Diversify by either style or industry using index funds, not individual stocks.
If you have enough to manage your own Index comprised of individual stocks with no one stock too heavily weighted (risk), it can work out better than funds.
Take for instance a low cost Vanguard S&P500 tracker. Looking at their yearly performance compared to the 'benchmark'
Vanguards yearly benchmark was lower than the S&P Index total return by respectively
0.84% 0.73%
Their fund actual performance however was above benchmark, reducing the difference of S&P Index Total Return minus Vanguards funds total return to respectively
0.488% 0.46%
So looking at the fund factsheet the impression is that its low cost (0.07% expense ratio) and actually outperformed the benchmark by around 0.3%/year (after costs). But in practice it lagged the S&P Total Return by around 0.5%/year. A whopping 0.8%/year difference!
And Vanguard is one of the best/lowest cost choices.
How did such 'error' (that makes the fund look good) occur? Simply because they benchmark to a net total return version of the S&P index, but in some cases they don't actually incur those taxes/costs. By security lending just prior to x-dividend to a more dividend tax efficient party, and then receiving those shares back again after having gone x-dividend, together with a payment for having lent the stock (that compares to the gross dividend), they benefit and relatively outperform the net of taxes benchmark.
That 0.5% actual cost might make a big difference to a investor. A casual glance might be taken as the fund nigh on matched the S&P total return after low 0.07% costs (expense ratio) and as stocks provide a 4.7% real return (or whatever) I can base my spending/lifestyle on a 5% rate. But if in practice you lag that by 0.8%/year then over time that compounds out to a poorer than expected result. And that's for one of the best choices. For others the impact can be much more significant.
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