Let’s take a closer look at the differences, advantages and disadvantages of ETF investing vs Stock picking for the average investor like you and me! If you don’t know what an ETF is exactly, you can take a look at this previous post I made.
ETFs
Advantages
ETFs are a great way to get into investing. You don’t have to know the ins and outs of the stock market. It is pretty easy to pick 1, 2, or 3 ETFs that compliment each other to accommodate your portfolio. The only thing you have to do is buy them regularly. On a monthly bases like I do for example!
ETFs don’t require you to study specific companies. This means that you will save a lot of time. You don’t have to think about which companies will outperform others because, in a way, you buy them ‘all’! This also makes it a very easy way to diversify.
Depending on the type of ETF, dividends could be reinvested for you! This means that you don’t have to do it yourself which saves you to potential broker fees and taxes. Depending on your country you won’t have to pay taxes on the dividends themselves as well!
Investing in a diversified ETF portfolio will give you guaranteed market returns. The S&P 500 returned around 8% yearly over the last 100 years. If you invested in en S&P 500 ETF you would have these returns as well!
Disadvantages
A diversified ETF portfolio will only give you market returns! Yes, this is both an advantage as well as a disadvantage in my eyes. If you invest in ETFs you won’t be the person that bought Amazon stock, for example, when it was way cheaper!
ETFs come with yearly operating expenses. These fees can be 0% but can go up to 3 or maybe 4%. My ETF portfolio has an average annual fee of around 0.20%.
ETF investing could get boring. If you invest in ETFs you will never have the rush of researching a company, investing your hard-earned money, and being right big time.
The price of an ETF can sometimes be slightly different from the underlying value. This could mean that you are paying a premium. Although, this is uncommon and it corrects itself over time, it is important that you this risk as well!
Stocks
Advantages
Individually picking stocks will give you more freedom to chose how you want your portfolio to look. This way you have more flexibility in choosing which companies you want to own specifically and what percentage of allocation you want to give them.
Investing in stocks gives you the opportunity to be right big time and maybe outperform the general market. This could be very exciting which will keep investing interesting!
The cost of owning stocks is usually lower than owning ETFs. You only have to pay a one-time commission when you buy the stock. ETS come with these same commissions but also have potential annual fees!
Disadvantages
Investing in stocks has the possibility of giving you fewer returns than the market. Research has shown that most people who actively invest in stocks underperform passive index investors over a longer time period.
Researching individual companies can be very time-consuming. This could mean you will be spending hours reading through company details or financial statements.
Even if you invest in 50 companies or more, you will probably never be as diversified as you would investing in ETFs. One single ETF can contain thousands of companies!
Overview
ETFs
- Easy way to start investing.
- Guaranteed market returns.
- Easily very diversified.
- Less flexibility.
- Could get boring.
- Yearly fees.
Stocks
- Time consuming.
- Possibility to outperform the market.
- Less diversified.
- More freedom.
- More intriguing.
- One time commision.
