The discussion about ETFs vs. single stocks is one of the most popular debates in the investment world. And to be honest, it’s increasingly getting on my nerves. Not because I can’t understand the arguments, but because (imho) the discussion often moves in a completely wrong direction.
Objectively, there is no “Right” or “Wrong”.
Instead, I think we should focus more on two fundamental questions every retail investor should deal wih:
- Does the asset class in question suit ME?
- And does the chosen strategy work FOR ME?
The eternal comparison of returns: a misguided approach
Most debates about ETFs and single stocks revolve around the question: “Which method will give you a higher return?”
However, many investors overlook an essentially important aspect: there is no universal answer to this question. This is because the return depends not only on the asset class, but also on numerous factors such as
- market development
- your own ability to analyze and make decisions
- the investment period
- risk tolerance
- emotional resilience
- the market situation at the time of entry
- the ability to weather times of crisis
Discussions too often suggest that there is a “right” and a “wrong” approach.
But we should rather consider following aspects: The choice between ETFs and single stocks is not a mathematical equation with a single solution, but a question of individual personality and circumstances.
The two crucial questions for every investor
Instead of arguing endlessly about differences in returns between ETFs and individual shares, every investor should ask themselves two crucial questions:
- does this asset class suit ME?
- Am I prepared to take a close look at individual companies?
- Can I deal with market fluctuations without selling in a panic?
- Do I have the time, knowledge and motivation to invest actively?
- Do I feel comfortable with a strategy that depends heavily on my own actions?
- does this strategy work FOR ME?
- Do I have a long-term plan that takes my financial situation into account?
- Can I sleep soundly with the strategy I have chosen?
- Am I prepared to follow my strategy consistently, even in turbulent times?
- Do my financial goals and risk appetite match the chosen method?
If the honest answer to one of these questions is “no”, then you should not force yourself into a strategy just because it supposedly promises higher returns.
Let’s now have a quick look at ETFs and single stocks.
ETFs: The relaxed solution for many investors
ETFs are a fantastic option for anyone who can’t (or doesn’t want to) deal with the markets on a daily basis due to time constraints.
ETFs offer:
- broad diversification
- lower costs than many actively managed funds
- simple handling without constant market analysis
- a stress-free way to build up long-term assets
However, you should not blindly invest in ETFs without understanding the mechanisms behind them.
A large part of the performance of broadly diversified ETFs – especially global indices such as the MSCI World or S&P 500 – is driven by a few large companies. The so-called “Magnificent 7” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta), for example, account for a significant proportion of market capitalization.
This means that the performance of an ETF is heavily dependent on these few companies, while the rest of the index often delivers relatively average returns.
Anyone who believes that they are automatically broadly diversified with an ETF should therefore be aware that there can be a considerable cluster risk effect.
ETFs are an excellent choice for investors who want to invest for the long term and without stress.
However, those who believe that they can beat the market should be aware that this can be difficult at times – and that an ETF approach is usually completely sufficient.
Single stocks: for strategy fans with stamina
With single stocks, you can put together a customized portfolio of companies from different sectors and regions.
However, there are important points to bear in mind. Anyone investing in individual shares must be prepared to:
- read company key figures and carry out in-depth analyses
- live with greater price fluctuations
- not to be emotionally driven by short-term market movements
- to stick to long-term convictions even in difficult times
Many people don’t like to believe it, but:
- There are many retail investors out there who WANT to deal with single stocks on their own initiative. They enjoy reading annual reports, analyzing trends and investing in companies that they believe are undervalued and have a promising future.
- Oh yes, it IS possible to generate way more attractive returns with single stocks than with ETFs. Remember following motto: “The profit is in the purchase”. And yes, it IS possible to beat the market.
For these investors, investing in individual stocks can be not only a challenging financial decision, but also an intellectual challenge that they enjoy.
However, it is important to realize that many private investors actually fail beating the market over the long term. Many overestimate their abilities and underestimate the risks, which often leads to poor investment decisions.
If you are willing to go the extra mile, then single stocks can be a lucrative way of investing specifically in future trends or undervalued companies. But if you get nervous about every negative headline in the finance press, you should rather keep your hands off them.
ETFs or single stocks: Which do I (Axel) prefer?
If I could choose only one of the two, then it would be individual stocks.
In my 10+ years as a retail investor I have discovered my love for single stocks because these have generated far more attractive returns for me than ETFs.
And I enjoy this intellectual challenge when analyising a company and making my investment decision.
For years, I have been following the above-mentioned motto “The profit is in the purchase”: I always bought single stocks when they were significantly undervalued.
BUT: In fact I like both types of investment. My ETFs have been providing constantly attractive “basic returns” while my investments in single stocks provided above-average returns.
In practice, I follow the so-called “core-satellite” strategy and invest in both ETFs and individual stocks – whereby the proportion of individual stocks (approx. 85%) is significantly higher than the proportion of ETFs (approx. 15%).
The biggest mistake: choosing a strategy that doesn’t suit you
The real mistake is not in choosing between ETFs or individual stocks, but in pursuing a strategy that doesn’t suit your personality. Here are some examples for typical misjudgments:
- Someone who has no interest in company analysis opts for individual stocks because they’ve heard of a so-called “Tenbagger” (10x multiplier).
- An active trader who loves the thrill invests exclusively in ETFs and is bored to death – resulting in constant rebalancing and a loss of long-term returns.
- A safety-oriented investor buys tech growth stocks because “YouTube Gurus” tell him that otherwise he will “miss out” (FOMO).
All of these mistakes have one thing in common: the chosen strategy does not match their own personality. Sooner or later, this leads to bad decisions and unnecessary stress.
Conclusion: Find your investment mix
Instead of getting lost in the eternal debate about ETFs vs. single stocks, investors should focus on finding a strategy that they can sustain over the long term.
For many, this can be a mix of both – ETFs for basic returns (as a basic protection) and single stocks for targeted return opportunities.
For instance, the above-mentioned Core-Satellite Strategy is a proven approach:
- Core: the majority of the portfolio (e.g. 70-90%) consists of broadly diversified ETFs that provide a solid base and long-term stability.
- Satellite: A smaller portion (e.g. 10-30%) consists of targeted individual investments that target above-average return opportunities.
This approach combines the advantages of both worlds: The ETFs provide a basic security, while the individual stocks offer the opportunity to take advantage of targeted investment opportunities and add a personal touch to the portfolio.
In the end, it’s not about winning a “beauty contest of returns”. It’s about finding an investment strategy that really suits you. Because only a strategy that you can stick with in the long term is a successful strategy.