Most individual stocks underperform basic savings accounts over their lifetime. Almost all professional fund managers fail to beat the index over a decade. Here's what the evidence actually shows - and what it means for how you invest.
Cameron Drury · Co-Founder, Canwi 11 min read
In this article
- The question everyone thinks they know the answer to
- The Bessembinder finding - most stocks don't beat cash
- What happens when professionals try to beat the market
- Why beating the market is structurally difficult
- Survivorship bias - the illusion that makes stock picking look easier
- What ETFs actually do - and why the maths works in your favour
- Is there ever a case for individual stocks?
- Frequently asked questions
The question everyone thinks they know the answer to
Most people who start investing think the goal is to pick good stocks. Find the next CBA before it became CBA. Get into the right tech company early. Avoid the ones that go to zero. Do that consistently, and you'll build real wealth.
It's an intuitive model. The stock market exists to buy and sell ownership in companies. Some companies are better than others. If you can identify the better ones, you should outperform.
The problem is that decades of evidence - from academic research, from professional fund managers, and from the actual trading records of millions of retail investors - consistently shows this is much harder than it appears. Not impossible, but hard enough that the rational approach for most investors is to stop trying and buy the whole market instead.
Here's why.
The Bessembinder finding - most stocks don't beat cash
In 2018, finance professor Hendrik Bessembinder published a study that genuinely surprised even seasoned investors. Looking at every US listed stock from 1926 to 2016 - roughly 26,000 companies - he asked a simple question: how many individual stocks actually outperformed Treasury bills (essentially cash) over their entire lifetime on the market?
The answer was startling: fewer than half. Four out of every seven stocks produced lifetime returns worse than a basic savings account. The median stock posted a negative lifetime return.
57%
of individual US stocks underperformed cash over their full lifetime
4%
of listed companies responsible for all net stock market wealth creation since 1926
86
individual stocks accounted for half of all stock market wealth creation over 90 years
Let that last number sink in. Of the roughly 26,000 companies that have listed on US exchanges since 1926, just 86 - 0.3% - were responsible for half of all the wealth created. The remaining 99.7% of stocks either matched cash, lost money, or contributed relatively little to the overall market's gains.
Bessembinder's findings have since been replicated across 57 international markets, including Australia, with similar results in each. This isn't a quirk of the US market or a particular era. It appears to be a structural feature of how stock markets work - gains are extraordinarily concentrated in a small number of exceptional companies, while the majority of stocks deliver disappointing returns over their lifetime.
The stock market delivers outstanding long-run returns. But almost all of those returns come from a tiny fraction of companies. The other 96% - collectively - did no better than cash.
This is the mathematical reality that makes individual stock picking so difficult. To beat the market, you don't just need to avoid bad stocks - you need to identify and hold the rare exceptional ones. And you need to do that before they're exceptional, when they look the same as everything else.
What happens when professionals try to beat the market
If the maths of stock picking is challenging, you might reasonably expect professional fund managers - with teams of analysts, proprietary data, decades of experience, and full-time focus - to do better than a retail investor sitting at a laptop on a Tuesday night. The evidence suggests they don't, at least not consistently.
The SPIVA (S&P Indices Versus Active) scorecard measures actively managed fund performance against index benchmarks. It is published semi-annually and covers Australia specifically. The 2025 results are unambiguous:
SPIVA Australia 2025 - percentage of active funds underperforming their benchmark
| Fund category | 1 year | 10 years | 15 years |
|---|---|---|---|
| Australian general equities | 71% | 84% | 85% |
| Global equities | ~70% | 94% | 96% |
Source: SPIVA Australia Scorecard, S&P Dow Jones Indices, 2025. Figures represent the proportion of actively managed funds that underperformed their index benchmark net of fees.
Over 15 years, 85% of Australian equity managers and 96% of global equity managers failed to beat their benchmark. These are not amateur investors - they are professional stock pickers with full research teams, sophisticated modelling, and decades of experience. And yet the overwhelming majority underperformed a passive index fund that simply holds every stock in proportion.
Perhaps most striking: of the 127 Australian equity funds that outperformed the ASX 200 in 2022, only one continued to outperform in both 2023 and 2024. Outperformance is largely random. The funds that beat the market in any given year are not reliably the same ones that beat it the next year.
The 2025 volatility test - and active managers still failed
Active fund managers have long argued that volatile markets favour skilled stock pickers. The first half of 2025 - with Trump tariff shocks, sharp currency moves, and rapid sector rotations - was exactly the kind of environment they said would prove their value. The result: 71% of Australian equity managers still underperformed their benchmark. The argument that volatility vindicates active management has not held up to testing.
Why beating the market is structurally difficult
Understanding why beating the market is so difficult matters as much as knowing that it is. There are several structural reasons, not just bad luck.
The zero-sum problem
Before costs, every outperforming trade requires an underperforming counterparty. For every investor who buys a stock that goes up, someone else sold it to them. In aggregate, all investors collectively earn the market return before costs. Beating the market isn't just hard - it requires consistently making better decisions than whoever is on the other side of your trades. And increasingly, the other side of retail trades is algorithmic, institutional, and operating with information advantages that individual investors don't have.
Fees compound against you
Actively managed funds charge management fees - typically 0.75% to 1.5% per year in Australia. That doesn't sound like much. But over 20 years, a 1% annual fee difference compounds to an enormous gap. On a $100,000 investment growing at 8% per year, the difference between a 0.1% ETF fee and a 1% active management fee is over $30,000 after 20 years. The active fund needs to outperform the index by its entire fee margin before it delivers a single dollar of additional value to you.
The concentration problem from Bessembinder
This is the most mathematically uncomfortable insight. Because almost all stock market wealth creation is concentrated in a tiny fraction of companies - and because it's essentially impossible to identify those companies in advance - any undiversified portfolio has a high probability of missing the few stocks that actually drive returns. An index fund, by owning everything, guarantees it holds the winners. A stock picker, by definition, doesn't own everything.
How fees compound - $100,000 growing at 8% per year
| Years | ETF (0.1% fee) | Active fund (1.0% fee) | Difference (cost of fees) |
|---|---|---|---|
| 10 years | $214,900 | $196,700 | $18,200 |
| 20 years | $461,600 | $430,300 | $31,300 |
| 30 years | $991,400 | $843,500 | $147,900 |
Assumes same gross return of 8% per year for both. Difference shown is purely the cost of the fee gap - before any consideration of whether the active fund also underperforms the benchmark.
Survivorship bias - the illusion that makes stock picking look easier
One of the reasons stock picking feels more achievable than it is comes down to a pervasive statistical distortion: survivorship bias.
When you look at the ASX 200 or the S&P 500, you're seeing the companies that made it. You're not seeing the hundreds of companies that were listed, failed to grow, fell below index inclusion thresholds, got delisted, or went bankrupt. The companies you're comparing yourself to - the ones that appear in financial media, the ones your broker surfaces, the ones with recognisable names - are already the survivors. The failures have been quietly removed from the conversation.
This creates a systematic illusion. If you look back at BHP or CBA and say "it was obvious that company would succeed," you're ignoring the dozens of mining companies and banks from the same era that no longer exist. The ASX had many more listed companies in the 1990s than the ones you can see today.
The same applies to fund managers. When a fund consistently underperforms, it closes. The underperforming track record disappears from the dataset. What remains are the surviving funds - which are, by selection, the ones that had better results. This makes the average performance of active management look better than it actually was when you account for all the funds that no longer exist.
The hindsight trap
It is always possible to look backwards at a 10-year chart and identify the stock you "should have bought." The problem is that in the moment - before the run-up happened - that stock looked identical to dozens of others that didn't run. Hindsight investing is not a strategy. It's a story we tell ourselves about luck.
What ETFs actually do - and why the maths works in your favour
An exchange-traded fund (ETF) that tracks a market index - like the ASX 200 or the MSCI World - doesn't try to pick winners. It buys all the stocks in the index in proportion to their size, then holds them. When a company grows large, you automatically own more of it. When a company fails and gets removed from the index, you automatically stop owning it.
This approach solves the Bessembinder problem directly. The handful of exceptional stocks that drive almost all market wealth creation? You own all of them - because you own everything. You don't need to predict which companies they'll be. You just need to be in the market when they emerge.
| Individual stocks / active funds | Index ETF | |
|---|---|---|
| Approach | Select the stocks expected to outperform | Own all stocks in proportion to their size |
| Typical annual fee | 0.75–1.5% (active managed fund) | 0.05–0.20% |
| Chance of owning the big winners | Depends entirely on selection skill | Guaranteed - you own every stock in the index |
| 10-year benchmark outperformance rate | ~16% of AU equity managers | By definition, earns the benchmark return |
| Tax efficiency | Active trading creates more CGT events | Low turnover means fewer CGT events |
| Time required | Ongoing research, monitoring, decision-making | Minimal - set up, contribute regularly, leave alone |
The irony is that the passive approach feels lazy. It doesn't require skill, research, or conviction. That's precisely why it's psychologically difficult - it seems like you're giving up. But the evidence shows that in this particular domain, the "effort" of active stock picking more often subtracts value than it adds.
Is there ever a case for individual stocks?
Saying the evidence favours index investing is not the same as saying individual stock picking is always wrong. There are legitimate reasons people hold individual stocks alongside a core ETF portfolio.
Legitimate reasons to hold individual stocks
- You have genuine information or expertise in a specific sector. A doctor investing in healthcare companies they understand deeply, a construction professional with real insight into building material suppliers - domain expertise is one of the few genuine edges a retail investor might hold. The key word is genuine.
- Employee share schemes. Many Australians receive shares in their employer as part of compensation. This is often attractive after accounting for discounts and tax concessions - though it creates concentration risk in the same company that provides your income. Many advisers suggest diversifying these holdings once vesting and lock-up periods expire.
- Direct ownership for tax management. Holding individual stocks gives you precise control over when you realise capital gains, which can be useful for tax planning in specific circumstances.
- Enjoyment. Some people find investing in individual companies genuinely engaging. If it's treated as a hobby with a defined budget - a "play money" allocation you can afford to lose - rather than the core of a retirement strategy, that's a reasonable choice.
What the evidence doesn't support
- Believing you can consistently identify outperforming stocks based on reading financial news, following analyst recommendations, or acting on tips
- Concentrating the bulk of your investable wealth in a handful of companies you feel confident about
- Expecting to outperform the index after fees and CGT over a 10-year horizon, without a specific and demonstrable informational edge
The question isn't whether great stock picks exist. They clearly do. The question is whether you - specifically you, with the information and time you have - can identify them in advance, consistently, after costs, over decades. The evidence says this is very rare.
Frequently asked questions
What about Warren Buffett? Doesn't he prove it's possible?
First of all, Warren Buffett's track record is real and remarkable. There's also a reason why he is considered one of, if not the greatest investor of all time. He is also exceptional in a way that is difficult to distinguish from extreme good luck at the distributional tail. Interestingly, Buffett himself has repeatedly said that most investors - including institutional ones - would be better off in low-cost index funds than trying to replicate his approach. He has instructed the trustee of his estate to put 90% of assets into a low-cost S&P 500 index fund for his wife after his death.
He also put his money where his mouth is - literally. In 2007, Buffett made a $1 million wager against Protégé Partners, a respected fund-of-funds manager. The bet: a simple, low-cost S&P 500 index fund would outperform a hand-picked portfolio of five funds-of-funds - representing over 200 underlying hedge funds staffed by some of the smartest people in finance - over a 10-year period.
The outcome wasn't close. By the end of 2017, the index fund had returned roughly 7.1% compounded annually. The hedge fund portfolio - after all fees - returned approximately 2.2%. Buffett won decisively.
He is not the argument against index investing. He is the argument for it.
If ETFs are so good, why does anyone use active managers?
Matthew McConaughey in The Wolf of Wall Street - whose character explains the brokerage business.There's a scene in The Wolf of Wall Street where Matthew McConaughey's character explains the business of being a broker with disarming candour - the gist being that the money moves from the client's pocket to the broker's pocket, and the broker's job is to keep the client calm about it. It's played for laughs. It's not entirely wrong.
Several reasons, most of which benefit the manager more than the investor. Active management generates higher fees - a significant and recurring revenue stream for the financial industry. Outperforming funds attract attention and inflows, while underperforming ones quietly close, their track records disappearing from the dataset. There is also genuine belief among some managers that their approach will prove itself over time. And for certain niche markets - small caps, frontier markets, specific asset classes - there is some evidence that skilled managers add more value than in large-cap equities, where information is more efficiently priced.
Are all ETFs index ETFs? What about active ETFs?
No - ETFs are a structure (exchange-traded, liquid, transparent), not a strategy. There are many actively managed ETFs that attempt to select stocks or time the market, just wrapped in an ETF structure rather than a traditional managed fund. The SPIVA evidence on active underperformance applies to active strategies regardless of whether they're packaged as managed funds or ETFs. When evaluating any ETF, check whether it tracks an index (passive) or uses active stock selection - and look at the fee accordingly.
What about the argument that index funds create market distortions?
Some critics argue that as more money flows into passive index funds, price discovery suffers and markets become distorted. This is a legitimate academic debate. The practical counterpoint: even with the rapid growth of passive investing, active managers still represent the majority of trading volume and price-setting activity in most markets. The distortion concern may become more valid if passive investing grows significantly further - but for now, it doesn't change the evidence on relative performance.
How does this apply to my super fund?
The same logic applies inside super. Many default super fund options are actively managed, meaning your compulsory contributions are being invested in strategies that, on average, underperform a passive index after fees. Most major super funds now offer index options with significantly lower fees - often 0.1–0.2% versus 0.6–0.9% for actively managed options. Switching your super to a low-cost index option is one of the highest-impact financial decisions many Australians can make, particularly over a 30-year accumulation period.
Model your investment strategy in Canwi
In Canwi, you can add share investments - ETFs or individual stocks - as part of your financial plan and see how they compound alongside your super, your mortgage, and your other goals over time. Adjust the expected return rate, the annual contribution, and the time horizon to understand how different investment approaches affect your long-run net worth.
General information only. This article provides general educational information about investment strategies and does not constitute financial product advice. Past performance is not a reliable indicator of future returns. All investing involves risk including the risk of loss of capital. Always consider your own circumstances and consult a licensed financial adviser before making investment decisions.
