When I tell people I am a financial advisor, the most common reactions I get are questions about which stocks to invest in, or stories about the best stock picks the person I am talking to ever made. When household name companies like Nvidia have such strong performance, it can make stock picking look deceptively easy.
The performance of the broad stock market is always driven by a handful of star performers. Naturally, there is a huge temptation for investors to try to only buy those best companies. I always hate to break this news, but you likely can’t pick the best performing stocks beyond just random luck. If it is any consolation, the professionals can’t either.
The reason it is so hard to pick stocks and outguess the market is because the market does such a good job of incorporating all available information people could possibly use to make investment decisions. Millions of investors pour through all the available information about companies and make buying and selling decisions based on that information.
Because of this, the stock market incorporates any and all information into stock prices more or less instantly. If information comes out that would positively impact a stock’s price, prices immediately rise to reflect that. If bad news comes out, prices will immediately fall.
By the time you have heard about something, the information you are acting on has already been incorporated into market prices. This is why it is so hard to “beat the market” by picking the best stocks. Even the professionals have a very hard time doing so.
According to research from Dimensional Fund Advisors, over the twenty-year period that ended December 31, 2025, only 12% of actively managed equity (stock) mutual funds beat their benchmark. That means 88%, a huge majority of actively managed mutual funds, actually squandered value with their stock picking activities. Of the funds that existed at the beginning of the 20-year period studied, 55% did such a bad job they were shut down and no longer existed by the end of the study.
The only way to ensure you own the best performing stocks that drive the performance of the stock market is through a constant commitment to broad diversification. By owning everything all the time, you will inevitably own whichever stocks are on a hot streak at that particular time. If you are thinking about investing a material portion of your wealth in just a few stocks based on information everyone already knows, you should probably think twice.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
