When it comes to building an investment portfolio, you have a choice. You could assemble a mix of individual stocks or load up on broad market ETFs, or exchange-traded funds. Or you could do a little of both.
Even though I'm comfortable researching stocks and investing in businesses individually, I still make a point of holding broad-market ETFs in my portfolio.
The best of both worlds
There are benefits, as well as drawbacks, to investing in both individual stocks and ETFs. First, let's talk individual stocks.
The upside is getting to beat the broad market and snag an impressive return on your investments. The downside is taking on the risk that if a company you own many shares of does poorly, you might end up losing money.
Plus, when you load up on individual stocks, you have to be very careful to make sure you're diversifying — that is, loading up on stocks across a wide range of market sectors. Go too heavy with a single sector, and you might end up taking losses if that specific market segment takes a hit (such as what's happened to tech stocks this year).
Meanwhile, ETFs have their pros and cons, too. The upside is taking the guesswork out of investing and getting instant diversification in your portfolio. The downside is passing up the opportunity to generate higher returns in your portfolio than what the broad market delivers.
Since I'm comfortable doing the research required to choose individual stocks and also willing to put in that time, my investment strategy largely centers on hand-picking specific businesses to put my money into. But that doesn't mean I don't take advantage of ETFs.
The reason I still keep ETFs in my portfolio is that they give me peace of mind. If a specific company I've chosen underperforms, or a specific sector of the market takes a hit, I'm comforted knowing that some of my money is still spread out across the broad market.
Also, it's important to keep tabs on the companies you're invested in. Buying ETFs gives me a little bit of a break from doing that.
Granted, even if you're solely buying broad-market ETFs, it's a good idea to check on their performance from time to time. But that doesn't require the same time commitment as tracking individual companies' earnings, keeping tabs on management changes, and doing the many other things you're supposed to do when you invest in individual businesses.
A setup that works for me — and may work for you, too
All told, I don't tend to rely too heavily on ETFs because I think I can do better with a solid mix of individual stocks. Right now, I'm invested in everything from tech to energy to healthcare to real estate (in the form of real estate investment trusts, or REITs, not physical properties).
That strategy works well for me. But it's still nice to have those ETFs to fall back on — and take a load off my mind.
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