Once you’ve decided to start investing, and important question comes up: should I invest in individual stocks, or should I stick with mutual funds or ETFs. Here are some arguments for investing in individual stocks, and reasons why you may want to avoid investing in individual stocks.
Why You Should Consider Individual Stocks
If you want to truly invest in a company, individual stocks are the way to go. If you do it right, you will do your research and invest in a company that you truly believe in. This is how people have been investing for centuries – putting their money into a real business.
Investing in individual stocks can also be very lucrative, but very risky. Stocks like Apple and Amazon have returned over 1000% since they were created. However, even more stocks have plummeted to $0 and investors have lost their shirts.
If you’re willing to do the homework and put in the time, you should consider investing in individual stocks.
Why You Should Stick to ETFs
However, if you just don’t have the time or effort to put into researching individual stocks, you should consider sticking to ETFs or mutual funds. Keeping with ETFs, you can stay away from having to do undue research, and just stick to investing in the entire market by buying a index ETF or mutual fund. Even better, these funds allow you to diversify your portfolio, which can also mitigate some of the risk that is present in investing in individual stocks.
Investing in ETFs or mutual funds is also usually lower cost than investing in individual stocks, because one commissionable trade can get you a basket of stocks, where building a basket of individually picked stocks will cost multiple commissions.
However, you can also have the best of both worlds. If you really want to invest in individual stocks, but are worried about the risks, you could invest 95% of your portfolio in a diversified portfolio of ETFs, and then use the remaining 5% to invest in a stock of your choice. Then you can see how well your research paid off.