MW My wife and I chose two stocks with a 20% annual return. Should we invest $75K in the S&P 500 - or try individual stocks again?

By Quentin Fottrell

'We are looking to invest this money for at least 20 years, until our retirement'

Dear Quentin,

We have $75,000 available to invest.

We're debating over whether to put all of that cash into the S&P 500 or buy individual stocks. We have chosen two stocks that have done well over the past five years: Chevron, with a 22% annual return, and JPMorgan Chase, with a 23% annual return.

The S&P 500 has a lower average return but is supposedly more stable over the years. We are looking to invest this money for at least 20 years, until our retirement. Which option is better? Are there any stocks on your radar that have a proven track record above 22% or 23%?

Husband & Wife

Related: My stepmother inherited 100% of my father's estate. She's leaving everything to her two kids. Is that fair?

Dear Husband & Wife,

Investing in individual stocks is tantamount to gambling.

It's not exactly gambling, but it's close to it. When you play the slots or a card game in a casino, the house has an advantage and, if you draw in blackjack, the house wins. When buying an individual stock, you can get lucky - as you have done so far with Chevron $(CVX)$ and JPMorgan $(JPM)$ - or you can lose. You have about a 50/50 chance of either happening. The longer you hold on to stocks, the greater chance you have of riding out market corrections and bear markets.

Your other error of judgement is to think that just because you bought two stocks that saw a 20%-plus annual return, your picking prowess will result in that happening again. In fact, you might experience the opposite: 20%-plus declines annually. You could go on a wild ride like many investors did with GameStop, which rose on the meme-stock craze and now languishes far below those heady days of 2021 (although it's still above its dollar-a-share value of 2020).

Your error of judgement is to think that because you managed a 20%-plus annual return with two stocks, that will happen again.

Your odds are better if you invest in the S&P 500 SPX, although some analysts have pulled back their predictions for the index recently. Goldman Sachs $(GS)$ last week reduced its year-end target for the S&P 500 to 6,200 from 6,500 previously. That puts Goldman's chief U.S. equity strategist David Kostin at the lower end of analyst forecasts, with Yardeni Research, Deutsche Bank $(DB)$, Wells Fargo $(WFC)$ and Oppenheimer $(OPY)$ all forecasting the index to finish the year at 7,000 or above.

There are headwinds whether you choose individual stocks or the S&P 500, including President Donald Trump's tariff policies and the lack of certainty surrounding them, along with geopolitical turmoil as the war in Ukraine grinds on and the current administration appears to be abandoning the postwar Western alliance. We're also in a period of historically high valuations on Wall Street - in fact, valuations have not been this high since the dot-com boom.

March 20 is the 25th anniversary of the 2000 dot-com bust, when investors dumped tech stocks in droves, precipitating the third-biggest point drop in the Nasdaq COMP on record up until that point. That anniversary and the most recent tumble in stocks have led some people to look back with anxiety - and not a small degree of déjà vu. In fact, some economists can't even bring themselves to utter the "b" word (bubble).

Red flags ahead

Don't bet on company leaders continuing to hire and plan for growth. There are many red flags: Consumer confidence has declined, not helped by Trump's trade war with China, Mexico, Canada and Europe, and employers don't hire when they're nervous. Tariffs lead to higher interest rates, and higher interest rates slow growth in the job market. Still, some sectors such as education, healthcare and professional services have a high number of job openings.

The group of megacap tech stocks known as the Magnificent Seven has had an impressive run over the last decade. These stocks - Apple $(AAPL)$, Microsoft $(MSFT)$, Alphabet $(GOOGL)$, Amazon $(AMZN)$, Meta $(META)$, Tesla $(TSLA)$ and Nvidia $(NVDA)$ - have reaped rewards for investors as the companies benefited from the tech boom 2.0 and, more recently, artificial intelligence. But as I told this investor who purchased Nvidia's stock several years ago because he liked its videogame graphics cards, there's a fine line between a stroke of genius and a stroke of luck.

Diversification is, as economists Paolo Sodini and Luis M. Viceira described it, 'the only free lunch in finance.'

Fortunately, you and your wife are not day traders, so you can have a long-term strategy for investing in stocks. "Over the past 96 years, the S&P 500 has gone up and down each year," says Capital Group, a financial-services company. "In fact 27% of those years had negative results. One-year investments produced negative results more often than investments held for longer periods."

I'm not going to give you stock recommendations, but I will direct you to MarketWatch's investing columnist Philip van Doorn, who has done lots of research about where you could put your money. This includes looking at nine quality bank stocks that are most likely to rise by as much as 45% after recent market decline, 13 growth stocks that are expected to recover from recent declines, and one thing that 10 stocks beating the recent Trump slump have in common.

Ultimately, I don't want you to lose your $75,000, and the best way to make sure you don't is to diversify your investments. That strategy doesn't guarantee returns, but it helps reduce your risk while building long-term wealth. Diversification is, as economists Paolo Sodini and Luis M. Viceira described it, "the only free lunch in finance." Consider that advice bread on the water, and pass it along to the next person who wants to spend a large portion of their wealth on a few individual stocks.

Related: 'It's been a scary ride': My family has $800K in stocks. We lost 2 years of market gains in a few weeks. Do we sell - or buy?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.

More columns from Quentin Fottrell:

'I'm deeply disturbed': My portfolio lost 20%. With Trump's trade war, do I sell my stocks and buy gold?

My husband has dementia and will need care. Will Medicaid go after my money if I use it to pay off our mortgage?

My stepmother inherited 100% of my father's estate. She's leaving everything to her two kids. Is that fair?

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-Quentin Fottrell

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March 21, 2025 05:25 ET (09:25 GMT)

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