Why pick stocks when you can buy ETFs?

 

Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

──────────────────

There are many reasons why individuals may choose to buy stocks instead of ETFs (Exchange-Traded Funds) despite the greater amount of time and effort needed for stock picking compared to simply buying ETFs. Below are the three primary reasons I believe why investors still choose to pick individual stocks over buying ETFs despite most investors failing to outperform the index.

1. Individual Autonomy

2. Desire to Beat the Market

3. Preference for the Status Quo

1) Individual Autonomy: Most people often prefer to have control over their investments rather than simply buying an ETF and letting the market index decide what stocks should be included in their portfolio. Naturally, people who wish to exercise autonomy in their investments would be more resistant to buying ETFs, because it takes away a large part of their autonomy when investing, such as buying large well-diversified ETFs, like the SPY, QQQ and DIA tracking the three major indexes in the US. As such, many hesitate to buy ETFs and still prefer to pick their own individual stocks to outperform the market.

2) Desire to Beat the Market: Whether one admits it or not, most people usually believe that they can beat the market if they put in enough time and effort in managing their investments consistently. However, research has shown that majority of retail investors have underperformed the market (e.g., the S&P 500 Index). In fact, even many fund managers have consistently underperformed the market despite having years of extensive experience, expertise and knowledge. Despite this, many investors desire to outperform the market by picking individual stocks instead of buying the index.

3) Preference for the Status Quo: Perhaps another compelling reason why people still pick stocks instead of buying ETFs is because of reluctance to change. Some older and more experienced investors may be accustomed to buying their favourite blue chip stocks and companies on a regular basis or during market corrections. Once this becomes habitual, it would be difficult for them to switch over to investing in ETFs, which could be something beyond their comfort zone especially if the bulk of their current portfolio is already invested in a huge basket of stocks they have slowly picked over the years. In such cases, the sentimental value attached to their favourite stocks, as well as the large amount of time and effort they have placed in picking those stocks over the years would likely create a strong resistance against liquidating their entire portfolio to invest in ETFs. As such, people's preference for the status quo or for what they have been doing over the years could cause them to stick with stock-picking.

Closing Remarks:

So is picking stocks worth the effort? Yes if you have the passion and time. But no if your primary goal of investing is solely to grow your savings and investments, without having much interest in the companies or businesses you are invested in. For most individuals, the most straightforward answer is to simply stick with ETFs because stock picking can be extremely time-consuming, especially if you have a portfolio with a huge variety of stocks. Consistent monitoring is crucial to ensure you "weed out" the companies which no longer meet your investment criteria or goals.

Oftentimes, in addition to discipline and consistency, this requires passion and patience. Also, few people, especially non full-time investors, would have time to do consistent monitoring. Companies typically release their financial results on a quarterly basis. With a portfolio of many companies, this requires much time and effort to monitor not only the companies' quarterly performance but also to look out for buying for good Companies and selling opportunities for underperforming companies.

Whereas for ETFs, one can easily just dollar-cost-average (DCA) into it, without needing to regularly analyse and scrutinise the companies' performance and stock price. This is especially so given that an ETF's components are based on the market index, and are thus updated and rebalanced regularly to ensure only good quality companies remain and are included. This eliminates the time needed to manually monitor your portfolio to ensure it is performing.

Simply buying consistently into a well-diversified ETF (e.g., SPY, DIA or QQQ for US, ES3 for Singapore, or VT for global markets) through the ups and downs of the market cycles will enable you to reap decent returns (between 4% to 12%) in the long term. In short, ETFs enable you to diversify without having to put in much (or even any) time and effort to monitor your portfolio. Nowadays, the process of DCA-ing into ETFs can be automated at regular intervals, allowing you to buy the ETF without even looking at its stock price, saving you on your time and effort.

How about a combination of picking stocks and buying ETFs?

For individuals who enjoy or still wish to pick their own stocks, it would be wise to have a combination of both individual stock picking and ETFs. Personally, as long term investors, our plan should be to only invest in companies which we believe in and are comfortable holding for at least the next 10-15 years. If the company's fundamentals are strong with predictable, consistent and growing earnings, such a company would be a good candidate for one to invest in.

It is important to keep in mind if the portfolio of stocks you pick underperforms the ETF (e.g., the S&P 500 Index) over time, you would have been better-off simply holding 100% in the ETF.  Therefore, one should only invest in a specific company if you are confident and reasonably certain the company you picked has the potential and ability to outperform the market. If not, sticking with buying ETFs will be the wiser and smarter choice.

"Consistently buy an S&P 500 low-cost index fund. Keep buying it through thick and thin, and especially through thin.” 

— Warren Buffett

──────────────────

Disclaimer:

The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

No copyright infringement intended. The images used in this blog are solely for educational and informative purposes, and are © copyrighted by their respective owners.

Copyright © 2024. All rights reserved. SN Finance Blog