Index investing is better than active investing, right?

What if you make a profit on individual stocks but still underperform an index? Considering the “hidden costs” of investing

Investing in individual stocks is interesting. You research companies you are curious about, predict their growth, and if you are right, you can sometimes earn higher returns than with index investing.

However, if your main goal is to grow your assets, should you be satisfied just because you made a profit? What if you had invested the same amount of money in an index for the same period? Only by comparing that can you reflect on your choices.

“Making a profit” is different from “beating the market average”

For example, suppose you make a profit of 1 million yen on individual stocks. If the profit from investing the same amount in an index for the same period would have been 1.5 million yen, even if you are in the black in absolute terms, your performance compared to the index is 500,000 yen lower. In the video, I expressed this as a “loss.” Of course, this is a hypothetical for comparison and not the actual performance of any specific stock or index.

If you are going to compare, you should align the investment amount and period, and also include dividends, taxes, trading commissions, and cash left uninvested. Also, “not losing” has different meanings: not reducing your principal, preventing real-term erosion due to inflation, and not underperforming the market average. Index investing does not guarantee your principal either.

Even for professionals, it is difficult to consistently outperform the index over the long term

The SPIVA Japan Year-End 2025 Report shows that among active investment trusts for large-cap Japanese stocks offered in Japan, 80.38% underperformed their benchmark index over a 15-year period. In the global equity category, the figure was 100% over the same 15-year period. Additionally, the 15-year survival rate for all categories covered was 46.47%. In other words, more than half were merged or liquidated during that time.

These are not statistics saying that “80% of individual stock investors lose.” They are evidence that even looking at the results of investment trusts managed by professionals, it is not easy to continue beating the index for a long time. These are results for a specific 15-year period, classification, and benchmark index, and do not indicate future win rates.

Costs cannot be overlooked either. According to the US ICI 2026 Fact Book, the asset-weighted average expense ratio for US equity mutual funds in 2025 was 0.64% for active funds and 0.05% for index funds. This is the average for all US mutual funds and not a direct comparison of individual Japanese products, but it provides a clue as to how differences in management costs affect long-term performance.

People say you just need to buy stocks that go up, but…

If you can buy stocks that rise significantly early and hold them for a long time, you have the potential to earn high returns. The problem is whether you can identify the rise in advance, actually buy them, and endure the price fluctuations along the way to keep holding them. If the growth is obvious to everyone, that expectation might already be priced in at an early stage.

Furthermore, more trading does not necessarily lead to better results. In Barber and Odean’s research, using US brokerage account data from 1991 to 1996, the group with the highest trading volume had an annualized return of 11.4%, while the market was 17.9%. In the video, I introduced the key point of the “top 20% who trade the most.” However, this is data from one US company at the time, and it is not a boundary where you will definitely lose if you trade more than a certain number of times.

Learning time and emotional ups and downs are also costs

The time spent researching companies and industries to select stocks. Days when you cannot concentrate on work because you are worried about the market. Checking the US market at night repeatedly. Mood swings caused by price increases or decreases. I remember that during the Lehman Shock, I couldn’t concentrate on my work. Even if it doesn’t appear on a statement as a monetary amount, it is undoubtedly a burden of investing.

If you spend about 30 minutes a day on investment research or trading, that is about 180 hours a year. The “200 hours per year” mentioned in the video is also an estimate to help think about the magnitude of time, not an actual measurement. It is worth comparing that time to other uses, such as improving your performance at your main job, studying, or spending time with family.

So, is there no point in investing in individual stocks?

I don’t think so. By researching companies, you can notice changes in industries and become more familiar with politics and the economy. If you view investing as a place for learning, there is value that cannot be measured solely by beating an index. However, it seems better to think of the purpose of learning and the purpose of maximizing assets separately.

The explanation of “core is index, satellite is individual stocks” can also become an excuse for not checking results if you stop thinking there. If you purely prioritize asset formation, it is possible to choose to make the stock investment portion 100% index. Conversely, if the joy of learning is great and you are satisfied with the burden and results, that is a reason to continue with individual stocks.

Finally, I will ask myself two questions: “Have I been consistently beating the index under the same conditions?” and “Am I getting returns or learning that are worth the time and emotional burden spent?” I would like to look back on this from time to time in order to choose a method that suits my purpose.

*This article is a reconstruction of the video content into reading material and does not recommend the purchase or sale of any specific product or stock. Past performance does not guarantee future results.