Yesterday’s big market winners turn into today’s big losers

They consist of Meta (formerly Facebook), Apple, Amazon, Netflix, Alphabet (formerly Google), Microsoft and Tesla.

Yes, I know I talked about a different Select Seven in January. But that column, which included Nvidia rather than Netflix, talked mostly about how those seven stocks had driven up the S&P 500 in 2020 and 2021.

This time, I’m giving you details of how much of a loss a mere seven companies inflicted on index fund investors for the first 10 months of this year. (It’s eight stocks, because Alphabet has two share classes.)

Why did I pick these seven companies? Because the first five, under their original names, were the highly publicized FAANGs, an acronym with a nice bite that I just loved. Then I threw in Microsoft and Tesla because they’re big growth stocks with big names and, until this year, they’d been making nice returns for their shareholders.

Given the big decline in growth stocks this year, I asked Vanguard to figure out how much the flailing Select Seven had dragged down its S&P 500 index fund. Vanguard’s numbers told an interesting story.

Last year, the Select Seven returned a weighted average return of 36.3 percent of their starting value to holders of Admiral shares in Vanguard’s S&P 500 fund.

That 36.3 percent was considerably more than the fund’s 28.7 percent overall return. In other words, the seven boosted the fund’s return above what it would have been without them. That’s what I’d come to expect them to do.

But through Oct. 31 of this year, the Select Seven have dragged the index down. A lot. Led — if that’s the right word — by Meta’s 72.3 percent decline, the seven companies posted a 32 percent loss, almost double the 17.7 percent that the S&P 500 fund lost. Those dogs are making noise: Aroooo! Arooooo!

And wait, there’s more. If you subtract the seven companies, Vanguard says the remaining S&P 493 — please note the rhyme — would have shown a loss of only 12.8 percent. This means that for the first 10 months of this year, the seven, down 32 percent, lost about 2.5 times as much on a percentage basis as the rest of the S&P 500 did.

Sure, the S&P 493’s decline of almost 13 percent isn’t exactly a number to celebrate. But it’s a lot better than 17.7 percent.

To be sure, the world has moved on since the Oct. 31 cutoff that I’m using because that’s the most recent date for which Vanguard could get me the numbers I sought.

To give one example of what’s been happening this month, Tesla has fallen 22 percent since Oct. 31. For another, Meta, the biggest dog among the Select Seven, has risen about 9 percent.

What can we learn from all these numbers?

The lesson is this: Although buying and selling individual stocks is more exciting and more fun than buying index funds, retail investors in the long term are generally better off owning broad-based index funds rather than trying to outwit the market by trading individual stocks.

Sure, you’ve lost money on your S&P 500 fund for the first 10 months of this year. But you’d have lost four times that much by owning Meta and twice as much if you had your money in Amazon or Tesla. (Amazon founder Jeff Bezos owns The Washington Post.)

Money managers follow the market obsessively and live and breathe stocks — but very few of them consistently outperform the S&P 500 over the long term. By contrast, a low-cost S&P 500 index fund gives you the S&P return, less than a minuscule 0.04 percent or so.

Please understand that I’m not shilling for Vanguard or its index funds. I became a Vanguard customer because some of my employers offered Vanguard funds in their 401(k) retirement plans, and I liked the way Vanguard treated me. Most of my wife’s and my investments are at Vanguard, but we’ve also got money at Charles Schwab, whose index funds are also attractive.

Even though index funds didn’t exist when I started investing more than 60 years ago, over the years I’ve migrated to them. I’ve still got a batch of individual stocks, some of which I’ve selected with the help of friends who are much better stock pickers than I ever was or ever will be.

However, my two biggest investments, by far, are in Vanguard’s S&P 500 and Total Stock Market index funds.

I give each of my grandchildren four shares of Apple stock on their birthdays. I figure that it’s a good idea to give them a bit of market exposure by gifting them a stock whose products they can relate to.

However, in the unlikely event that my grandkids came into serious money and asked me for investment advice, I’d suggest they put most of the money into index funds. That’s not as much fun as owning Apple and collecting its quarterly dividend checks, but it’s a lot more reliable way to make money than trying to outwit the market by trading individual stocks.