Active vs Passive Investing: The $1,000 Stock Market Challenge
I’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?
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 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.
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?
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