Title: An Unexpected Investment Blunder in 2024 I Learned to Avoid in 2025
In a typical year, the S&P 500 index gains around 10% on average. However, 2024 has been an exceptional year with the index jumping nearly 28% year to date, making it a lucrative period for investors with minimal effort. Simply purchasing an S&P 500 index fund would have been enough to keep pace with the market benchmark, providing excellent returns.
Personally, I opt for selecting individual stocks rather than investing in simple index funds. While this approach can lead to some successful investments, it also opens the door for potential mistakes, something I experienced this year. Despite making some smart decisions, my performance this year has lagged behind the S&P 500.
My initial investment in Celsius Holdings (CELH) was one such example. Despite its impressive growth, improving profit margins, and solid financial position, the stock have dropped by another 30% since my purchase. While I remain optimistic about its long-term potential, the short-term negative impact on my portfolio is disappointing.
However, my worst blunder this year was not what I bought but what I sold. Warning bells should ring loud when someone urges, "Don't sell your winners!" And unfortunately, I disregarded this advice.
Before the 2022 bear market, I invested in United Rentals (URI) and Axon Enterprise (AXON), which became my second- and third-largest portfolio holdings respectively. But fearing a market downturn and believing they were overvalued, I sold both. Fast forward to 2024, and both stocks have skyrocketed, providing returns that would have outperformed the S&P 500 this year.
As the saying goes, "You can't improve the results by pulling out the flowers and watering the weeds." I learned this lesson the hard way and have vowed to hold onto my winners for 2025, starting with my current largest position, MercadoLibre (MELI).
Incorporating an S&P 500 index fund in your investment strategy is a wise move due to its diversification, low costs, historical performance, and liquidity. However, choosing individual stocks can be riskier, requiring extensive research, incurring higher fees, and causing emotional stress. But if handled with patience and careful consideration, the rewards can be substantial.
Enrichment Data:
Benefits of Investing in an S&P 500 Index Fund:
- Diversification: By investing in an S&P 500 index fund, you gain exposure to a wide range of 500 companies across various industries. This diversification reduces the risk associated with individual stocks, protecting your investment portfolio from the potential downturns of single companies.
- Lower Costs: Index funds typically have lower expense ratios compared to actively managed funds, ranging from 0.03% to 0.1% annually. These cost savings can add up significantly over the long term, maximizing your investment returns.
- Historical Performance: The S&P 500 has consistently provided solid returns with an average annual growth rate of around 10% over several decades. This historical performance makes an S&P 500 index fund an attractive long-term investment option.
- Liquidity: S&P 500 investments, such as index funds or ETFs, are highly liquid and provide investors with the flexibility to easily buy and sell shares.
Potential Downsides of Selecting Individual Stocks:
- Higher Risk: Investing in individual stocks can be riskier as it exposes you to the performance of a single company. This singular exposure increases the risk of significant losses if the company underperforms or faces unexpected challenges.
- Time-Consuming Research: Choosing individual stocks requires an extensive amount of research on each company's financial health, management team, industry trends, and market conditions. This time-consuming process can lead to emotional decisions based on short-term market fluctuations.
- Higher Fees: Actively managed funds, which often focus on selecting individual stocks, typically have higher fees compared to index funds. These higher fees can eat into your returns, reducing your overall investment gains over time.
- Emotional Stress: Investing in individual stocks can be emotionally challenging due to the constant need to monitor stock prices, make investment decisions, and deal with market fluctuations. This emotional strain can lead to poor investment decisions and increased stress.
Despite the potential rewards of selecting individual stocks, the process can be emotionally taxing and time-consuming. The risks associated with this approach make diversification through an S&P 500 index fund an appealing alternative. In fact, the lower costs and historical performance of index funds can offer better returns over the long term compared to investing in individual stocks.
