Investing in stocks or ETFs?

This question depends on one thing, basically: What size is your trading account?

If you have a great saving capacity and can put more than 20,000 Euros or dollars a year then it is better if you do directly in stocks.

The reason is clear: you will not have to pay any annual commission, which being smaller with ETFs, still adds to the costs.

If you can only save 2 or 3 thousand dollars or pounds a year, then we will find the problem that we cannot diversify as we would like.

Doing so we should wait something like 10 years to have a portfolio minimally diversified.

Besides, there is another question.

In many brokers you will end up paying the same yearly commission for 2 than for 10 thousands.

All in all, the answer depends on how much you can diversify your portfolio.

If you prefer to invest in individual stocks there are some arguments in your favour, like:

  • We can buy stocks that give dividends

This reason is a very strong one.

Most ETFs do not pay such dividends, since they are formed by a portfolio of stocks, some of them with good dividends, and some with small or no dividends at all.

This reason could be good or not depending if we prefer investing based on dividends or not.

The problem is that if we have a small portfolio it will be very difficult to diversify with all the problems it can cause us no matter how good dividend we could get at the beginning.

Besides, there are even ETFs that are specialized in dividends like Dividend Aristocrats.

  • More liberty for entering and closing the position

It is true that when we have individual stocks it will be easier to buy and sell without any problem.

In ETFs this should be easy as well since they are quite liquid assets.

However, we should remember that many people who feel more comfortable investing in stocks because they feel their ownership is more direct.

Stocks or ETFs?

The truth is that both options are quite ok.

One option has its advantages over the other but the most important thing is that they are acceptable for long-term investing.

If you have a significant amount of money it is probably better if you buy the stocks directly.

If not, ETFs are a good option.

Index based ETFs are probably some of the best you can buy because it is very difficult to find “active strategies” that can beat the major indexes in the long-run.

The problem with that is the word “active” since that implies more commissions, costs and inefficiencies.

The “buy and hold” approach has demonstrated that it can behave better.

The question gets worse if we try short-term trading, but that is another story.

1 thought on “Investing in stocks or ETFs?”

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