Buying Individual Stocks or Index Funds: My Most Expensive Mistake

What did a mid-twenties me learn from buying individual stocks at the apex of the market before the Great Recession? Are index funds better than stocks?

Reading Time: 8 minutes

This post follows the end of my introductory post last month with the start of the Great Recession of 2008-2009. Setting the stage a bit, just understand that I was a few years out of undergrad with my first “real job” and finally some money saved and invested.

I’d been following the money magazines, reading about investing in individual stocks, commodities, precious metals. I was manually managing my investments and making stock purchasing decisions frequently rather than automating my finances. I didn’t seriously consider buying index funds.

Have any guesses as to where that took me?

The Great Recession

I freaked out as half my life savings disappeared through late 2008 and into 2009. My individual stocks underperformed the market. I hadn’t actually lost anything yet since I hadn’t sold my shares.

I’d returned from my stint in the Peace Corps to discover a dwindling net worth. I was in my mid-twenties and my nest egg wasn’t exactly huge, but it was all I had. As I initially held strong, the world was sounding the alarm.

Headline companies were going bankrupt.

Capitalism was dead!

This time it was different.

The constant dread and fear got to me, and I sold.

I sold it all.

The End of Capitalism and the Markets

I took a capital loss of more than half my total investments. I moved the money into safer investment: treasuries, money market funds, savings.

Hell, I even put some money into leveraged inverse S&P500 tracking exchange-traded funds (ETFs).

Oh, not familiar with those?

I’m not surprised, as leveraged funds are one of the riskiest types of funds. They carry significant expenses to leverage or multiply with debt, the change in the index they track. In my case, if the S&P500 went down 5%, I’d earn 15% (minus some leverage expense). If it went up 5%, I’d be down 15% (plus some leverage expense).

Me on Wall Street in 2008 at the NYSE
The NYSE on Wall Street.
Sorry about the crap camera quality, it was an iPhone 3G in 2008!

I’d really not learned my lesson it seems. Fortunately, I’d already lost most of my investment so as the market recovered and my risky bet cratered, I only lost a little more.

Of the $34,015 I’d squirreled away and gambled over 2007, and some of 2008, I had less than half my net worth in 2009. Of the balance, I withdrew $3,300 in early 2009 to put into savings—nearly nailing the market bottom of the Great Recession. I pulled another $3,617 out in May of 2010 as the recovery took a small stumble.

I didn’t make serious investments again until late 2010, missing out on a large amount of the recovery. The S&P 500 had bottomed at about 666 points near Spring 2009. By the beginning of 2011, it’d already nearly doubled. A similar whipsaw had occurred with the individual stocks I’d owned, with both the trough and peaks more extreme due to the volatility in the individual stocks.

Losing More Than Half My Net Worth

This was the moment I realized that maybe I wasn’t smarter than the average investor. Just like when we grow up thinking we’re physically invincible, we often think—and are reinforced with praise—that we’re above-average at many intellectual pursuits. It’s funny that a group that prides itself on math (personal finance generally), often has so much trouble identifying the mathematical likelihood that we’re a coinflip from being above average.

Another FIRE writer, Dave, happened to write about his worst money mistake yesterday. I’m lucky my worst mistake didn’t lead me down a darker path.

To give you an idea of just how financially damaging the loss was during this time, here’s my Social Security Earnings history (by the way, you can obtain this official record from my Social Security if you’re in the U.S.):

2008: $26,597
2009: $12,645

The decision to sell in 2009 had turned a paper loss into a realized loss more than my earnings for the entire year.

The Recession of 2020

As we’ve begun to come out of another V-shaped dive in the stock market (the Great Trench of 2020), I didn’t actually think much about our investments. If anything, I was trying to find some more money to invest with when things were looking grim—partly by rebalancing our portfolio. Rather than being fearful, I was greedy.

But is this simply because I’m older now? Is it because of that previous mistake in the Great Recession?

How to Handle Stock Losses

Our paper losses during this recent market dive brought on by the pandemic equaled hundreds of thousands of dollars. Still, neither Jenni nor I really thought much about selling. I don’t think that’s necessarily simply because we’re “more experienced”, now.

I think it’s because we don’t really own individual stocks anymore (full disclosure: I have a very small amount of individual stock still held in old brokerage accounts that are stuck in pink sheets, they don’t represent a significant share of our portfolio).

During the Great Recession, several individual companies were going bankrupt—Lehman Brothers, AIG, Fannie & Freddie—I remember General Motors going under chapter eleven!

Seeing those big names going under left me to think that maybe my carefully handpicked stocks could also be bankrupt. After all, the one thing that enough time for stock values to recover won’t solve is an actual bankruptcy event.

I was fearful that one of my individual stocks would go to zero.

Reducing Risk with Diversification

That’s the key difference, to me, in owning individual stocks versus a wide index tracking fund like VTSAX: I’m pinning my hopes on the entire market instead of an individual stock.

Vanguard Total Stock Market Index Fund (VTSAX) is a well-known mutual fund operated by Vanguard that attempts to track the entire U.S. stock market. It operates with incredibly low fees and has a very similar sister ETF with the tracker VTI.

If VTSAX goes to zero, we’re all probably screwed anyway. That’d mean capitalism in the U.S. has truly collapsed.

It really does help me sleep at night to know that the chance of our funds going to zero is so much less likely even if there’s a huge hit to the economy like during this pandemic. The world will eventually recover and so too will the broad market.

Should You Buy Individual Stocks or Index Funds?

Not all investors feel that this risk reduction is worth reducing their upside, though. It is true that, generally, higher risk yields higher returns, on average, over time.

It’s one of the reasons that stocks tend to beat bonds in the longterm. It’s why lots of traders chase high beta (stocks with big swings up or down), as they think they can capitalize on the fast-moving changes better than others.

Jenni and I have been participating in personal finance, FIRE, and investing Twitter-sphere since launching TicTocLife. Or at least, we’ve been trying to get the hang of it.

One of the threads I was following asked:

To my #dividend people: do you prefer dividend paying ETFs or picking individual stocks? Why?


Lots of the Twitterverse jumped on the individual stock bandwagon. While this is a question around dividends, the sentiment still applies to the general idea of individual stocks handpicked versus index funds.

Here’s a selection of comments:

  • “For those just starting, a broad market index fund is often a good idea considering most investors can’t beat the S&P500. Then once you have that base, you can start picking individual stocks as they generally offer more upside + higher yields.”
  • “Indiviudals. More opportunity to gain advantages. You’ll pick some losers, but if you do it right, the winners will outshine the losers better than an ETF can track.”
  • “Individual stocks. I can analyse balance sheets. I choose what I want. Not what someone else picks for me.”
  • “Picking my own individual stocks. I like to make my own mistakes Especially when the economy is strong, I feel better taking on riskier stocks with higher dividends Also avoids management fees…”
  • “World class, blue chip, perpetual dividend increasing individual stocks. I can target undervalued companies, I can strategically reallocate the dividends, I can shift strategy and optimize my portfolio in response to current world events.”
  • “Stocks. I like to know what I’m holding and have control. I like to know at what sort of valuation I’m buying the stock and don’t feel like it warrants an annual fee.”
  • “Leaning individual stocks for now because a lot of them are still on a nice discount and have great growth upside.”
  • “Individual stocks due to the tracking error some etfs have as well as the stable growth potential of one really solid company.”

Do you see a common theme here?

People want to have control.

People think they’re better than average.

Even as the first comment I highlighted mentioned that most investors can’t beat the S&P500, they proceed to recommend them.

Passive vs. Active Investing

The common wisdom is that most people can’t beat the S&P500. I wanted to understand just how uncommon it was.

There’s a primary source many financial outlets cite to suggest that most investors can’t beat the market. It is an analysis performed by none other than the company behind the DOW itself: S&P Global. They publish a scorecard multiple times per year for different regions and industries around the world pitting active investors against passive indexes.

Per their 2019 year-end analysis, 70% of domestic equity funds lagged the S&P 1500 composite they track for the year. A similar result occurs internationally.

That means that the professionals, most of the time, can’t beat the market. These are the companies dedicated to financial analysis with all the research and tools available to beat individual investors into oblivion.

What chance do we amateur investor gals and guys have?

Some amateurs and some professional money managers will beat the market, but it’s luck and by extension—a very rare skill.

I know what some of you are thinking: “but I am that skilled!”

I’m making the assertion that it’s more luck than skill, not only from the 70% figure already discussed but also because the chances of beating the market get worse over longer periods.

Risk-adjusted Return

S&P Global releases a risk-adjusted scorecard, that among other things we’ll discuss, tracks the active versus passive investing approach over a longer timeframe. Once the comparison is held over 10 or 15 year periods, the odds of passive indexes beating their active counterparts reach upwards of 90% in many different sectors.

As time passes, the chance a stock picker will beat index funds, decreases. With time, more chance is removed from the equation.

The risk-adjusted scorecard also accounts for, well, risk—it’s a common thought that though passive indexes may beat active managers, they often won’t do so during downturns. The rationale is that active managers will move funds into safer assets during a downtown, protecting the principal. Index funds will continue to lamely hold.

The scorecard develops a clear methodology for how they ascertain risk-adjustment, but ultimately the result is:

Actively managed domestic and international equity funds across almost all categories did not outperform the benchmarks on a risk-adjusted basis

Risk-Adjusted SPIVA® Scorecard

It’s important to note that this is even when the scorecard works from a gross-of-fee basis. This means that even where the analysis ignores the fees active managers charge they still lose to passive funds. This is even where the comparison is risk-adjusted which active managers are supposed to be better!

My Most Expensive Mistake

I dumped hours into learning how to evaluate company balance sheets, researching different industries, understanding commodity trades, and so much more during 2007-2008. Hundreds of hours that could have gone to improve my career skills, or hell, just having fun in my twenties!

I sold into the bottom of one of the worst bear markets in the last century, taking a realized loss larger than my earnings for that year. The experience delayed my return to the market for over a year, causing me to lose out on much of the recovery. The opportunity cost mixed with the realized losses easily beats out my terrible experience with lifestyle inflation.

Had I simply kept the money in the market in an index fund, I could have been in a stronger financial position today and avoided the time sunk learning detailed investment theory.

Early retirement and freedom could have come even sooner.

That’s one expensive lesson.

What do you think about investing in individual stocks?
What about passive versus active funds?
What’ve you learned from my mistakes?

Let us know in the comments!

By Chris

Chris began his early retirement pursuit in 2007 as he learned basic personal finance from GetRichSlowly and eventually about financial independence.

Learn more about him with his Meet Chris post.

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22 days ago

OMG, I cringed while reading your story about pulling out during the 08-09 recession. Ah, but – hey – it sounds like you learned your (costly) lesson. And I couldn’t agree more with all of this! When I saw those responses to my tweet (thanks for including me, by the way!) I was shocked at how many people preferred to own and invest in individual stocks! Then again, this is the Twitter world we’re talking about. If someone was truly curious about how the stock market functions on a more intimate level and wants to get their hands dirty, then… Read more »

Backpack Finance
22 days ago

Excellent. In the beginning I was invested in a few weird active funds which had ridiculous fees. I even remember how clueless I was sitting with the bank’s advisor. I cringe when I think about it now.

You know, this quote for me is the key to successfully “surviving” the volatility of the equity markets.

“If VTSAX goes to zero, we’re all probably screwed anyway. That’d mean capitalism in the U.S. has truly collapsed.”

I always tell myself that if everything goes to 0 then I’ll have bigger things to worry about.

13 days ago

Just recently found your blog – writing some great stuff. Reminds me of the early MMM days. Excited to keep reading.

freddy smidlap
44 minutes ago

funny thing here is that even though we’re older than y’all we started really investing around 05 or 06 but did not sell at the bottom and kept buying. that was a big help in getting where we are today. i used to own some bad individual stocks like mining companies, oil drillers, etc. i got better at investing and we now own around 35 individual stocks that make up 57% of our non-housing assets. last year we were up 58% and this year it’s 54% to date compared to -3 for the vtsax. i don’t know how long it… Read more »