Stock picking is over, says economist and author Ben Stein. Evidence of the superiority of index funds over individual stock selection has become simply “overwhelming,” he says.
Stein has written about finance for Barron’s, The Wall Street Journal, The New York Times, and Fortune and regularly appears on CBS’s “Sunday Morning,” CNN, and Fox News. In the 1980s, he was among the chief busters of junk-bond fraud.
Stein appeared on The Wall Street Journal Live NewsHub program to promote his newest book, How To Really Ruin Your Financial Life and Portfolio.
His biggest regret by far, after a lifetime of investing?
“I think I tried to pick stocks for too long,” Stein said.
“You know something, it’s interesting, the data about how much better you do just buying the indexes as compared to trying to pick stocks has only become really overwhelming in about the last 20 or 30 years,” he said.
“So, when I first got out of school and had a few dollars to invest, that data was not yet overwhelming. It is now overwhelming and just blows away any contradictory data.”
It’s hugely important that people understand how to invest effectively and safely, Stein explained. For most people, their only source of capital for investing is their working income, he said.
Most Americans are unready to retire, having saved far too little to pay for their own retirements, Stein warned.
“Your main liability is providing for yourself after you retire. That’s your primary liability, and that is an enormous liability. And very few people make adequate provision for it,” he said.
“It used to be that was handled by pensions. It isn’t handled by pensions for many Americans now, unless they’re civil servants, and so people have to make a very substantial provision.”
Given the low interest rate environment, investing in stocks is the best choice for investors who seek enough growth to make their retirement work. But not individual stocks, Stein said.
Instead, buy the whole market using exchange-traded funds, Stein said, suggesting the SPDR S&P 500 (SPY) and related SPDR sector funds, the SPDR Dow Jones Industrial Average ETF (DIA) and the Vanguard Total Stock Market ETF (VTI).
“Avoid trying to pick individual stocks. Stocks are the way to go, but broad indexes: the SPDRs, the Diamonds, the VTI. There are various specific indexes that emphasize high dividend-paying stocks, low beta stocks,” Stein said.
“There are all kinds of ways to go. But don’t try to pick the stocks yourself unless your last name is Buffett. If your last name is Buffett, go ahead.”