index funds and etf's over stock picking

Stop “Picking Stocks” – Why Index Funds & ETF’s Are Better

Do you believe in the concept of stock picking? Or is value investing and following the ebbs and flows of the Dow Jones a more appealing idea?

The case can certainly be made for both depending on your lot in life. For the millennial investor, however, one choice stands alone.

The Myth of Stock Picking

Lets quickly review a scene from one of my all-time favorite movies, Limitless:

The above scene shows a zoned-in Bradley Cooper wizarding his way through stock picks and building a genius portfolio. I’ve seen the movie countless times and it’s a great way to get fired up about finance. Sadly, the super pill he takes in the movie (NZT) obviously doesn’t exist in the real world. I wish it did, but that’s another story.

Temptations of a Young Investor

I wanted to provide some insight into the fork in the road that every young equity investor reaches: Individual stock picking versus your traditional index and exchange-traded funds (ETF). We put together a course which covers this in detail, but I wanted to specifically highlight stock picking. It can be thrilling to win and dangerous to lose, which makes it a natural hit for folks our age.

While movies like Limitless would have you believe overnight millionaire status is a few picks and pills away, the reality is a lot more reserved. It’s easy to get starry-eyed by Hollywood flicks. It’s plausible to think you’ve got at least some competence to pick stocks. After all, what do thousands of industry experts and Wall Street traders have over a 22-year-old armed with Google.com and Yahoo Finance?

The Reality of The Market

why you should stop picking stocks

Sometimes, a picture really is worth a thousand words.

Please take a moment to review the historical movement of the Dow Jones Industrial Average since the mid 70’s. Aside from the 2008 global financial crisis, it becomes quite clear which way things are trending over time. Up.

The beauty of an index fund or ETF, which we will cover a bit later in this post, is that it follows the same bullish trend you see to the right. Index funds are designed to mirror the movement of major stock exchanges. ETF’s are designed to provide flexibility and diversification across a certain part of the economy.

Broad market exposure is not always the best thing in the world, however. As seen in the chart, many funds were rocked by what happened to our economy in 2008. The shock waves of a mortgage bubble evaporated many hard-earned 401k’s. Important to note is that a few years later the DJIA was right back where it started. Eventually, the Dow rocketed onwards and upwards to double the pre-GFC level.

For the value-minded investor who doesn’t have their eye on a quick buck, the indexes tracking our economy have a clear upward trajectory. ETF’s with the right asset allocation also follow the same trend.

Hitch your wagon to a horse you know is headed in the right direction.

What if I still want to pick stocks?!

No matter what we at Home At 30 or any financial advisor out there might say, some people will still want to pick stocks. The sexy names like Tesla, Snapchat, Facebook and more dominate Yahoo Finance and news headlines across the world.

(As a side note: Yesterday saw Facebook’s stock drop 19% and lose $120 billion in market cap, the largest one-day drop in US market history. As if I needed another reason to write this article up.)

So what’s the gameplan if you want to keep picking stocks while maintaining an equity portfolio that’s much broader? It’s essentially the same as what I’ve written about Bitcoin in the past. Specifically, “focus on fundamentals” and “invest only what you are willing to lose entirely”.

I personally have picked and continue to pick individual stocks in my Fidelity account. I’d estimate that 90% of the fund focuses on index funds across a range of US and international funds (index and ETF) which mix both equity, debt, and other asset vehicles. The other 10% is reserved for picking stocks. Anything I do pick, there’s plenty of research done in the background.

At the end of the day, consider it a hobby and set a rule for yourself like the 90/10 I abide by.

Going With an Index Fund or ETFeft's and index funds over stock picking

I’d hope the value of looking into index funds has become clear at this point in the post and wanted to make a few suggestions before wrapping up. Companies that run and manage index funds come in all shapes, sizes, and locations. Here are a few that we have covered in the past worth re-iterating.

Vanguard – Vanguard is a massive investment advisor business out of Pennsylvania that runs dozens of index funds and ETF’s. They allow you to not only track a particular stock index like the Dow or S&P 500, but also small-cap versus large-cap companies, international sectors, specialty sectors and more. Do some digging of your own to figure out which Vanguard makes the most sense for you.

iShares – Managed by financial advisement company Blackrock, iShares is another family of index funds tracking various market segments and indices. I like iShares because they run promotions in collaboration with Fidelity, where they don’t take a cut of the commission if you buy a certain ETF or index.

While index funds and ETF’s are largely the same from company to company, it makes sense to do your own research on what fits best.

Your next “Pick” should be an Index

It’s a brave new world out there once you start scanning through all of the index options available and where to put your money. Time to stop picking individual companies as a large component of your portfolio, and keep it to side money only, similar to what we outlined with bitcoin.

Do that and you’re on the right track over the long haul!


Want to learn more about investing, real estate, retirement, and beating debt?

Become a Money Master and sign up for the FREE course today!

Disclaimer:
All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.

Author: Joe Savoia

Joe is a 2014 graduate of Northeastern University and currently works in a field sales role for technology company Acquia. He has worked internationally as one of Acquia’s earliest Australia-based employees and helped in the early stages to develop that region. Today Joe is based out of Boston and lives in Somerville, MA. Joe’s primary interests vary widely, including everything from robotics/AI to finance, blockchain, and the rapidly evolving world of tech we live in.

Stop “Picking Stocks” – Why Index Funds & ETF’s Are Better was last modified: July 27th, 2018 by Joe Savoia

Leave a Reply

Your email address will not be published. Required fields are marked *