How to Use the Index Fund vs Stock Picking Calculator
Stock picking can look more attractive on paper with a higher expected return, but actual long-term compounding rarely matches that headline number. Higher-volatility assets show a gap between their arithmetic average return and their real compounded (geometric) growth rate — a gap commonly called volatility drag. Add in the commissions and taxes from frequent trading, and stock picking's real-world performance can fall well short of expectations.
This calculator compounds the index fund's average return net of its expense ratio into a final value, and for stock picking it subtracts half the squared volatility (the volatility drag) plus trading costs from the expected return before compounding. Comparing the two final values side by side shows which approach actually leaves you with more money for the same amount and period.
The higher the volatility you enter, the more stock picking's final value tends to fall short of its headline expected return — this is a numerical illustration of why high-volatility stocks often "don't earn what you'd expect." On the other hand, a skilled stock picker who keeps volatility and trading costs low could still beat the index. Treat this as an estimate based on your assumptions, not a verdict that one approach is always better.
Frequently Asked Questions
Higher-volatility assets show a gap between their arithmetic average return and their actual compounded (geometric) growth — often called volatility drag. The higher the volatility, the more this drag can pull real long-term compounding below the expected return.
Frequent trading racks up commissions and short-term capital gains taxes that chip away at long-term returns. Index funds trade far less often, so this cost burden is much lower.
Not always. A skilled stock picker who keeps volatility and trading costs low can outperform an index fund. This calculator only shows an estimate based on the assumptions you enter — it doesn't guarantee future returns.