Stocks vs. ETFs: Which one do you buy?
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Announcement
I’m by no means big into the crypto space but I recently got into staking crypto as a way of boosting my passive income. As of today, I have about $5,000 in crypto spread across Ethereum, Bitcoin, and Solana. For some reason, I had all of it spread out across different platforms, it was a bit overwhelming. I like when things are all in one place so last week I decided to consolidate it all into one account on crypto.com.
If you haven’t used crypto.com yet it’s a very interesting platform and extremely easy to use. Not only do they allow you to have your own crypto Visa card (which gives you cashback among other perks) but you can also send your coins to an “Earn” wallet within the platform where your crypto can earn you interest every single day.
It’s like a daily dividend… but for crypto. I’ve been playing around with this concept called “staking” and so far I’m enjoying it. Right now I’m earning about $1/day which will only grow as I buy more.
I’m going to be slowly increasing my exposure to crypto in 2022 as I learn more about the space, but I’m excited to see where this staking process takes me in the future.
Here’s to creating more streams of income!
Stocks vs. ETFs: Which one do you buy?
So you find yourself at a fork in the road. Go left and you become too concentrated. Go right and you become over-diversified. What do you do?
Making the decision between buying stocks or ETFs can be a difficult one. It’s a constant tug of war between wanting to generate a return that beats the market but also looking for ways to reduce your exposure to risk (if you’re into that kind of thing).
However, often you’ll see investors give up massive amounts of growth opportunities to decrease their risk. If the name of the game is to “grow your nest egg” then is that what we should be doing?
Let’s get into it.
Before we do, we need to understand Alpha.
Alpha explained - (not the jacked guy on roids pumping iron)
Definition as per Investopedia:
“Alpha (α) is a term used in investing to describe an investment strategy's ability to beat the market, or its "edge." It is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market return over some period.” - Investopedia (James Chen)
Essentially, Alpha is what every investor in the world is chasing. The excess return between your portfolio and the market. This is, in its truest form, “beating the market”. And unfortunately, there is a belief that you must own stocks in order to beat the market as ETFs only produce what many believe to be “average returns”. While this may be true (sometimes), it really depends on the sector you’re investing in. As you might know, there is an ETF for pretty much everything:
Real estate
Technology
E-sports
Utilities
Crypto
Artificial intelligence
Electric vehicles
The list goes on and on and on…
But here’s a tip for all of you stock pickers: ETFs may be the better choice if you cannot gain an advantage through knowledge of the company.
In other words, if understanding the business model, the moat, the competitors and the target market doesn’t provide you with the upper hand when it comes to putting together an educated guess about where the stock price and company will trend in the future (also called conviction), then you are probably better off buying an ETF instead.
Let’s look at the other side of the coin.
When Picking Your Nose Stocks Might Be The Better Choice
The right time to pick stocks is within industries where there is a wide dispersion of returns from the average. Also called variation from the mean. Also called outliers. Also called volatility.
This opens up a window to use fundamental and ratio analysis in order to spot companies that may be mispriced in the market. Ultimately, if you’re able to identify these types of companies, then you have a higher chance of experiencing larger returns and “beating the market”.
The Retail Industry Might Be Your Best Bet
Contrary to popular belief, picking technology stocks can be extremely risky and most investors have no idea what they’re doing or investing in.
My recommendation: take the safer road (and the road less traveled)
Retail is a good place to start if you want to try stock picking because companies in this industry offer different types of products which creates larger dispersion in their returns.
Example: let’s say your son and his friends start shopping at a specific retailer. Every week they’re looking online at new products and deals. When you dig into it further, you find out that the retailer is expanding in your area, building new stores, new product lines, and is targeting teenagers (like your son). You quickly realize that most people aren’t aware that this retailer could become a quickly growing trend among teenage boys and therefore that knowledge might give you an edge when buying the stock.
When you’re able to take everyday observations and apply them to your investments, sometimes you can achieve much larger returns than the average person.
I was able to do this with Shopify (SHOP). My friend group would always talk about how easy it was to buy stuff online and how much more convenient it was than going into a store. I was fortunate enough to pick up on this trend and invest in Shopify back in 2017 when the stock was trading at around $100 per share. The rest is history. All I did was become aware of a trend through “market research” (more like research on my own friend group).
Become more aware of what’s going on around you and you’ll make a lot of money.
When ETFs Might Be The Better Choice
You might want to consider ETFs when there’s a smaller dispersion of returns from the average. Essentially, ETFs could be a better choice if individual stock performance is fairly similar across the entire sector.
2 sectors that fit this description are utilities and consumer staples. Instead of trying to pick stocks, you might be better off deciding how much of your portfolio you feel comfortable allocating to these sectors through an ETF.
Ask yourself, does the risk of owning individual stocks match the potential return you might receive. It’s no secret that risk and reward are correlated. As an investor, you should demand more return if taking on more risk. But if the dispersion of returns from the average is minimal (like it is in consumer staples and utilities) then it just makes sense to have exposure to the entire sector rather than trying to pick a couple of lucky horses.
Another example where ETFs may be the better option is within the biotech industry. Companies depend on FDA approval for the sale of a new drug and if they don’t get that approval it could damage the performance of the company long term. On the other hand, if the FDA approves the sale of a new drug, investors could be generously rewarded. When the success of your investment is highly dependent on an organization’s approval, it might be in your best interest to buy the biotech ETF instead and participate in the gains of the entire industry, rather than just one stock.
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Some resources to help you make more money:
Money Mastermind - the “Money Bible”. Myself and 29 other expert creators teamed up to create the most all-inclusive 280-page finance book on the market. Over 100 topics about money including real estate, crypto, budgeting, dividend stocks, online business, and more.
The Complete Investors Accelerator Pack - everything you need to build a dividend portfolio that grows on itself. Learn more about dividend investing, how to analyze dividend stocks, what to do with your dividends and how to build a stream of passive income through the stock market.
The Molina Letter - the only product that’s helped me grow my Twitter account to 30,000 followers. Fill in the blank templates you can copy to help you create viral content with minimal effort. A big following gives you the key to creating products and making money online. There’s a reason why 500 people are subscribed to this letter.
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Hipster Budget Guide - having trouble saving money? Learning how to budget is your solution. This book will show you ways to save money you never even thought of. Worth every penny.
My 2 Cents - my other newsletter where I voice my personal opinions on life, money, and people. Beware: I have zero filter. But it might give you a good laugh.
