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Goldman Sachs: Stock picking isn't paying off

July 10, 2012: 1:22 PM ET

Don't waste your time picking stocks.

Choosing individual stocks won't give you much of an edge in this investing environment, according to a report by Goldman Sachs' research analysts released Tuesday.

So-called idiosyncratic risk -- how much an individual stock deviates from the performance of the overall stock market -- is at its lowest level since July 2011. And that makes it tough to find stocks that stand out from the crowd.

"We continue to expect a slow recovery in the stock-picking environment as macro growth concerns and event risks dominate the investment environment," Goldman's analysts said.

By contrast, stock specific strategies paid off during the fourth quarter of 2011 through the first quarter of this year, when stocks were rallying and idiosyncratic risk was much higher.

When idiosyncratic risk is high, individual stocks and sectors are moving far enough away from the broader market to offer greater opportunities for outsize returns.

"Those trends have reversed since March," said the analysts.

Related: Goldman Sachs says sell the S&P 500

High idiosyncratic risk doesn't necessarily correlate with a stronger economy, though. In December 2008, the risk was more than three times its current levels. That same year the S&P 500 (SPX) ended down 38%.

The safest sectors for getting better-than-average returns in this environment are information technology and industrials, say the analysts.

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Maureen Farrell
Maureen Farrell
Staff writer, CNNMoney

Maureen Farrell is a staff writer at CNNMoney and covers Wall Street, banking, mergers and the stock and bond markets. Prior to joining CNNMoney, she covered venture capital and entrepreneurs for Forbes, and mergers and bankruptcy for Mergermarket and Debtwire, both divisions of the Financial Times.

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