What are the advantages or disadvantages of buying individual stocks versus managed funds?

I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 225 million views in the last few years.

On the answers below, taken from my online Quora answers, I focus on a range of topics including:

  • How many investment bankers really retire in their 30s?
  • What are the tried and tested ways to get rich investing, or at least grow wealthy?
  • Which habits, personality traits and decisions help make people successful?

I also focused on answering a simple question; what are the advantages or disadvantages of buying individual stocks versus managed funds?

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

What are the advantages or disadvantages of buying individual stocks versus managed funds?

Source: Quora

The disadvantages of buying individual stocks is:

  • You often need to spend more time, and money, building a diversified portfolio. You can buy loads of stocks to reduce your risk, but in that case it is cheaper to buy a fund. You also spend more time managing individual stocks as you need to keep up-to-date with the latest trends.
  • If you go for the “narrow and deep” option, it is much more risky.
  • Even most professional investors don’t beat the market long-term. As a DIY investor, your chances are close to zero over a 50-year career. What’s worse is that you might not know this because you do have a 20% chance of beating the market over a 5-year period, and a much higher chance over a 1–2 year period. Therefore, it might seem easy to pick the next Amazon and Netflix for a few years. I even know plenty of people who have managed this over a 10–15 year plan. Eventually though, there is a reversion to the mean. People who outperform for a decade or longer, eventually let their egos get the better of them. We saw that in the 1990–2003 period. So many people outperformed the market in the technology bubble of the 1990s, only to lose that advantage in the early-mid 2000s.
  • In most countries it is more tax-efficient to buy certain kinds of funds and ETFs as compared to individual stocks. Not everywhere though.
  • You can still hold a diversified portfolio which has 5%-10% in individual stocks and the rest is in safer bets, if you need some excitement.
  • All the information is now publicly available. Therefore, you can’t “out research” the market these days.
  • Most stocks underperform the S&P500 as per the chart below. Yet a few, say the Amazon’s of this world, vastly outperform. That makes it harder to get even an average return from picking winners.

I guess the advantage of buying individual stocks is that you will have more excitement, and a very small chance of making loads of money.

As an aside, there is a third option – non-managed funds like ETFs.

These can have additional benefits like a cheaper price. It is still better if the process of asset allocation is managed, such as rebalancing, though.

And honestly, if you want to have a greater chance of beating the market for less risky, a sector-specific ETF is a better way of doing it.

You are still taking on more risk than buying the S&P500, but much less than holding just a few stocks.

How many investment bankers retire in their early 30s?

Source: Quora

There are two kinds of investment bankers………and for that matter management consultants, lawyers and young business owners.

  • Those that don’t make as much money as the public thinks
  • Those that make a lot of money

The first type can’t usually afford to retire early. The second type can, on occasion, afford to retire in their 30s, especially if they emigrate.

The problem is if you get used to a certain amount of money, and a certain quality of life, it isn’t always realistic to get used to less.

There are exceptions though. One of the founders of the Minimalist podcast decided to semi-retire and create the podcast:

Yet when he was interviewed about it, he said he only quit after reaching a (junior) executive position at 30.

He was dreaming of that day for years, but burst out crying the day he was offered the promotion.

He quit on the same day he was promoted. The reason? He knew if he got used to the new salary, even if he lived well below his means, he wouldn’t be able to walk away from the job easily.

Even if he started to hate it. So the ironic thing is, early retirement often doesn’t work out well for high-flyers.

The only time it does is when somebody is in the habit of living very frugally.

One of the few people I know who early retired in his 30s, had a very high-income for his age, but always only spent 20%-60% of what he made.

Therefore, every time he made more money, he didn’t just consume more. It was relatively easy for him to retire early for that reason.

He is an exception though.

How do I invest to get rich?

Source: Quora

Firstly, I would differentiate between being rich and wealthy. Second, I would take a look at people who have done it.

Fortunately, most brokerage houses keep statistics on this kind of thing, and academics (and others) have data as well.

There are only two ways to get rich investing:

  • Slow and steady. Get rich slow
  • Get-rich-quick

We have seen an example of get-rich-quick in recent weeks with the GameStop stock which has gone crazy….albeit now is falling hard:

One thing I have learned though is very few people get rich sustainably from these methods.

The reason is simple – greed and other emotions like uncertainty, fear etc. Some examples:

  • If somebody has made money once from buying one stock, they are very unlikely to realize that it is luck. They will take bigger and bigger chances. Sometimes this can even work for a 5–10-year period as it did during the 1990s tech bubble.
  • If somebody makes money timing the right moment to get in (and out) of the stock market once, they will gain confidence. The assumption will be that all the evidence pointing to the fact that market timing is a losing game long-term is nonsense. They will get the next timing wrong or the time after that.

The point is, very few people have the self-awareness to know when they have received luck.

In comparison, there are loads of people who have sustainable became wealthy from just investing for decades.

The trick is:

  • To be diversified but not overly so. 2–4 ETFs is fine provided those investments themselves are broadly diversified like the S&P500
  • To invest monthly, or at least at regular intervals, into the markets, without timing them.
  • To reinvest dividends. Dividends contribute massively to total returns.
  • Buy, hold and forget or buy, hold and rebalance between stocks and bonds.
  • Keep any high-risk stuff done to 10% of the total of the portfolio.
  • Don’t panic during market crashes or get too excited during the good times

Doing that for a very long period of time has had an 100% success rate. Even somebody who invested one day before the Great Depression would have done well over the next 35 years if they had followed this formula.

In fact, as I mentioned on this answer, they would have even been up after just 7-8 years – Adam Fayed’s answer to What are the best financial investments during a coronavirus crisis?

That doesn’t mean it will do in the future as nobody can predict what will occur many decades from now.

It is just boring. The problem is, most people want investing to be entertaining rather than effective.

WWh are habits or rules which make us successful and rich?

Source: Quora

The title of the story is Foreigners Reveal What Shocked Them About the British Class System – Foreigners Reveal What Shocked Them About the British Class System

Now plenty of the comments were negative and understandable so, but one comment stuck out to me.

A man from Singapore, living in London, said “There are definitely very rich people out there pretending not to be rich, or acting like it is cool to be working class”.

Now he is young, 25, and probably associating with people of a similar age. Younger people are more likely to try to be something they are not.

After a certain age, people stop caring about what other people think so much.

The interesting thing is though, that there is a kind of inverse snobbery in many countries in Europe which have generational wealth.

Flaunting wealth is less likely to make you sustainably successful because:

  • If you are doing well, and showing off on social media or in-person, you will attract attention from competitors. If you are doing well in business openly, then others will copy.
  • If somebody overspends you might become broke in any case.

Perhaps though this is more of a rule about how to “stay” successful and wealthy, as opposed to getting there in the first place.

In terms of getting there in the first place, I have noticed the following commonalities

  1. The following personality and character traits can be important; persistence, hard-work, a thick skin and not caring about what others think too much, resilience and the right balance between patients and impatience. If combined with smart work, it can be key. Many people are willing to work hard for a short period of time. Few are willing to keep the faith if something isn’t working. Even fewer can work hard, smart and long for decades. Also in this section I would include the ability to take calculated risks. People who do that are more likely to invest in themselves, financial assets and their businesses. Many others are focused on playing it safe.
  2. Any skills which are linked to making money or managing money. That could be a hard skill (like medicine or engineering), soft skills like managing people, sales, marketing, branding etc.
  3. People who use leverage. Leveraging others (if you are a business owner), time (compounded returns is an example of that) and sometimes money. Leveraging time is also linked to having a long-term focus which is a personality or at least character trait.

Taken together, those things can supercharge people. I will give you a simple example.

Let’s say you have a doctor or engineer who has qualified from medical or engineering school.

If they get onto the job ladder, the average salaries will eventually be high. Yet if that person simply spends more as they earn more, they might never be wealthy.

Let’s say that instead they start investing from their 20s and 30s, and learn how to market themselves which eventually leads to them opening their own company, then their wealth could be many times greater than the person who only focuses on selling time for money.

The reason is simple. They have applied leverage in two or three ways; they have leveraged their money by buying financial assets, leveraged time by compounding and leveraged their soft skills.

As a reminder, if you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 225 million answers views on Quora.com and a widely sold book on Amazon.

Further Reading 

I regularly answer questions from readers on Quora, YouTube and adamfayed.com.

These questions tend to be on financial matters such as wealth accumulation.

In the article below I discussed:

  • What were the best investments I made in 2020? What can we learn from this?
  • Markets rise long-term yet not everybody makes money. Therefore, what are the worst places to put your money in the stock market?
  • How to invest in US stocks from Romania?
  • What are the best ways to invest in Thailand? Local stocks or real estate? I present other options.

To read more click below:

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