ETFs or Individual Stocks: The Million-Dollar Dilemma Unraveled

When I first embarked on my investment journey with this blog, I eagerly dived into the world of individual stocks, handpicking companies like Manulife, Great West Life, Enbridge, Pembina Pipeline, and even Pizza Pizza. The thrill of researching and identifying promising companies to invest in was exhilarating, and I believed I had chosen stocks that would form the backbone of my long-term portfolio.

However, the rollercoaster ride of market volatility proved to be a tough pill to swallow. In an attempt to mitigate this turbulence, I gradually shifted my focus toward diversification through ETFs. As a result, I sold off many of the individual stocks and transitioned to ETFs such as Covered Call Bank ETF, Covered Call Utilities ETF, and a few low-volatility ones. Additionally, I expanded my portfolio to include a substantial portion of S&P 500 index funds and dividend funds.

The question arises: are ETFs truly the lower volatility option, and does embracing this stability come at the expense of potentially lower returns compared to individual stocks? The short answer is that ETFs generally provide lower volatility due to their inherent diversification. By spreading your investments across a range of stocks within a specific sector or the entire market, you minimize the impact of individual stock fluctuations on your portfolio.

However, it is essential to note that lower volatility doesn’t necessarily equate to lower returns. In fact, research has shown that, over the long term, a well-diversified ETF portfolio can often yield similar or even outperform individual stock investments, especially for passive investors. This is because the compounding effect of consistent returns, coupled with reduced emotional decision-making, can lead to significant growth in your investments over time.

Sometimes on Twitter, I debate with people who have opinions of Warren Buffett. I do not personally idolize Mr. Buffett, as some do. I think he has run his business exceptionally well, but it may be difficult for us to copy his style. How can I lend Goldman Sachs $5 billion on a Sunday evening, stopping the bank from going out of business? Buffett secured a 10% annual dividend on his $5 billion investment at the height of the 2008 financial crisis.

Some people think Buffett has only marginally exceeded the return of the overall market. I think it’s incredible that he has beaten the market over several decades, as he has. His longevity is the skill, not that his return exceeds the market “by a bit.”

I am not Warren Buffett, however. So can I hope to beat the market at all? Or should I invest in an index fund and be happy to match the market and not try to beat it with individual stock picking?

There were times when I had a really strong conviction in a company and didn’t act. When Amazon was at its “decade low” recently, I knew that couldn’t last long. Amazon is a fantastic company, and there is no doubt that it will outperform its competitors in the future. Amazon has gone up ~50% in the past 6 months. That was such an obvious trade, but I didn’t take it.

I did get into FNGS a while back with a similar thesis. But I couldn’t handle the volatility. It was up 10%, and then it was down 10%, and then it was up 20%, and then it fell to be only up 10%. I had to get out.

My Current Investment Mix, Unregistered Accounts

Overall, I think I should continue to invest in ETFs, and plan to hold them for a long time. Owning the whole stock market (VTI), the S&P 500, and a selection of individual sectors (banking, utilities, high-dividend yielders) should be suitable long-term investments. Around 42% of my current investments are in indexes and big funds like this.

In addition, I have picked up money market funds and bond funds. Around 42% of my current investments are in money market and bond funds.

The remaining 16% of my investments are in individual stocks and riskier ETFs.

42% / 42% / 16%. That’s a pretty good mix! I like my current investment mix! Seems balanced! And safe! Maybe a bit too safe, but I don’t need to take risks.

All the money I consider “invested” represents around 75% of my total investible assets. That leaves 25% sitting on the sidelines.

My Overall Investment Mix

So outside of all of the above, I also have a lot of cash lying around. This is usually just sitting in a checking account somewhere.

This has been the root of my problem since the beginning of the blog. My 2022 Goals post set one of my goals to be “fully and efficiently” invested. I am clearly not fully invested.

Adding my cash to the bonds/money market funds brings my “safe” assets up to 67%. That’s way too high for my age.

So What is the Problem? Why is This So Hard?

That’s a complicated question.

My money is not all together. I do not have a single “checking account” at Bank A that contains 25% of my assets. It’s spread out over 10 different accounts at 10 different institutions. I guess I can count this as the cost of being diversified. Given that we’ve seen various US banks going through problems this year, having money in several banks gives an additional layer of protection in the event of a disaster.

Of course, that money is not earning me interest, so there has to be a better way to handle this.

Also, as we go through tax season, I’m still figuring out what I owe and to whom. So clarity will come in the next few weeks and I can then reallocate that money after that passes.

And finally, there is still a level of fear in the market. Various economists are calling for a recession later this year or into next year. Should I invest heavily in stocks going into a recession?

That said, I did move into the ZMMK money market fund specifically since it gave a reliable amount of interest and could be easily sold to generate cash. So I could still invest more into this fund to collect some interest while waiting for various “clarity” events to pass.

I will do that today. I will get more of that cash into both index funds AND short-term investments. It’s unreasonable to have SO MUCH of my wealth sitting, earning no interest. It’s almost 100% certain I’m not going to need so much money in the near future.