Stocks VS ETFs: Which is Best For You?

Investing your money into assets is key to building wealth and achieving financial freedom.

But, new investors can often find themselves stuck, and not knowing what to invest into.

• Stocks.

• ETFs.

• Real Estate.

• Cryptocurrency.

You name it.

There are a huge range of asset classes that you can invest into, and for beginners, the best place you can start is the stock market.

It’s easy to learn, and a high level of liquidity means you can buy and sell investments quickly, if you wanted to do something else with your money.

In the stock market, you have a choice of two main asset classes:

• Stocks

• ETFs

So… in this blog, I’m going to be answering these key questions:

1. What are Stocks/ETFs?

2. What are the benefits and drawbacks of both?

Stocks

Owning stock means owning shares in a company that is publicly traded on the stock market.

As someone who owns Apple “stock”, I am an official Apple shareholder, and own shares (albeit not many) in Apple.

In the stock market, you can buy shares, or “stock” in any company that is publicly traded, and available to invest into in your region.

Some of the biggest public companies include:

• Apple ($AAPL)

• Amazon ($AMZN)

• Microsoft ($MSFT)

• Google ($GOOG)

• Tesla ($TSLA)

And more.

When people first think of investing, they tend to think of stocks. It’s the most popular way to invest your money, especially as a beginner.

It’s cheap, profitable, and super easy nowadays.

With a few clicks on your phone, you could be a Tesla shareholder.

So, let’s dive into the key pros and cons of investing into Stocks.

Benefits of Stocks

Great Potential Returns

Stocks have the potential to provide you with great returns on your money, and the past year or so have reflected this.

Sure, timing is important, but if you can develop a habit of investing in the right stocks, at the right time, you can easily beat the market average 8–10% annual return.

Even some of the safest, largest companies, are way up in comparison to the market average over the past 12 months:

• S&P 500: +19%

• Apple: +22.5%

• Google: +35%

• Microsoft: +51.5%

• Meta: +137%

• NVIDIA: +208%

Easy to Invest

Go back 50 years and trying to invest into stocks would’ve been hard work.

Today?

• Download an investing app.

• Create an account.

• Deposit some money.

• Buy assets when the market is open.

It’s as easy as creating a new social media account, only more fun.

Wide Range of Companies

It’s important to understand that companies don’t have to go public, but they should because there’s one great underlying incentive:

More investment to grow the business.

This means that the stock market gives you access to a huge range of companies, in a wide range of industries:

• Finance & banking

• Technology

• Commerce

• Pharmaceuticals

• Automobiles

• Sports

Sure, not every company is public. But, there’s much greater upside if you are. As a result, the retail investor has a huge (and growing) range of stocks to invest into.

Drawbacks of Stocks

Not Diversified

One of the biggest investing lessons you’ll ever learn about is the need for diversification, and to reduce the risk of your overall portfolio by investing in a diverse range of assets.

This way, any significant losses can be offset with the gains of other investments, and you won’t be left to lick your wounds after losing a big chunk of your portfolio.

To diversify with a stock portfolio, you need to take matters into your own hands, whereas with ETFs, you don’t.

Can Be Risky

One of the biggest problems with individual stocks lies within the fact that it can be very hard to predict what will happen within a single company.

Sure, the odds of Apple or Amazon going bust is… slim.

But, you can’t guarantee the success of a stock, and you’re playing a dangerous game if you have a lot of money invested into just a handful of investments.

Takes Time to Research Stocks

Because of these risks, it’s necessary to spend time reading up on companies to see whether they’re fit for your portfolio.

Of course, you don’t have to. But, you’d be playing a dangerous game if you’re investing into companies you have little knowledge about, especially if you have a large amount of money to invest.

Because of this, many investors over time will begin to question whether investing their time into researching stocks is actually worth the reward, or if you should take a more passive approach.

And this passive approach involves… ETFs.

ETFs

An ETF, or Exchange Traded Fund, is a stock market fund which tracks a specific asset, or index.

It’s a brilliant invention, which helps retail investors invest without the hassle of having to spend time researching individual stocks, or keeping up to date with everything that’s going on.

Typically, retail investors can invest into an ETF which tracks the entire stock market, and see a healthy 8–10% return on their money, in exchange for a small management fee.

You can also buy ETFs which track the prices of:

• Gold

• Oil

• Semiconductors

• Foreign markets

• Bitcoin

All without having to buy the real thing. They simply track the price.

It’s investing made easy, and although sometimes it can seem too good to be true, it really isn’t.

Here are some pros and cons of ETFs.

Benefits of ETFs

Already Diversified

One of the key benefits of ETFs is that you don’t have to worry about one of the main issues with stocks:

Diversification.

One of the most popular index funds, the S&P 500, is a fund that tracks 500 of the biggest public US stocks.

This fund is constantly switching out poorly performing stocks for assets which are doing better.

You can invest in the S&P 500 through ETFs like $VOO (Vanguard 500 Fund) which will give you a slice of all 500 stocks, typically netting investors a 10% average annual return.

All in one single investment.

Don’t Need Research

Building on from the first point, most ETFs (sure, it depends on what ETF you’re investing in) are designed for convenience purposes, and remove the need to spend hours researching different stocks and other investments.

Sure, you might miss out on bigger investment returns as listed above, but ETFs will help you save time, which could be spent elsewhere:

• Side hustles

• Personal finance books

• Starting a business

Investing is as much about opportunity cost as it is about overall return, which is why ETFs are becoming and more and more popular.

Set And Forget

One of the biggest stereotypes that prevents people from investing is:

“I don’t have time for it”

Well, ETFs make this excuse obsolete.

Take $VOO, or the S&P 500. A fund which has generated an average 10% annual return for investors for decades, growing investor’s wealth exponentially over time.

All you need to do is create your account, and set up an automatic direct debit into whatever ETF you wish to invest into, and you’re all set.

Everything will be automatically set up for you, and you’ll be investing into a broad fund with healthy returns, eliminating the need for you to spend any of your valuable time investing.

What’s not to love?

Drawbacks of ETFs

Fees Can Be High

All of this convenience and management can come at a cost to the investor, and it’s often a cost that goes unnoticed.

It’s always important to check the fees associated with any fund, as they can eat into your overall returns, even if it’s only a few %.

Vanguard is known for it’s ETFs and it’s incredibly low fees. I’d start here if you’re looking to invest.

Lack of Control

The contents of certain index funds and ETFs change all the time, to fit the criteria of said fund. As a result, this lack of control on what you’re investing in has been known to put off some investors.

But, these are managed by professionals, so I wouldn’t stress out too much if things start changing.

They’re changing for your benefit.

Limit on Growth

When you’re investing into an ETF which tracks the top 500 US stocks, or indeed, the entire US stock market, the odds of you gaining a triple digit annual return is pretty much impossible because of what it is.

Any stock can double in a year, no matter how big.

An entire stock market can’t. Simple as that.

So, if you’re looking for greater risk, but also a greater reward, these broad ETFs might not be for you.

Sure, you could go and look for a riskier ETF, which is less diversified and has more risks attached to it, but it’ll be a similar story in most cases.

Conclusion

The beauty of investing is that you’re constantly given 2nd chances.

The honest answer here, is that there isn’t one asset class that’s better than the other. It’s dependent on you, and what approach you’d prefer:

• Active (Stocks) — taking time to research stocks with a higher upside potential.

• Passive (ETFs) — sit back and see safe, steady returns come in without the need for work.

The truth is, why not invest in both?

My portfolio sits at around a 70/30 ratio between ETFs/Stocks.

1. I use ETFs to grow my wealth passively.

2. I use Stocks to receive dividends to grow my ETF holdings.

3. Rinse and repeat.

But, if I had to pick one of the two, for a beginner investor…

I would pick ETFs.

It’s like driving a car with an automatic gearbox.

Easier, and much more enjoyable for 90% of the population.

But, there’s no denying that there is a small % of the population that would prefer the old school, “manual” route of picking your own stocks and seeing if you can get a better return that way.

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