Stock picking isn’t dead. But for most investors it might as well be

By Paul R. La Monica, CNN Business

What’s the best way to invest? Plenty of active traders are out there trying to make a quick buck on meme stocks like AMC and GameStop, fads like Snap and Peloton or bitcoin and other cryptocurrencies. Professional money managers try to identify stocks that can beat the broader market over the long haul.

But for most individual investors, a strategy of buying and holding so-called passive funds that track top indexes like the S&P 500 and Nasdaq 100 makes the most sense if you want to accumulate wealth for retirement. It’s like that popular old rotisserie chicken infomercial slogan: Set it and forget it.

Index funds tend to be cheaper. New data from S&P Dow Jones Indices showed that investors saved more than $400 billion in fees with index funds over the past quarter of a century.

Obviously, index provider S&P Global has a vested interest in promoting passive funds backed to various benchmark indexes.

The company, along with competitors like iShares owner BlackRock and index provider MSCI, offers many options for investors looking to get exposure to the broader market without trying to pick individual winners and losers.

Even legendary investing guru Warren Buffett of Berkshire Hathaway has extolled the virtues of index funds for average investors. That’s because Buffett, despite being one of the most successful stock pickers ever, doesn’t believe most active investment managers can beat the broader market.

The 92-year-old Oracle of Omaha famously wrote in Berkshire’s 2014 annual shareholder letter that his advice for the trustee of his estate is to “put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund” for his wife. (Buffett suggested one from Vanguard.)

“I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers,” he wrote.

And given how some high-profile active investors have lagged the market lately, there is something to be said for conservative investors with a long-term horizon betting on the S&P 500 over a handful of stocks.

Just look at Cathie Wood at Ark, who has made big, high profile bets on companies like Tesla, Zoom, Roku and Teladoc. Ark’s flagship Innovation ETF has plunged 60% this year, compared to “just” a 20% drop for the S&P 500.

“Actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons,” said Bryan Armour, director of passive strategies research for North America at Morningstar, in a report last month. He noted that just one of every four active funds beat their passive benchmarks over the ten years ending in June.

Both active and passive investing haven’t worked this year

Of course, buying index funds is no guarantee of investing success either…especially not in the short-term. After all, the S&P 500 has plunged this year, too.

“Diversified portfolios do okay usually, but they’ve been hit hard lately by the rise in rates,” said Shamik Dhar, chief economist at BNY Mellon Investment Management, in an interview with CNN Business.

Even the vaunted 60/40 asset allocation recommendation for investors, i.e. owning 60% stocks and 40% bonds, has so far failed to beat the market in 2022.

“This year, it seems like there has been a broad-based source of fear. It’s shock therapy. There is slowing growth and inflation. That is disorienting investors,” said Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors, in an interview with CNN Business.

Along those lines, any investor with decent exposure to bonds, hoping that they’d hold up better as stocks tanked, has gotten a rude awakening. The iShares 20+ Year Treasury Bond ETF, a top proxy for long-term bonds, has done even worse than the stock market, plunging more than 35% this year.

That’s why some investors aren’t singing a funeral dirge for active stock picking — just yet.

“A 10-year ‘secular bear market’ is underway,” said Stifel chief equity strategist Barry Bannister in a recent report, who predicts that the market may be stuck in a narrow range throughout the rest of the decade.

“We believe this environment favors the following approach: active (not broad passive) management,” he said.

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