As Warren Buffet often says, most investors should invest in ETFs and not pick individual stocks. However, everyone knows he does not apply what he preaches and if you want more performance on your investments, picking individual stocks can be a good idea.
So, when should you choose ETFs and when should you pick stocks? Which are the best option for you?
Picking stocks is time-consuming
First, you need to define what performance you are look for and which time you can spend learning about value investing and finding good stocks to invest in.
Picking stocks is insanely hard, and requires to real financial statements for many companies to find hidden gems. This can take a lot of time, as the more companies you look at and the better chances you will have to outperform ETFs. You must then ask yourself, is it worth it to dedicate a lot of time to only outperform ETFs by a few percents?
If you really are looking for passive investments, your best bet is to dollar cost average on ETFs.
However, and only if you really know what your are doing, picking stocks can offer you better performance while at the same time reducing risks, especially when the general market is overvalued.
Stocks and ETFs, why choose when you can do both?
If you are starting with investing, and you really want to try stockpicking, there are a few options for you.
You can for exemple invest 100% in ETFs, and have a paper portfolio on the side where you buy stocks.
The advantage of doing this is that you can invest the exact same amount you invest in ETFs to see if you would have done better with stocks.
However, as this is not real money, you probably will not have the same reactions as with your real portfolio. For example, it will be way easier to not sell your down positions.
As a good alternative, you could try to allocate a small portion of your portfolio, such as 10% to invest in stocks and see how you are doing after a few years. You will then be able to invest in stocks, and see if you can outperform ETFs after a few years.
If it is the case, you could then progressively switch to invest a larger portion of your portfolio in stocks. The other big advantage is that this will allow you to make big mistakes and learn (and what a better way to learn with real money and real companies), but without impacting too much your real portfolio. With 10% allocation in stocks, even if you are down 50% will only affect your overall portfolio performance by -5%.
How to pick good stocks?
If investing in ETFs works best for you, just dollar-cost-average and don't worry about it!
However, if you want to learn how to pick good stocks, learning about Value Investing is a mandatory step before doing anything.
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