Individual stocks vs. index funds

Hey Saul fans,

I was recently invited on a popular podcast called Choose FI (Financial independence) where I discussed the merits of picking your own stocks vs. going with an index fund.…

The FI community tends to be full of investors who are against picking your own stocks because “you can’t beat the market”. I did my best to share a few reasons on why professional money managers often fail to beat the market and talk about why individual investors like us can succeed.

I wasn’t able to get into the nuts & bolts of how to pick great stocks, but if I’m invited back to the show to do so I plan on pointing them to this board as a free resource for interested investors to use.

Many thanks to several investors who frequent this board who helped me prepare for the show. I did my best to defend those of us that are crazy enough to think that they can actually beat the market by picking our own stocks!



Hi Brian,

Really enjoyed that – thanks! I listened at lunch today. I thought you did an excellent job of explaining the idea, and offered a “lite” approach (which it sounds like you employ for yourself) of owning index funds and also individual stocks. A couple questions:

  1. For someone like yourself, if your individual stock returns are better than your index fund returns (and it sounds like they are), why wouldn’t you go 100%?

  2. I don’t know how you keep track of 80 stocks. I think even if I did this full time, even half that would be a LOT. And even then, I would get burned out. I have about 20 or 30 I try to keep an eye on now, and I still get burned out, even though I don’t own most of them – and I follow the ones I own much more carefully. I guess my question is…don’t you think there are some of the 80 you could sell? I had a lot more stocks (almost 30 at times) when I went with everything that was interesting. Then I started to cut out the ones that I was just hoping would work out, like Twitter. Turns out if I’d held Twitter, it would have doubled, just like the rest of my portfolio, so it would have been a fine return. But it was low conviction, so I’m glad I sold it. Many of my other low conviction stocks I sold (RUBI, PN, FIT, YELP) have either gone nowhere, or straight down.

My point is that some of your low conviction stocks may do just fine, but I bet as a group they’ll do worse than your high conviction stocks. Worth thinking about. As analytical as you are, you might enjoy studying it.

Please let us know if you go back for another podcast – I’d love to listen in.



Thanks Bear!

  1. My SEP IRA, IRA, ROTH IRA are with Vanguard, so I can’t pick individual stocks. My wife’s 401(k) is with a crappy company that gives you no choices at all, but we invest in it just to get the match. My kid’s 529 plan are all with the state, so index funds are the only option. I keep them there for simplicity sake – it’s enough work for me to manage my broker. But, add em up, and you get about 25% of our portfolio. Still, the vast majority of my assets are in my regular brokerage account.

  2. I lean on the Fool for that. My strategy is largely – but not completely – buy and forget. Many on this board take a concentrated approach, which is great and it works for them. I focus my time on finding great companies and try to buy them at “better and better value points”, a la Tom Engle. While I hold 80 or so stocks, the bulk of my assets are in the top 20 or so. I focus my time there, but in some cases, the companies require next to no work. Take SBUX, PLCN, AMZN, V, and MA, for example. I look at the report and its usually the same story – revenue UP, earnings UP, thesis on track. Deep dives are not necessary IMO. I can’t quickly scan the Fool’s articles on them and read the board posts and be up to speed. Other companies require a bit more work, like TSLA, NFLX, and ISRG, but I lean on other Fool’s work to quickly confirm that the thesis on track.

Thus, while I own and follow 80 companies, it’s not nearly as time-consuming as you might think. Heck, if I just read Tom Engle’s page posts on about half the companies that I own I’d consider myself fully up to speed! Let alone following the Fool’s advice, which is almost always “do nothing.”

This strategy works for me, but I realize that those who follow Saul’s style tend to go much deeper on a smaller group of companies.


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My IRA is with Vanguard also. Seven years ago I opened a brokerage account in my IRA. I cashed out most of my fire and forget mutual funds and began investing in individual stocks and options with a few limitations on certain types of option investments. My returns in my IRA have been much better than than the mutual funds since I switched. While not as impressive as Saul’s, they have been good enough to keep me in premium craft beers and pretzels in my retirement.

Unless you have some employer restrictions, you should be able to invest in stocks. In order to invest in individual stocks or options you need to open a brokerage account in your IRA. Call Vanguard to get the particulars. I think you can fill out the request for a Brokerage Account on line. You will be able to trade stocks in the brokerage account using funds from your IRA either by selling some of your mutual funds or by adding new money (your annual contribution). However, the IRA brokerage account will be a cash secured account not a margin account. As such you will have some limitations, no shorts, cash secured puts, no call diagonals, etc.




While I hold 80 or so stocks, the bulk of my assets are in the top 20 or so. I focus my time there

Sorry to belabor this point, but I’m just really interested, so I just want to point out, if it’s as simple as comparing the largest 20 positions to the smallish 60 positions, you could quickly do a study of how each group has performed. I’d love to hear the results!




I had “mutual fund only” accounts in the 1980’s. When I inquired about buying stock, USAA had me fill out a form and the accounts were converted, still holding the funds. I sold some of the funds, waited for settlement and bought my first stock. I continued that until the mutual funds were gone.

All holdings and some statistics on my profile page