Gold and Equities Indexing Over Individual Stocks
In the world of investments, there’s often a tug-of-war between what seems promising and what is prudent. As attractive as individual stocks may appear, the allure can sometimes blind us to their inherent risks. My experiences and insights dictate a more careful approach: for the non-professional, buying gold may be the safer and wiser option than individual stocks. And for those interested in the long-term prospects and dividends of equities, investing in a major index like the S&P 500 is a much smarter route.
The Self-Optimizing Nature of the S&P 500
The phrase “buy stocks” often goes together with the concept of buying into America’s blue-chip corporations. That’s where the beauty of the S&P 500 comes into play. It’s a dynamically managed portfolio that filters out companies failing to meet performance criteria, ensuring you’re always invested in America’s corporate elite. Plus, its market-weighted structure prioritizes the most influential companies, thus offering a stable and robust investment avenue.
The Farfetch Story: A Lesson in the Pitfalls of Individual Stocks
However, even seasoned investors can deviate from the plan. Last November, seduced by its captivating story and low stock price, I invested in Farfetch (FTCH) at $5.60/share. Though the company initially showed promise and its CEO, José Neves, had impressed me, Farfetch’s volatility reminded me why my core strategy — equity index ETFs, short-duration fixed income, and gold — was formulated in the first place.
Farfetch’s stock price plummeted, and my position ended up losing 50% of its value. Meanwhile, if I had stuck to the S&P 500 or gold, I would have enjoyed an uptick of 11% and 9%, respectively.
The Hard Numbers: Individual Stocks and the Odds Against You
It’s essential to highlight that my experience isn’t an anomaly. Consider these sobering statistics:
Limited Winners: My research indicates that only about 30% of individual stocks outperform the value-weighted market.
Negative IPO Returns: More than half of U.S. stocks deliver negative returns from their IPO.
Timing the Market: Even if you pick a winner, most individual investors struggle with when to exit, often selling too early.
To put this into context, nearly 200 companies in major U.S. stock indexes have seen their values drop by over 50% year-to-date. This list, of course, includes speculative biotech firms, but also many familiar names. Investors may have bet on retail recovery with Foot Locker and Victoria’s Secret, or semiconductor growth with Valens Semiconductor, only to see half of their value evaporate. Even a robust back-office player like Expensify (used by Hard Assets Alliance) has shown that soaring growth and robust valuations are still subject to gravity.
Gold: The Underappreciated Asset
I would ask that investors who have no exposure to gold consider establishing a position in an amount that you would be comfortable with if you were buying an individual stock. Certainly, gold offers a more stable and reliable long-term performance than you can expect from any single stock. More importantly, it will provide useful diversification to your overall equities/investment portfolio. The World Gold Council’s research indicates that an allocation to gold has enhanced risk-adjusted portfolios over just about every time frame. Gold also offers a “peace of mind” dividend as it lacks the complex risks that stocks and bonds carry, such as credit, counterparty, and operating risks.
While the allure of individual stocks (for reasons of performance and “bragging rights”) may be tempting, it’s crucial to remember the associated pitfalls and risks. From my own misadventure with Farfetch to the broader statistical trends, individual stock investment is fraught with challenges that even professionals struggle with. (Note that Warren Buffett once challenged the hedge fund industry to a 10-year contest pitting the S&P 500 against hedge fund returns. The S&P won.)
If you’re pondering your next “stock tip” or contemplating investing in the “next big thing,” I hope that you consider looking at the gold option. It’s an age-old asset that has proven its worth time and time again, making it an invaluable addition to any diversified portfolio. Sometimes, the best strategy is rooted in simplicity and time-tested assets.
In a world that often overcomplicates things, perhaps it’s time we simplify our approach to investment. With a balanced portfolio that leans on stable assets like gold and diversified index funds, both peace of mind and financial growth are the likely outcome.