prospect |  Yesterday's big market winners become today's big losers

prospect | Yesterday’s big market winners become today’s big losers


For years, it was hard to go wrong buying what I call the growth stocks of Select Seven. Even when some of the seven had a less than stellar year, their collective performance helped push the S&P 500 index to record highs.

But things are not like that this year. In fact, the seven have been such dogs – collectively – that you can almost hear them howl.

They consist of Meta (formerly Facebook), Apple, Amazon, Netflix, Alphabet (formerly Google), Microsoft and Tesla.

Yes, I know I talked about another Select Seven in January. But this column, which included Nvidia rather than Netflix, mostly talked about how these seven stocks drove the S&P 500 higher in 2020 and 2021.

This time, I’m giving you details on the magnitude of the loss that just seven companies have inflicted on index fund investors in the first 10 months of this year. (That’s eight shares, because Alphabet has two classes of shares.)

Why did I choose these seven companies? Because the first five, under their original names, were the much publicized FAANG, an acronym with a nice bite that I loved. Then I added Microsoft and Tesla because they are big growth stocks with big names and up until this year they had made good returns for their shareholders.

Given the sharp decline in growth stocks this year, I asked Vanguard to determine how much the struggling Select Seven had lowered its S&P 500 index fund. Vanguard’s numbers told an interesting story.

Last year, the Select Seven returned a weighted average return of 36.3% of their starting value to holders of Admiral shares in Vanguard’s S&P 500 fund.

This 36.3% was considerably higher than the fund’s overall return of 28.7%. In other words, the sevens boosted the fund’s performance above what it would have been without them. That’s what I expected them to do.

But until October 31 this year, the Select Seven dragged the index down. A lot. Led – if that’s the right word – by Meta’s 72.3% decline, the seven companies posted a 32% loss, nearly double the 17.7% lost by the S&P 500 fund. make noise: Aroooo! Aoooooo!

And wait, there’s more. If you subtract the seven companies, Vanguard says the remaining S&P 493 – please note the rhyme – would have shown a loss of just 12.8%. This means that for the first 10 months of this year, the sevens, down 32%, have lost about 2.5 times more in percentage terms than the rest of the S&P 500.

Of course, the nearly 13% drop in the S&P 493 isn’t exactly a number to celebrate. But it is much better than 17.7%.

Admittedly, the world has moved on since the October 31 deadline I use, because that’s the most recent date Vanguard was able to get the numbers I was looking for.

To give an example of what happened this month, as of Friday’s market close, Tesla had fallen 19% since Oct. 31. On the other hand, Meta, the biggest dog among the Select Seven, was up around 21%.

What can we learn from all these numbers?

The lesson is this: while buying and selling individual stocks is more exciting and fun than buying index funds, long-term retail investors are generally better off holding broad-based index funds rather than trying to outsmart the market by trading individual stocks.

Sure, you lost money on your S&P 500 fund in the first 10 months of this year. But you would have lost four times as much owning Meta and twice as much if you had your money on Amazon or Tesla. (Amazon founder Jeff Bezos owns The Washington Post.)

Fund managers follow the market obsessively and live and breathe stocks — but very few consistently outperform the S&P 500 over the long term. In contrast, a low-cost S&P 500 index fund gives you the S&P yield, less than a miniscule 0.04% or so.

Please understand that I am not shilling for Vanguard or its index funds. I became a Vanguard customer because some of my employers offered Vanguard funds in their 401(k) retirement plans, and I liked the way Vanguard treated me. Most of my wife’s and my investments are in Vanguard, but we also have money in Charles Schwab, whose index funds are also attractive.

Although index funds didn’t exist when I started investing over 60 years ago, over the years I’ve migrated to them. I still have a lot of individual stocks, some of which I picked with the help of friends who are much better stock pickers than I ever was or ever will be.

However, my two biggest investments, by far, are in the S&P 500 index funds and Vanguard’s Total Stock Market.

I give each of my grandchildren four Apple shares on their birthday. I think it’s a good idea to give them some exposure to the market by offering them a stock whose products can identify them.

However, in the unlikely event that my grandchildren make a lot of money and ask me for investment advice, I would suggest that they put most of the money in index funds. It’s not as fun as owning Apple and collecting its quarterly dividend checks, but it’s a much more reliable way to make money than trying to outsmart the market by trading individual stocks.

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