Scarce stock picking ability The second common pitfall in investing is that ordinary investors think they have stock picking ability.

If investors decide to allocate stock assets, they have several options: allocate individual stocks to invest; choose stock funds to invest; choose index funds to invest.

However, for most ordinary investors, stock selection is a scarce ability, and it is difficult for most people to beat the index through stock selection.

Even experienced active fund managers find it difficult to beat the index.

This is also true for A-shares.

We can compare active stock funds and index funds.

An index fund is a passive stock fund that selects stocks based on the index. The index fund manager does not participate in stock selection, so the stock selection ability of the index fund is to select stocks based on the index.

In active stock funds, the fund manager selects stocks. The fund manager will choose which stock he thinks is good.

The income of active funds depends on the stock picking ability of the fund manager.

Both types of funds belong to the category of stock funds, and they will always maintain more than 80% of stock positions.

Index funds can even reach over 90-95%.

In other words, most of the time, active stock funds and index funds hold large amounts of stocks.

Their income gap mainly comes from their stock selection capabilities.

Index Fund VS Active Fund So what is the difference in the returns between these two types of funds?

Fund rating companies like Morningstar have already done the analysis for us.

We open the Morningstar official website, find the fund screening, and select stock funds that have received 5-star ratings in the past three years and the past five years.

Morningstar's 5-star rating indicates that this fund's overall "return and risk" score has been in the top 10% of the fund's portfolio over the past three and five years.

It is already difficult to get a 5-star rating, but it has received a 5-star rating in the past 3 years and the past 5 years, which means that the A-share stock fund has performed very well in the past period of time.

But active fund managers as a group also find it difficult to outperform excellent indexes in stock selection.

For ordinary investors, who are not from related majors and usually have their own jobs, they do not have much time to study individual stock investments; they also do not have time to attend shareholder meetings or conduct research in listed companies to check the real situation of listed companies.

So it becomes more difficult to make profits through stock picking.

Individual Stocks VS Index In addition, there is another reason why it is difficult for stock selection to outperform the index: that is, the maturity of A-shares is getting higher and higher.

In some industries or varieties that have entered the mature stage, it is difficult for the individual stocks in them to outperform the industry index.

For example, the food and beverage industry.

We can calculate that the food and beverage industry index rose by nearly 63% from the beginning of 2016 to the end of July 2019.

But during this time, only about 25 stocks outperformed the food and beverage industry index.

In other words, 30% of food and beverage stocks outperformed the index, and 70% of food and beverage stocks underperformed the index.

For the food and beverage industry, if you pick a random stock, there is a high probability that it will underperform the industry index.

Similar situations have occurred in other industries.

For example, if you hold the banking index, you can outperform bank stocks by 60-70%.