Active vs Passive Investing: The $1,000 Stock Market Challenge

Gambling_stock_marketI’ve always liked to gamble, but at the same time, it’s hard for me to willingly throw away my money when I know I have a disadvantage.  When I go to Vegas, I never gamble more than a couple hundred bucks and think of it more as entertainment.  How many free drinks can I get before I lose my money? :)  Sometimes I win, sometimes I break even, but usually I lose.  So when the opportunity to challenge a co-worker in a test of stock market acumen came up, I couldn’t say no.

I’m sure you have a friend or co-worker who is always talking about their latest hot stock tip or gut feeling they have.  Ever notice how they never mention that huge loss they had?  Remember the stock market is a zero sum game, so for every winner there’s always a loser.  There are thousands of professionals out there who aren’t able to consistently beat the average market return, so why would an average joe think he can?

Delusional Investor

The worst thing that can happen to a newbie investor is too much success.  I started trading stocks in high school and had some success due to dumb luck.  My initial investments were in blue chippers like AT&T and Disney and after a couple years of  up and downs, I had made a few hundred bucks.  I thought investing was pretty easy until my next wave of investments fared very poorly.  That’s when I found out about passive investing and started researching how I could achieve the average returns of the market.

The stock market is a risky place, and in my opinion investing in individual stocks is akin to gambling in Vegas.  Sometimes you win, sometimes you lose, but at the end of the day, if you play long enough you will never be above average.  The stock market has returned an average of 10% every year since it’s inception, but the volatility we’ve experienced in just the past 10 years is a reminder of how risky it can be.  Remember that fees and expenses will never allow an active investor to beat a passive investor.

The Challenge

The challenge is simple: who can achieve a higher rate of return investing in the stock market with an initial starting balance of $1,000.  There are no rules in regards to what investments you can make as long as the stocks are publicly traded.  The challenge involves myself and two co-workers and at the end of one year, we’ll see who has the higher account balance.  The winner will get $100 from each competitor.

I took the challenge because I like to gamble and more importantly because I felt I had a competitive advantage.  My competitors plan on actively investing their $1,000 and although there is the chance they may pick a winner, the odds are in my favor.  And since the investment value is so low($1,000), a trade commission of just $10 is an automatic 1% loss.

My Strategy

I plan on investing in a low cost index fund through my brokerage: TD Ameritrade.  They offer a variety of no commission ETF’s that cover every market sector.  I chose Vanguard Total Stock Market(VTI) because of it’s ultra-low expense ratio(0.07%) and it’s exposure to the overall stock market index.  I don’t know what type of funds my competitors will be investing in so I think this is the safest index to follow.

With my $1,000 I bought 14 shares of VTI at $67.55.  I’m already up about 3% since the market had a great day on Friday!  I’ll keep everyone updated on how the competition is going once I find out what my competitors are investing in.

Do you think I’m going to win this competition or do you think my competitors stand a chance because of the short time frame?

-PF Pro

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Hi, I'm Harry, the owner and head writer for Your PF Pro. I started this site back in 2011 in order to create a place where young professionals could come and get all of their financial questions answered. On the site, you'll find articles on everything from asset allocation for retirement to saving money at Chipotle! So enjoy..

Comments

  1. Peter says

    The “market” (read S&P) is so unpredictable right now that I would bet on you losing without knowing what stocks the competition picked. The winner will be in on the hottest days of the year and out on the coldest. Take a look at your S&P over the years…1m: 6.84%; 3m: -3.77%; 6m: 8.58%; 1y: 1.93%; 5y: -9.17%; 10y: 37.96%
    I agree with you that maybe if the contest was to last for 30 years, you’d be in the driver’s seat but why would you think that such a volatile market will put you in the lead after a short 6 months? I’d pick 3-5 of the hottest stocks with major milestones on the horizon and maybe a dark-horse that has recently taken an excessive beating or poised for a jump-start. (

  2. says

    Hi Peter, thanks for commenting. My point is you can’t pick stocks that will perform better than the average return of the market over any time period, be it 30 years or just one year. Let’s say you buy 5 stocks with a commission fee of $6 each. That’s 30/1000 = 3%. You now have to beat the market by an additional 3%. This is what I’m trying to illustrate with this competition. There’s definitely a chance I may lose, but the odds are clearly in my favor IMO.

  3. JY says

    I think that with two other participants, one might get lucky and beat you with a 5 or 10 percent gain, since it is just the one year. Perhaps he/she will invest their 1k in silver and/or gold and win with a precious metals rally.

  4. says

    Oh this sounds exciting. A buddy and I did this on a virtual stock market site and we started with $100,000 and whoever had the most valuable portfolio at the end of the month owed the other a 6 pack of his choice. Good thing for us though is that we both found out we sucked but we didn’t lose any money since it wasn’t real!
    Jeremy recently posted…Mad At Myself…My Profile

    • says

      Originally, we were planning on doing that but we couldn’t find one that fit our needs. I ended up investing in VTI through TDA(no fee ETF) and after it went up a few percent I sold since these two clowns I bet with never even transferred in their money. I’m going to wait until the year is up and make them pay up, doubt they will though haha. Experiment = FAIL :)

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