LIKE MOST READERS of this site, I’m committed to index fund investing. Still, even though I know I’d have little chance of beating the market as a stock-picker, I’m periodically tempted to buy individual stocks. When a former mentor who’s a brilliant strategist joined Moderna in May 2020, I strongly considered buying shares. Given where the economy was at the time, I passed on buying the company’s shares (symbol: MRNA) and stuck to my standard S&P 500-index fund investing. In hindsight, this was a mistake.
As a daily viewer of CNBC, it’s been hard to ignore the performance of Moderna over the past 16 months. It has increased more than 300% in 2021 and yesterday it was up more than 17%.
As I watched CNBC yesterday, I said to myself, “It’s a bummer I didn’t buy shares last year, but at least I’m getting some upside now that Moderna is in the S&P 500.” I spent a little time analyzing this attempt at rationalization—and the results weren’t consoling.
My conclusions? First, you won’t get rich quickly through index fund investing. While you’re well-diversified against the risk of any one stock cratering, you’ll also see limited upside from a superstar like Moderna.
Second, Moderna has risen to have a market capitalization of close to $200 billion, but it still has a relatively small S&P 500 weighting. The top five companies in the index—Apple, Microsoft, Amazon, Facebook and Alphabet—comprise more than 20% of the index, so even moderate price swings by these stocks will impact the index much more than significant changes in a company of Moderna’s size.
Finally, if you periodically get well-informed gut feelings about individual stocks, it may be worth setting aside a small pool of funds to buy these stocks. Such a mini-portfolio won’t be well-diversified. But you’ll likely have fun with it and, at worst, some losses—and those losses will serve as a reminder to stick with your index funds.