ETFs vs Individual Stocks
I was looking at my portfolio yesterday and I realized that right now it provides the clearest example of the benefits of owning a total market ETF, like VTI, although there are many, versus owning individual stocks.
VTI, is the example since it’s the one I own, is comprised of over 3,500 different equities, which makes periods of volatility, like the one we’re experiencing right now, a little easier to stomach.
My Vanguard ETF is only 8% off its 52 week highs, while the rest of my portfolio is 16 - 19% of their highs, exception made for Tesla which is nearly 50% lower.
True for me that the majority of my money is concentrated into VTI, so even a 8% drop off is felt pretty hard in the wallet. But still it’s better than 16%, or 50% in the case of Tesla, had I continued to maintain large dollar amounts in those positions.
That’s the benefit. That when the market corrects, and certain equities, Tesla, or industries, tech, drag the market down, the diversity of an ETF will help soften the blow. If you are a risk averse person, that’s the reason, one of the reasons, to focus on segmental or total market ETFs. It takes the guess work out of stock picking, and it also makes the lows easier to tolerate.
The other reason as far I’m concerned to own only ETFs, or to have ETFs make up a majority of your portfolio, is because it creates less of a headache. Instead of managing and following 10 individual stocks, or 20+ like I used to, you can narrow your focus to just a few and maintain a better understanding of what’s happening in the market as a result. You just have less to track, and unless investing is your full time gig, then when it comes to equities, it’s been my experience that less is certainly more.
But it is true there is a flip side. While VTI, or any broad market ETF, might not plummet as sharply as an individual stock might, it also isn’t going to increase as drastically either. My VTI holdings show a 53% gain over the lifetime I’ve owned it, while some of my individual stocks show 100%+, and unicorns like Tesla stands at 1,380%, and has been the gift that keeps on giving.
But those aren’t gains that are easy to come by or easy to predict. I’ve been very fortunate with my timing of the market. The large chunk of my investment into the market started in 2019. Depending on which index you view, Dow, S&P, or Nasdaq, the gains over the last 5 years have either been just under 100% or in excess of 125%. A lot of luck. You can’t time the market.
Whatever your appetite is for investing, I think anyone that is not in the market is missing out on the opportunity to make “free” money (taxes will be due when you eventually sell). So I don’t view being in the market or not as a choice. It’s a must for anyone who wants their money to grow.
Having said that, you do have a choice when deciding how to invest. If you don’t think you’re a person who can handle volatility, than an ETF is the route for you. If you’re someone who is going to dedicate time each day to monitoring the market and have an appetite for risk, then individual stocks might be for you. And if you’re somewhere in the middle, then consider a mix of both (like me right now).
But with the market returning on average 8-9% per year (including the low valleys and high peaks), not being involved is not an option. All the richest people in the world own stocks, and all the richest people in the world control the world, and therefore the market. They have a vested interest in making sure it goes up and to the right. You might as well jump on board.