Bull markets correlate with stock recommendations. You can see it on social media. People are either recommending or asking which stocks they should be buying. During a bull market, you can almost buy any random stock, or even pick a 10x stock by pure chance, and make money from it. Unless you’re unlucky.
In my opinion, if someone needs to ask which stocks to buy, they probably shouldn’t be buying individual stocks. Seeing someone making money from a particular stock isn’t a good enough reason for you to buy that stock. This goes for any investment. Just because somebody else is making money from Bitcoin, doesn’t give one a good enough reason to buy Bitcoin. FOMO is the worst investment methodology.
Can you outperform the market?
When you’re buying a bunch of shares you’re suggesting that you can outperform the market as a whole (index) by selecting specific shares. According to the 2020 S&P Indices vs Active (SPIVA) report, more than 78% of active funds underperformed in the Top 50 index. These are highly qualified individuals who are selecting the stocks that should outperform the index – and even they struggle. Do you think you can do a better job by picking stocks from recommendations on social media? Don’t get me wrong, you certainly can. However, the odds are against you.
So if the index outperforms more than 78% of the market professionals, by just buying the index you will do better than 78% of the professionals. What’s more, it will be low in risk and cheaper.
What to buy?
The answer to “which stock can I buy?” is therefore simple: All of them. Remember, your number one goal should be the return OF your money, not just return ON your money. If you buy all the stocks the odds of getting some of your money back are high. Some will perform poorly, some will perform. On average over the long term, the index outperforms inflation, plus most asset classes.
Njabulo Nsibande is a Just One Lap user-turned-contributor and a founding member of an investment club. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.
Follow Njabulo’s journey here every month. You can also follow his trading journey by listening to his Village Trader podcast.
Find him on Twitter: @njabulo_goje.