Passive investing, particularly through index funds and ETFs, has become one of the most popular strategies for building wealth. However, the hidden risks of popular stocks often go unnoticed by investors, leading to suboptimal returns.

Many investors overlook these hidden risks, unknowingly holding both strong and underperforming stocks. Instead of maximizing gains, passive investors are often exposed to weak stocks that drag down overall portfolio performance. The hidden risks of popular stocks can significantly impact long-term wealth, forcing investors to hold onto assets that weaken returns.

See Why Index Funds & ETFs Might Be Hurting Your Portfolio!

Goldman Sachs’ recent article, The 3 Biggest Passive-Investing Myths Goldman Sachs Says Investors Need to Get Over, argues that passive investing isn’t harming the market as some critics claim. While this may be true, the real issue remains: passive investing forces you to own both winners and losers—whether you want to or not.

At VectorVest, we believe there’s a better way. Instead of blindly following an index, investors can use a simple, data-driven system to select the best stocks at the right time, maximizing returns while avoiding unnecessary risks.

1. Why Passive Investing Holds Both Winners & Losers

Why ETFs and Index Funds Hold Underperforming Stocks by Design

One of the hidden risks of popular stocks is that they can be overvalued during certain market cycles, consequently, leading to significant losses for passive investors. Passive investing works by tracking an index, such as the S&P 500 (SPY). This means every stock in the index gets bought—regardless of whether it’s a strong investment or not.

For example, consider this:

  • As of early 2024, seven tech stocks (the “Magnificent Seven”) made up nearly 32% of the entire S&P 500.
  • This means passive investors are heavily exposed to a handful of stocks while also holding hundreds of underperforming companies.

Example: Walmart (WMT) vs. Tesla (TSLA) 

According to VectorVest’s proprietary stock analysis, let’s compare two well-known stocks: 

Stock  Relative Value (RV)  Relative Safety (RS)  Relative Timing (RT)  VST Score  Rating 
Walmart (WMT)  1.01 (Avg)  1.34 (Strong)  1.45 (Rising)  1.30  BUY 
Tesla (TSLA)  0.07 (Very Poor)  1.45 (Excellent)  0.67 (Weak)  0.93  HOLD 
  • Walmart (WMT) is rated BUY because it’s financially strong (RS = 1.34), has upward price momentum (RT = 1.45), and decent value (RV = 1.01). 
  • Tesla (TSLA), despite its popularity, has very poor long-term upside potential (RV = 0.07) and weak momentum (RT = 0.67). 
  • An S&P 500 ETF forces you to own both—even if one is a much better investment than the other. 

💡 Smart investors don’t just accept what’s in an index. They choose the best stocks while avoiding the ones that drag down returns. 

 

2. How Passive Investing Ignores Market Timing (And Why It’s a Big Mistake)

The Myth of ‘Time in the Market Beats Timing the Market

While staying invested long-term is important, buying at the wrong time can lead to major losses.

Example: What Happens When You Buy at the Wrong Time?

  • Imagine investing in the S&P 500 at its peak in 2000 (before the Dot-Com crash) or 2007 (before the Financial Crisis).
  • Investors who bought at the wrong time saw their portfolios drop 40-50% before recovering years later.
  • Buying blindly—without considering market conditions—can be costly.

💡 VectorVest’s Market Timing Indicator (MTI) helps investors know when the market is rising or falling—so they can buy at the right time and avoid market crashes.

 

3. Smarter Investing Strategies: Beating the Market Without Guesswork

Avoiding The Hidden Risks of Popular Stocks – Smarter Investing Strategies

The Ideal Stock Selection Formula

At VectorVest, we follow a simple but powerful investing mantra:

👉 Buy safe, undervalued stocks, rising in price, in a rising market.

This means investors should:

✔️ Find undervalued stocks with strong upside potential (RV > 1.00).
✔️ Focus on financially strong companies (RS > 1.00).
✔️ Buy stocks with upward momentum (RT > 1.00).
✔️ Only invest when the overall market is trending up.

Example: Stocks That Are Strong Buys Right Now 

According to VectorVest’s ratings, here are some stocks currently rated BUY: 

Stock  Relative Value (RV)  Relative Safety (RS)  Relative Timing (RT)  VST Score  Rating 
Amazon (AMZN)  1.53  1.42  1.14  1.35  BUY 
Meta (META)  1.45  1.45  1.39  1.43  BUY 
Broadcom (AVGO)  1.21  1.43  1.54  1.41  BUY 

💡 Passive investors hold everything. Smart investors use data to select only the best stocks. 

 

Final Takeaway: Why Settle for Average? Invest Smarter With Data

Goldman Sachs’ article argues that passive investing isn’t hurting the market—but that doesn’t mean it’s the best strategy for individual investors.

While ETFs and index funds offer diversification, they also force you to own weak stocks, ignore market timing, and accept average returns. To avoid the hidden risks of popular stocks, investors must use data-driven strategies rather than blindly following market trends.

📊 If you want to take control of your investments, start using a system that helps you:

✅ Find the best stocks (and avoid weak ones).
✅ Invest at the right time, not just anytime.
✅ Follow data, not emotions.

📢 Want to see if your stocks are worth holding? Get a free stock analysis now:
www.vectorvest.com/stockanalysis

📢 Try VectorVest risk-free for 30 days and take the guesswork out of investing:
www.vectorvest.com/trial