Introduction

When most people imagine "investing", they picture buying shares of Apple, Tesla, or the next hot IPO. But is individual stock picking actually a good strategy — or is it closer to gambling? In this article, we'll compare index funds and individual stocks and help you decide which fits your situation.

What Are Index Funds?

An index fund is a collection of stocks that mirrors a market index. The S&P 500 index fund holds proportional shares of the 500 largest US public companies. When you buy one share of VOO, you instantly own a tiny piece of Apple, Microsoft, Amazon, Google, and 496 other companies.

  • Instant diversification across hundreds of companies
  • Expense ratios as low as 0.03% per year
  • No research required — just buy and hold
  • Returns match the overall market performance

What Are Individual Stocks?

Individual stocks mean buying shares of a single company. Your return depends entirely on how that one company performs. If it doubles, your investment doubles. If it goes bankrupt, you lose everything.

  • Potential for market-beating returns
  • Requires extensive research and ongoing monitoring
  • Much higher risk — single company can fail completely
  • More tax complexity from buying and selling

The Data on Stock Picking

The evidence is overwhelming: most professional stock pickers — people who do this full time with teams of analysts — fail to beat a simple index fund.

  • According to S&P's SPIVA report: over 15 years, 92% of large-cap active fund managers underperformed the S&P 500
  • Over 20 years, the number rises to 95%
  • Individual amateur investors do even worse on average
💡 Pro Tip: If professional fund managers with infinite resources can't consistently beat index funds, the math strongly favors just owning the market. This isn't defeatist — it's liberating.

When Individual Stocks Make Sense

  • You deeply understand a specific industry from professional experience
  • You enjoy investment research as a hobby and accept the risk
  • You're limiting individual stocks to 5–10% of your portfolio

The Core-Satellite Strategy

This is the approach used by many sophisticated investors:

  • Core (90%+): Low-cost index funds — your foundation for long-term wealth
  • Satellite (0–10%): Individual stocks you're convicted about

This gives you the stability of index investing with a small portion for individual stock exposure. The index fund core ensures you don't catastrophically underperform the market even if your individual picks struggle.

Conclusion

For the vast majority of investors, index funds are the clear choice. They outperform most professional stock pickers, require no research, cost almost nothing, and let you sleep at night. If you want to add individual stocks for fun, limit it to 10% of your portfolio and treat it like a hobby — not your retirement plan.