Early in my investing journey, I took some very common financial advice to heart: “Invest in what you know.”
At the time, my grandmother was living at a Sunrise Assisted Living facility. I visited her often and was absolutely blown away by the care she received. The staff was incredible, the facility was top-notch, and the business seemed booming. It felt like a sure thing. So, I proudly bought $1,000 worth of Sunrise stock.
Fast forward over two decades. That stock had barely moved, and once you account for inflation, I actually lost money.
It was a tough lesson, but an important one: Just because you like a company—or even if they provide world-class service—doesn’t mean you understand their financial fundamentals or market position.
On the heels of my recent conversation with Alex Edmans about market inefficiencies, I decided to record a solo “10 Things” episode of the Earn & Invest podcast. In it, I break down exactly why I choose boring, broad-based index funds over picking individual stocks—even when chasing “alpha” sounds incredibly tempting.
Here is a quick look at why I’ve permanently hung up my stock-picking hat:
“Invest in what you know” is a trap. My Sunrise Assisted Living experience taught me that loving a product doesn’t give you an informational edge in the market.
Good companies don’t always win. A business can have happy customers and great service, yet its stock can still stagnate or collapse (remember Sears, Enron, or Arthur Andersen?).
A few big winners drive the entire market. The S&P 500’s annual returns are usually carried by a tiny handful of top-performing stocks. If you pick stocks and miss just one of those key drivers, you underperform. Index funds guarantee I own the winners.
I don’t want to study balance sheets. Tracking CEOs and analyzing trends takes massive amounts of time. I’d rather spend my time writing, podcasting, and being with my wife.
I concentrate risk elsewhere. We build wealth through concentration (in our careers, our W-2 jobs, or our businesses) and we preserve it through diversification. Stock picking flips this model, concentrating risk in a place meant for wealth preservation.
The Dunning-Kruger effect is real. It’s easy to get lucky early on and think stock picking is easy. That overconfidence almost always leads to long-term underperformance.
Money is a tool, not the goal. I refuse to spend all day thinking about money. Obsessively checking tickers in retirement creates anxiety and steals time away from purpose and relationships.
Perfect is the enemy of good enough. Capturing the market average (“beta”) through index funds has historically delivered strong returns that easily beat inflation. Chasing “alpha” adds massive risk for a minimal potential reward.
I hate volatility stress. Broad index funds lower my anxiety. I don’t have to watch daily market swings because I know I own a slice of the entire global economy.
I am not a power hitter. Stock picking requires hitting home runs to consistently beat the market. I prefer hitting a steady stream of singles and doubles—accumulating wealth reliably without the risk of striking out.
The 80/20 Rule of FIRE
At the end of this episode, I also dive into an awesome email from a listener named Gareth. He proposed a fascinating framework: viewing “FU Money” (having roughly 5 years of living expenses saved) as the 80/20 rule of the FIRE movement.
Essentially, you get 80% of the freedom benefits of financial independence for only 20% of the effort and cost.
Historically, I haven’t focused much on the concept of FU money, mostly because I believe we should start living purposeful lives immediately, regardless of our net worth. But Gareth’s framing really got me thinking, and I’m hoping to bring the godfather of FU money himself, JL Collins, on the show soon to discuss it.
Want to hear the full breakdown of my index fund philosophy and the FU money debate?
I think my grandparents did this as well. The stocks they purchased for me in an UTMA many years ago did laughingly bad over time.
Funny timing. I had almost this exact conversation with a friend last night.
He was excited to tell me about his investments in XRP and other blockchain projects, and I think he expected me to be impressed by how much research he had done and how well he understood the technology. And I was impressed by how much he knew. But when he told me XRP was his main asset and talked about moving most of his retirement investments and “backing up the truck,” instead of being impressed, I found myself scared for him.
The interesting thing is that he may be absolutely right about blockchain transforming financial infrastructure. I have no idea. What I do know is that I don’t have to correctly predict which technology, company, or token ultimately wins. My boring total-market index fund will eventually own the companies that do.
The harder question for me is what we owe the people we care about when we see them taking risks we wouldn’t take ourselves.
I shared my philosophy, recommended The Simple Path to Wealth, and explained why diversification matters so much to me. And then I realized I had reached the point where I needed to let it go.