Individual stocks involve many risks, but more importantly, they show much lower returns than other instruments available to any investor.
As you know, the choice of stocks is not an easy task. Almost no investor has succeeded in forming a portfolio that has been ahead of the market for a long time, and only a few realize how difficult it is to find a stock that will provide you with a large and stable profit.
In the long run, the stock market is ahead of bonds and bank deposits (albeit with greater volatility), but its superiority is largely based on the incredible growth of several securities.
Essentially, they drag along the rest of the market. As a rule, an ordinary share is not only not ahead of the stock index, but often inferior even to treasury bonds.
According to studies, from 1926 to 2015, the monthly stock yield exceeded the yield of government short-term bonds (T-bills) in 47.7% of cases. Only 42.1% of the shares were ahead of treasury bills.
Between 2007 and 2014, about 54% of the stocks lagged behind stock indices. Only one out of ten exceeded the average market profitability twice.
Between 1983 and 2006. The results were even worse – only 37% of individual shares were ahead of the wide market.
Obviously, investors do not randomly choose stocks – research increases the likelihood of success. In addition, lagging the paper from the rest of the market does not mean that its owner will necessarily lose money.
Understanding the difficulties associated with the selection of individual elements of a portfolio encourages people to passively invest in a broad market index.
Studies show that investing in an index fund not only leads to better results compared to an actively managed portfolio, but also saves on costs (manager's remuneration).