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Avoid Picking Individual Stocks

Individual stocks are exciting - no question about it! In the 10 years between 2013 and 2023, Apple($AAPL) went up ten times - almost 26% a year. If that's not already ridiculously impressive, Telsa ($TSLA) went up by the same 10x in just 5 years, between 2018 and 2023 - over 58% a year! This is what drives all those websites to write articles telling you that if only you invested $100,000 back in the day, you'd be a millionaire today.

Heck, if you go back further, in the 20 years between Aug 1st, 2003 and Aug 1st, 2023, Apple's stock went from 38ยข to $196. That's about a 500X return. Cue the articles that now say that if you invested just $2000 back in 2003, you'd be a millionaire by 2023. How tempting is that? (You can verify these numbers at Yahoo! Finance.)

But here's the thing: hindsight is 20/20. Back in 2003 Apple was near dead - not the multi-trillion dollar behemoth it is now. In 2003, Apple would have looked less like a bargain and more like a once-great company that was on its last legs. Another multi-trillion dollar behemoth, Microsoft, in the 10 year period between 2003 and 2013 barely budged! Putting money is Microsoft in 2003 would have felt like a perfectly sound idea - back then, it was behind only IBM in the list of the most valuable technology companies of the day. In fact, IBM, in the ten year period between 2013 and 2023 has fallen in value. Further, remember that hundreds of companies go bankrupt every year making their stock worthless so it's extremely unlikely that investing thousands of dollars in Apple in 2003 might have felt like a guaranteed path to millions.

I am not dissing IBM or MSFT as good investments - that would be unfair - over a much longer period say 20 or 30 years, IBM and Microsoft have done marvelously well. The point is that it's hard to pick the winners with any consistency. And it's not just me saying this: Burton Malkiel in his 1973 classic, A Random Walk Down Street contends that markets are efficient in the long term and that it's hard even for the "experts" to pick individual winners. And Daniel Kahneman in his 2011 classic, Thinking, Fast and Slow also arrives at the conclusion that fund managers who beat the market do so by chance and probability rather than by skill.

So is there a low-risk way to invest money in the stock market and have it grow nicely without it being an all-or-nothing deal? Most definitely and here's what both Malkiel and Kahneman suggest: just buy a low-cost, passively-managed index fund.