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ETFs versus individual stocks. Which
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one's better? Which one's going to make
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you more rich in your portfolio? By the
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end of this video, you should be able to
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answer this and you should be able to
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figure out what's going to be best for
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you personally. The good thing about
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this type of video and all of my videos
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really is that my goal is never to tell
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you exactly what I think or what I think
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you personally should do. I'm going to
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give you a bunch of information, give
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you the pros and cons on ETF investing,
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the pros and cons on individual
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investing, give you my highlights and my
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thoughts on which one is going to be
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best just generally, but I want you to
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be able to make this decision. My goal
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with any of this in my teaching is
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always to teach you how to fish, not
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just give you the fish. So, if there's
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ever anyone out there that's just like,
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"Hey, this is the stock you should buy.
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Just trust me. Go out and buy it." and
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they don't give you any information or
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teach you how to do the research, you're
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listening to the wrong person. After
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this video, I have so many different
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videos on ETF investing and individual
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stock investing and the combination of
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both. So, whichever one you choose, you
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have a whole library to help you with
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your research as you go. So, let's start
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with the pros of ETF investing. And so,
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now when I say ETF, I just mean a fund
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of investing. That could be a mutual
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fund, index fund, ETF, whatever. just
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make sure that you're finding the lowest
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fees of those types of funds. But
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altogether, when I say ETF, I'm
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encompassing basically the difference
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between something that has a bunch of
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stocks within it versus the individual
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one stock. So, pros of ETFs. Number one
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is diversification. ETFs typically hold
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many stocks or other assets, reducing
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individual company risk. Even one ETF
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can offer exposure to an entire sector,
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index, or theme. Diversification is
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definitely the top reason why someone
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should have an ETF in their investing
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portfolio. By investing in that one ETF,
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you're investing in a hundred, maybe
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500, maybe thousands of different
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companies within the certain specific
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ETF. Number two, lower risk. Broad
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exposure helps cushion the impact of any
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single company's poor performance. If
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you have something like 500 companies
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within the ETF and 100 of them do
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terrible, but then 400 of them do pretty
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good, that pretty much balances it out.
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But if you're investing in that one
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stock and that one stock is one of the
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100 that did terrible, and that's your
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entire portfolio, your entire portfolio
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will drop. Number three, an ETF is just
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cost effective. Usually they have low
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expense ratios or at least the ones that
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I recommend have low expense ratios and
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there's no need to buy multiple stocks
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individually to diversify. Number four,
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nowadays they're just so easy to find
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something that you care about or that
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you want to invest in. So if you want to
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invest in technology, there's going to
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be an ETF for that. If you want to
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invest in healthcare, there's going to
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be an ETF for that. If you want to
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invest in specifically robotics and AI,
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there's going to be an ETF for that.
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Number five, which is one of the main
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reasons why I talk about ETFs so much on
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this channel and why I call this channel
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investing simplified, is that ETFs just
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provide lower maintenance. There's no
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need to constantly monitor or rebalance
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your portfolio manually. Within an ETF,
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if the stock within that ETF is doing
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bad for a couple quarters in a row, then
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that ETF kicks out the bad or lower
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performing company and brings in one
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that's been doing better. And you don't
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have to do any of that. that it does it
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all on its own for you. So, what are
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some negatives then or what are some
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cons of ETF investing? Number one is the
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lack of control. You own the basket, not
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individual companies. So, you can't
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exclude poor performers unless you sell
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the whole ETF. There are certain ETFs
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that have a bunch of companies in them
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that just do bad over time and you're
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kind of stuck with them, right?
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Eventually, the ETF will get rid of
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those companies and bring in good ones,
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but there may be a year or two where
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that ETF does perform poorly. Number
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two, and this is a big one, this is over
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diversification. Too many holdings can
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dilute returns. Even the winners might
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not move the ETF much. And usually what
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I'm seeing is people are overdiversified
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within their portfolio overall. If you
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have something like 20 different ETFs,
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each ETF is already diversified enough.
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So, I always recommend to have three to
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five of them. If you have something like
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20, you're probably overdiversified in
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just every way possible. Number three,
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there are fees. There is going to be a
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fee. Even if it's something like 03%,
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there's still a fee there. Whereas with
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individual stocks, you're going to see
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there is no fee. So overall, the big
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ones for me as far as ETF investing is
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number one, you get that great
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diversification. And even more important
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for me and probably for your lifestyle
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is that lower maintenance. You don't
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have to check it every day. You don't
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have to worry about what the CEO is
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doing or what competitor is coming up in
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their space. If you have an ETF that
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especially that's a broad ETF like the
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S&P 500's VU or something like that, you
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can kind of just sit back and relax and
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let it do its thing. The con though
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would be the fee and then also the lack
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of control. And near the end of this
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video, I'm going to do a compare and
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contrast and I'll tell you exactly what
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type of personality or what type of
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person would rather have an ETF versus
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individual stocks and why. All right, so
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now let's talk about individual stock
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investing. So here's the pros. The first
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one is that upside potential. Picking a
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winning stock like Apple or Nvidia early
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on can lead to outsized gains. There's
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certain stocks that have gone up 500 or
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a,000% in one year. That's not going to
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happen with an ETF. Number two is that
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you have full control. You decide what
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to buy and sell and when. You're not
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tied to a preset portfolio. Number
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three, this is a big one. There's no
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fund fees. When you buy a stock, it's
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not going to cost you anything just to
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own that stock. They don't have ongoing
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management fees. Number four, this is
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probably the biggest one for me
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personally, and this would just be
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customization. You can build a portfolio
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aligned with your values, convictions,
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or analysis. I know a lot of my clients
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like to do this a little bit more just
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because certain ETFs have companies that
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don't align with their values or their
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ethics. And so by customizing your own
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portfolio in an individual stock
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investing, you get to pick based off of
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what you care about most. Number five is
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tax loss harvesting. Easier to
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selectively sell losing positions to
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offset gains. And that one's a bit more
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complex, but as you get deeper into the
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investing game, taxes become a huge
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issue. So what are some cons on
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individual stock investing? The first
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one, probably the biggest one, is higher
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risk. Poor stock selection or a
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company's unexpected collapse can be
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devastating. Like I was talking about
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from before, if you have most of your
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portfolio in one or two or maybe even
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three stocks and maybe they're all
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technology stocks, maybe it's like
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Google and Netflix and Amazon and for
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some reason technology just goes down or
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a new competitor comes up and absolutely
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crushes that technology and puts those
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companies out of business. If that's
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your whole portfolio, that's high risk
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and that's going to deplete your gains.
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Number two, lack of diversification.
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Unless you build a large balanced
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portfolio, you're more exposed to
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specific risks. Number three, and this
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is a monster of a big one, they're
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timeintensive. It requires ongoing
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research, monitoring earnings, market
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trends, and news. And that's just the
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beginning. It's so hard to know when to
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buy a stock. It's also very hard once
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that stock goes up to know when to sell
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that stock or if it's going down, when
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to sell that stock. Should you sell it
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at a loss? Should you just keep it even
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though it's been steady for a year or
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two or three when ETFs are consistently
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gaining 10% or something? It's very,
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very tough to understand and you need to
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do a lot of analysis to be good at
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individual stock investing. Number four,
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emotional decisionmaking. Investors
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often overreact to short-term volatility
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leading to poor decisions. It's so hard
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to watch a certain stock in your
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portfolio go down 30% in the matter of a
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week. And for most people, that's going
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to scare them and they're just going to
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sell out of it. Even if this was just
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something that totally makes sense based
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off of macroeconomic or geopolitical
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issues. And so if you don't have the
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stomach to hold during something like
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that, it's probably better to be in
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ETFs. Number five, this is the biggest
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one. It's harder to beat the market.
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Most individual investors underperform
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broad indices over time. So, which one
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should you choose? If you value
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simplicity and diversification, consider
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ETFs. If you value lower risk and
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passive investing, consider ETFs. If you
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value high potential and control,
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consider individual stocks. And if you
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value willingness to research, consider
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individual stocks. Now, many investors
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use both. I personally use both. My
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personal portfolio is about 85 to 90%
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ETFs and then about 10% or so in
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individual stocks. I personally think
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ETFs is just the way to go. And through
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all my academic research, it's really
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really tough to ever consistently any
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long period of time beat something like
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the S&P 500 or my three fund portfolio.
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But I do like the customization aspect.
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It might also just be the business nerd
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in me as a professor. But I really do
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like to do the research. I like to look
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up certain CEOs. I like management
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teams. I like the competitive analysis.
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I like watching certain industries. So
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certain companies I just really, really
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like. And so I add to that in my
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portfolio. Specifically, Berkshire
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Hathaway and Microsoft. No matter what
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you choose, consider all of the pros and
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cons of all of the different things that
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I talked about in this video and
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customize the portfolio that fits you
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and your risk profile. To learn more
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about that three fund portfolio and how
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it's just the easiest, most simple way
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to invest to get solid returns, watch
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this video here or watch this one to
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keep you going strong in investing and
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keep investing simplified.
