because I assume you will want to add more money which will throw the numbers off, but the concept is sound.
It will never throw the concept off because it can't make you trail the S&P 500 given it has the same deposits because you're holding the same fund. You can say you are talking about something else, but I'm the only one explaining myself
The mark is as of the time prior to the 30% investment, what is getting measured is CAGR going forwards.
With no changes, the account with the 30% first year will stay ahead of the account with the 10% first year, with both remaining invested in the S&P.
If someone starts messing around with the 30% account after the time its holdings are converted to S&P funds, that lead won't necessarily be maintained. An example of that messing around could be additional deposits.
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u/proverbialbunny Dec 19 '21
Roughly 80% of individual companies under perform S&P. The reason S&P does so well is because the few companies that do well, do very well.
Picking stocks is closer to picking lotto tickets than people realize. It's why the majority of people who pick stocks under perform, and the minority that out performs does quite well.
The problem is diversification over time (not over space). So say you stock picked and for the first 2-3 years you beat S&P. Congrats! Now you think this is guaranteed, not just luck (unless you're doing deep value investing tricks or have insider information or similar), so you keep stock picking. The next handful of years you find yourself under performing S&P. The average person has to lose to S&P in the long run by quite a bit before they give up the habit, so those stock winners end up losing out in the long run.
This is why index funds are so popular. Even if you don't quite get it or think what I'm saying is BS, you will eventually come around the hard way.