Investing in AMZN versus index funds

Investing
#1

I have a question regarding investing in individual stocks versus index funds.

I am 27 years young and I’ve maxed out my Roth IRA ever since the age of 22. I started out only investing in index funds. However, considering my young age I figure it doesn’t hurt to take a little more risk. I bought 8 shares of AMZN a couple years ago and I’ve since tripled my investment. I don’t invest in risky stocks, just bluechip large-cap stocks that aren’t going anywhere anytime soon.

This obviously goes against the advice of most financial experts including you Jeremy. I know index funds are sexy. But tripling my money in AMZN has been pretty sexy too. What’s everyone’s beef with individual stocks? I don’t day trade I just buy and hold large companies that make up a significant portion of the S&P 500 anyway. I plan to take on less risk as the years go on. Advice? Am I playing chess with the devil here? My Roth is almost worth six figures in just five years.

#2

Also, this may sound ignorant, but if diversification is so important then how does one explain the portfolios of CEOs like Jeff Bezos? AMZN probably makes up the largest percentage of all his holdings and he’s the richest man on earth. Same goes for pretty much any CEO.

#3

Hi @Shae_Bryant,

I personally don’t think there is anything wrong with what you did, I mess around with individual stocks too. I bought the faang stocks, plus Nvidia, amd, Microsoft, Tesla a few years ago too. With that said I also bought companies like IQ, XPO, DAL, where I lost money. I think investing in individual companies can work but it is a lot of work and more risky depending on the company.

I used to spend my days doing valuations, reading 10K reports, and looking into the CEOs background. This basically turned into another job for me. I would much rather just set it and forget it. Just my 2 cents.

Nirav

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#4

Hey Shae!

Yes, tripling your money in Amazon is awesome. But that is what I would call “getting lucky”. Study after study after study after study show that it’s basically impossible to consistently pick stocks that will outperform the market over time. So when you pick an individual stock, you don’t get a higher expected return, but you do get higher expected volatility (up and down). What if (for example) you KNEW that MySpace was the future of the world, social media was gonna take over and you want to ride that wave and put all your money in MySpace. Well, now your Roth IRA would be worth $0! That’s what we call “risk”. And normally when you assume more risk you deserve a higher reward. That’s why people invest in the stock market instead of savings accounts. But with individual stocks you’re assuming more risk than an index fund without a higher expected reward. (But you still can get lucky)

THAT SAID, investing in individual stocks isn’t BAD. After all, an index fund is just made up of individual stocks. If you invest early and often in 20-30 different individual stocks over the course of your career, I’m sure you’ll do great. But I would bet at the end you’ll have less than the index fund route.

And for sure, if you want to become a billionaire you have two options: Start a company or inherit it. But for every Jeff Bezos there’s a million failed/broke entrepreneurs out there. Some of it might be luck. i.e. if you flip 100 different coins 100 times each and ONE of them turns up heads 98 times you could point to it and say “See. I should just flip a coin to get a bunch of heads”. But that’s not going to be repeatable.

So: Tried and true, mathematically buying and holding index funds is most likely to optimize your future wealth from the cash you invest. BUT if you want to pick a few stocks, go nuts. Use the 90/10 rule (90% buy and hold index funds, 10% go nuts). If you’re so good at picking stocks, your 10% will quickly outpace the 90% anyway. And if you happen to pick a MySpace next time, at least you’re not broke.

And if you want to start a company, go for it! Like I said, that’s the only way to become a billionaire unless you have some rich parents you didn’t mention.

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