Index funds are NOT always the answer (hear me out)

Ok before you all pile on me just hear me out. I know this forum is like 90% bogleheads and index fund people but I think the "just buy VTI" advice is way too simplified and actually bad for some people.

My buddy who works in finance told me that with how concentrated the S&P 500 is in like 7 tech stocks right now, you're basically making a massive bet on big tech when you buy an index fund. The top 10 holdings are like 35% of the whole index. Thats not diversification thats just buying Apple and Microsoft with extra steps.

Plus index funds by definition give you average returns. Why would you settle for average when you can do better with some research? Ive been picking individual stocks for 6 months and im up 18% which beats the index over that same period.

I know im gonna get roasted for this but whatever lol

I'm going to try to be constructive here even though I disagree with almost everything you said.

1. Market-cap weighting means large companies ARE a bigger part of the index. That's by design. When Apple grows, it becomes a bigger part of the index. When it shrinks, it becomes smaller. The index self-adjusts. You don't need to "fix" this.

2. If you're worried about concentration, buy a total market fund (VTI) instead of S&P 500 (VOO). VTI holds 3,600+ stocks including small and mid caps. Still market-cap weighted but much broader.

3. "Index funds give you average returns" -- yes, and average returns beat 85-90% of actively managed funds over any 15+ year period. This is not my opinion, this is data. Look up the SPIVA scorecard.

4. You've been stock picking for 6 months. Six months. Come back in 10 years and tell me your returns. Literally everyone thinks they're beating the market in the first year. Survivorship bias is real.

I've been doing this for 25+ years. Buy the whole market, keep costs low, stay the course.

oh boy here we go again lol

@ratechaser99 with all due respect you sound exactly like every other person who's been investing for 6 months and thinks they've figured out something that professional fund managers with PhDs and supercomputers haven't. I've seen this movie before. Many times.

The concentration argument is the hot take du jour and it has a kernel of truth but people misapply it constantly. Yes the S&P is concentrated in tech. That's because tech companies are worth a lot. If you think that's a problem you can tilt to equal weight or add international but you're still better off doing that with index funds than picking stocks.

Your 18% over 6 months means nothing. Absolutely nothing. I could flip coins for 6 months and beat the market too. Come back in 20 years. I'll wait.

Also "my buddy who works in finance" is not a source lmao

I actually think ratechaser has one valid point buried in there even though I disagree with the conclusion.

The concentration in the S&P 500 IS worth thinking about. The top 10 stocks making up 35%+ of the index is historically unusual. It doesnt mean index funds are bad -- it means you might want to think about equal-weight alternatives or adding more international exposure.

But going from "the S&P is concentrated" to "therefore I should pick individual stocks" is... not it. That's like saying "this restaurant has too much salt on the steak" and concluding you should cook all your own food from now on. You'll probably make worse steak.

The data on active management vs indexing is overwhelming and it's not even close. Over 20 years, something like 90% of stock pickers underperform the index after fees. Your 6 months of outperformance is noise.

Stick with index funds. Maybe diversify which index funds you use.

Ok fair enough I knew I'd get pushback lol. But let me push back on the pushback:

You guys keep saying 6 months means nothing but at what point does it start meaning something? Like when do you admit someone is actually good at picking stocks? 5 years? 10? Because there are people who beat the market consistently. Warren Buffett. Peter Lynch. Cathie Wood was beating everyone for a while.

Also the SPIVA data includes a bunch of terrible actively managed mutual funds with high fees. Im not comparing myself to those. I'm just a guy on robinhood buying companies I understand. Its not the same thing.

"Cathie Wood was beating everyone for a while" -- this is actually a perfect example of my point. ARKK returned something like 150% in 2020. Then it lost 67% in 2022. People who bought in late (chasing performance, exactly what most retail investors do) got destroyed.

Buffett himself tells people to buy index funds. He literally bet a million dollars that the S&P 500 would beat a hedge fund portfolio over 10 years, and won.

To answer your question directly: it takes about 20-30 years of data to distinguish skill from luck in investing with any statistical confidence. That's not my opinion, that's just how statistics work with noisy data.

I don't say this to be mean. I say this because I was you 20 years ago. I thought I was smart enough to pick stocks. I wasn't. Almost nobody is. The sooner you accept that the better off you'll be.

Since nobody's actually posted the numbers let me do it:

SPIVA U.S. Year-End 2025 report:
- Over 5 years: 78.7% of large-cap US funds underperformed the S&P 500
- Over 10 years: 87.4% underperformed
- Over 20 years: 93.1% underperformed

These are professional fund managers with teams of analysts, Bloomberg terminals, insider access to company mgmt, and decades of experience. 93% of them can't beat the index over 20 years.

But a guy on robinhood for 6 months is gonna do it. Sure.

Gonna be honest this thread is a bit harsh lol. ratechaser asked a legitimate question even if the conclusion was wrong.

I used to think the same thing when I started. It took me about 2 years of stock picking to realize I was basically gambling and got lucky early on. When I finally tracked all my trades including the losers (not just the winners I bragged about) I was actually behind the S&P.

The human brain is really good at remembering the stock that went up 40% and forgetting the one that dropped 25%. That's confirmation bias and it will absolutely fool you into thinking you're a good stock picker.

@ratechaser99 -- genuinely, start tracking EVERY trade including cost basis, sell price, and dividends. Compare your total portfolio return to VTI over the same period. You might be surprised.

lol this thread.

vti and chill. thats it. thats the post.

I'll say something slightly controversial for this forum: it's ok to put 5-10% of your portfolio into individual stocks if you find it fun and it keeps you engaged with your finances. I call it "play money." The other 90% should be in index funds though.

The problem is when people think they can beat the market with 100% of their portfolio. The math just doesn't work out long term for almost anyone.

I retired at 58 primarily because of index fund investing. Boring? Yes. Effective? Extremely. I wish I had all the money back that I lost picking stocks in my 30s. Would have retired at 55 probably.