Hot Stocks Or Hot Potatoes

An article by Jeff Sommer in the New York Times points out the potential rewards of picking individual stocks, but also warns about the riskiness: “Over the long run, while the total stock market has prospered, most individual stocks have not.” He summarizes a study by Arizona State University professor Hendrik Bessembinder, which likened individual stocks to lottery tickets: a small chance of winning with a large chance of making nothing. The study showed that since 1926, over half (58%) of stocks failed to outperform 1-month Treasury bills over their lifetimes (i.e., less than 1% return). All net market returns from 1926 to 2015 were provided by just 4% of stocks.

From the article: “Professor Bessembinder said that he, personally, favors low-cost index mutual fund investing.” Add another data point for the recommendation found in my book Basic Personal Finance.

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