Your DIY Portfolio is Killing It. Here’s What You Should Consider

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I spoke with a friend who manages his own money. Here has been his experience: he’s currently in his 50’s. In his 30s and 40s, he managed his own money and ended up losing almost all of his money in tech stocks. 

There could be a temptation to just move on with the story, but let’s pause and look at that. How the hell did he lose the majority of his money with that decision (the decision to be heavily weighted in one sector)? Here is what is critical for you to get. It was not any one or two decisions that could have led to that outcome! Owning a sector that completely tanks is entirely foolish, but that decision alone is not enough for you to wipe out decades of earnings/savings. No, you would need to make many more imprudent decisions. That’s a critical and relevant point! Why am I writing a paragraph about that? Because many do-it-yourself investors have no idea how many wise decisions you have to string together to create an intelligent, winning investment philosophy. Said another way, many investors are unaware that you can blow up an investment philosophy with one or two terrible decisions. 

Please let that sink in. My friend lost two decades of savings and he is responsible for that. That absolutely did not need to happen!

Okay, let’s keep going with the story. Fast forward to today – he still manages his own money and over the past 5 years, he is averaging a 63% return. For any novice, that is nothing short of impressive.

But let me tell you why I’m not moving my money over to be managed by him. Let me tell you why his portfolio terrifies me. 

Building an academic and efficient portfolio

The majority of his returns that have him leading most indexes are all inside of one company. You guessed it, NVIDIA.

Here are a few reasons his stock-picking portfolio is wildly unappealing to me:

First, my friend has a remarkable return because he picked a single strong stock, NVIDIA. However, consider this – as you look at the top 10 performing stocks of the last 3 months, NVIDA is not on the list. As you look at the top 10 highest-performing stocks over the last 6 months, NVIDA is not on the list. If you look at the top 10 highest-performing stocks over the last year, NVIDIA is not listed in the top 10! You have to go out three years before NVIDIA shows up, coming in 6th. As you look at the last 5 years, NVIDIA makes the top 10 list, but look at this, the leading company, Applied Digital touts a return of 10,588% compared to NVIDIA’s 2,602% return. 

So why didn’t he pick Applied Digital, APLD? The winning stock over the last 5 years? Why didn’t he pick any of the top 5 stocks over the last 3 years? (ADMA, SMCI, VKTX, VST, FTAI) The answer is he could not predict any of those. 

(All data is sourced from StockRover as of October 1, 2024).

It has been showcased dozens of times that even professional money managers rarely succeed with a history of long-term above average performance. Some have a few great years of performance, but it is very rare for an active fund manager to have impressive performance on a consistent basis. But why is that? It’s because yesterday’s stock leaders are very rarely today’s or tomorrow’s stock leaders!  So, trying to be your own Warren Buffet, managing your own portfolio with 75 holdings or less, ends up going one of two ways: either really well, or flat terrible – for all the reasons cited above. My friend could not pick the top stocks. He got lucky and had a good amount invested in one particular holding that went up. 

But what are his odds of picking the next “big” stock? Consider this – The best-performing 4-5% of listed stocks accounts for the entire lifetime dollar wealth creation of the U.S. stock market since 1926. Stock market concentration has been increasing for many decades and is the steepest it has been in 60 years. This means that very few stocks are driving most of the returns!

Today, the top 10 stocks by market cap in the U.S. account for approximately 29.4% of the overall equities market, according to Khuram Chaudhry, Head of European Quantitative Strategy at J.P. Morgan.

What You Can Learn From His Mistakes

So why am I not trading in my highly diversified portfolio for my friend’s holdings? Because in a portfolio you get exactly what you set up. To say that another way, the ride my friend has been on, is exactly the ride one could expect when investing in a small number of holdings, and selecting those holdings yourself. He has already lost big and won big, there is no part of that that is puzzling. What I’m unclear on is whether he is aware of how his portfolio would rate in a table of standard deviation. Meaning, does he have any idea how much risk he is willingly taking in exchange for his return?

I would suggest that he would wake up with his feet straight up in the air if he had any idea how much risk he was subjecting his money to in exchange for that 63% return (over 5 years). And he’s approaching the end of his career, not the beginning or middle. So to have to start over in the wake of extreme volatility should be more than most can stomach. After all, that happens in America, every day with business and money management decisions!

Here is what I’m asking you (the reader) to think about as you finish this article. 

  • Do you know how much risk you are taking on inside of your portfolio? 
  • Are you aware that the level of risk you are taking inside of your portfolio can be measured and plotted?
  • Are you in a reasonable portfolio for your age and risk tolerance?

 

There may very well be investors who are clear that they are taking on enormous amounts of risk in their investment methodology. As long as you are clear on the risks, and you wish to proceed, that’s better than sitting in a portfolio in complete ignorance!

However, 14 years in this space has me clear that not enough investors are really aware of the level of risk they are taking on in exchange for the return they are “chasing.”

Remember, my friend already lost the majority of his wealth once. Investing in a portfolio filled with stock picking – stock picking that you/he the novice investor are assembling without the huge budget that fund companies have to review, carefully examine, and even visit companies and countries. Do you really feel settled that you can outpick these huge institutions and managers who do this full-time?

In an article for Reuters, James Saft put it this way:

“If you want to be a stock picker, you had better be a truly exceptional one because the alternative is not pleasant. … You are, in other words, more likely to buy an IPO which underperforms T-bills over its entire publicly traded lifetime than one which beats bills. … This implies the IPO you buy is more likely than not to actually destroy wealth on an inflation-adjusted basis.”

Know your odds, stop fooling yourself, and know there is a completely different way to invest in financial markets, participate in great returns, and drastically reduce your exposure and risk.

The case for massive-scale diversification makes a compelling argument for investors.  With index funds and ETFs, this is becoming far easier and significantly less expensive to participate in. 

Tencap is Here To Help

This article is intended to showcase the extreme amount of risk one takes in stock picking. If you want more specifics on investing, here is a link to an article that you can review.

If you want to take on enormous amounts of risk and chase high returns, knowing that it can go up or down in extreme ways, we are not the group you will want to interview. 

However, if you are interested in competitive rates of return, with a portfolio engineered to take on as little risk as possible while focusing on costs, tax implications, and exposure, we would love to meet with you and coach you on how we manage money. 

Having been a part of multiple RIA firms leading thousands of clients to and through retirement, I can tell you that most investors are interested in similar things – an investment methodology that is academic, has controls to buy low and sell high, adjusts for your age and changing risk tolerance, helps you to amass wealth and intelligently consume your wealth, and is tax conscious. 

While this is not a complete list, it’s an example that showcases that Tencap is worthy of an interview to discover if we would be the right group to manage your money.

Call today to schedule your no-cost consultation with a licensed financial advisor. We look forward to coaching you on the academic way we manage wealth and build complete comprehensive financial plans.

The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Utah or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.

Joe Griffin Standing
Joe Griffin
CEO Tencap Wealth Coaching |  + posts

Joe has been building and managing financial planning firms for the past 14 years. He loves the financial planning space and is very proud of the success and growth that has come from his proprietary marketing and leadership. Joe spent years being involved with the bright minds of the investment committee at Utah’s 529 college savings plan – a plan managing over 20 billion. Joe only works with firms that are stated fiduciaries on a client relationship. Joe is committed to leading a financial planning firm with ethics and integrity.  The money management philosophy that Tencap subscribes to is built on strong academics and is supported by a highly impressive academic board. We can't wait to coach you on the excellence that Tencap stands for.

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