The siren song of stocks

.

  By Guest Blogger Sinan Terzioglu

.

When markets are on the rise, the allure of individual stocks can become especially hard to resist. Seeing certain names dominate headlines and deliver eye-popping returns can stir a powerful urge to jump in. This emotional pull—often driven by FOMO (Fear of Missing Out)—can tempt even the most disciplined investors to stray from their long-term strategies in pursuit of larger gains.

I was recently asked:

With the S&P 500 and Nasdaq recently hitting new record highs, and the big potential of AI continuing to drive investor enthusiasm, I’ve been thinking about whether it makes sense to allocate a portion of my portfolio — say 10–15% — to individual stocks with strong growth potential. Companies like Amazon, Meta, and NVIDIA have rebounded sharply since their April lows, with Amazon up over 30%, Meta over 40%, and NVIDIA up more than 60%. It’s hard not to feel like I might be missing out on opportunities that could meaningfully enhance my overall returns.

Allocating a small portion — say 2–3% per stock — doesn’t seem like it would significantly increase my overall risk, especially if I take the time to thoroughly research each company and maintain a well-diversified, balanced portfolio. What are your thoughts on this approach?

I completely understand the appeal. When I first started investing over 25 years ago, I watched the internet boom of the late ’90s and early 2000s unfold — and I felt that same rush of excitement around the headline-making stocks of the time. But over the years, I’ve come to realize just how challenging picking stocks really is. If anything, it’s only become more difficult in today’s fast-moving, hyper-competitive market landscape.

In many areas of life, time and effort lead to improvement—but picking individual stocks is a different story. Deep research and dedication often don’t translate into better results. The unpredictable nature of markets and the constantly evolving business landscape can quickly undermine even the most well-informed decisions. Many investors spend countless hours analyzing companies, only to be blindsided by factors no model or forecast can predict. That’s what makes long-term success in picking individual stocks so challenging.

In his recent Morgan Stanley report, Drawdowns and Recoveries, Michael Mauboussin analyzed the performance of more than 6,500 U.S.-listed stocks from 1985 to 2024, focusing on how they fared after reaching their maximum drawdowns. The analysis excluded companies that were delisted due to bankruptcy or other reasons, as well as American Depository Receipts (ADRs) representing foreign companies. It also filtered out stocks that failed to maintain an inflation adjusted market capitalization of at least $1 million at the end of any given month.

As with other research on individual securities, Mauboussin’s findings were very insightful. Here are five key insights that underscore just how challenging it is to outperform the market by picking individual stocks.

1. Most stocks suffer enormous drawdowns
The median drawdown for individual U.S. stocks from 1985 to 2024 was 85%, with the average drawdown not far behind at 81%. That means if you bought the typical stock at its peak, you would have seen its price fall by more than 80% before it hit bottom.
 
2. Close to a third of all U.S. stocks dropped by 95%-100%
28% of the over 6,500 U.S. stocks analyzed experienced a drawdown of 95-100% at some point in their trading history. This statistic highlights just how common and severe large losses can be, even among large and widely known companies.

3. More than half of all stocks never fully recovered 
54% of stocks never returned to their previous highs after suffering a major drawdown. For those that lost 95% or more, only 16% ever made it back to their peak. This means that, statistically, most stocks that crash stay down, and waiting for a full recovery is usually a losing bet.

4. Recoveries take years—if they happen at all
The typical time from peak to trough was 2.5 years, and if a stock did recover, it took another 2.5 years on average to get back to its previous high. For the hardest-hit stocks, the round trip from peak to trough and back to par averaged 15 years—6.7 years down, 8 years back up.

5. Averages are skewed by rare winners
The average recovery from the bottom was 340% of the previous peak — but that figure is misleading. It’s heavily skewed by a small number of exceptional performers. While most stocks never fully recovered, a few standout names like NVIDIA and Amazon rebounded dramatically, inflating the overall average. The challenge, of course, is that identifying these rare outliers in advance is incredibly difficult.

In summary, even allocating just 10-15% of your portfolio to carefully researched individual stocks might appear low risk, but it can quietly demand more of your time and focus than expected. It also opens the door to potentially harmful investing habits that often come with picking individual stocks. The reality is, you don’t need to take on that kind of risk to achieve your financial goals. A balanced and globally diversified portfolio provides a more reliable path forward and helps preserve your mental energy for what truly matters.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

Source: https://www.greaterfool.ca/2025/07/03/the-siren-song-of-stocks/