Stocks vs ETF’s

An Argument for Picking stocks as well as ETF’s

You can pick a sh**ty ETF just as easily as you can pick a sh**ty stock’

Me – 24 June 2020

I’ve found this ☝ to be very true!

So why not combine strategies?

I get that index funds, ETF’s and these packaged funds which track multiple indexes make life very easy for your average FI (Financial Independence) seeker, as you can chuck money in your Vanguard account each month and see annual returns of around 7-9% over decades and decades.

However, that’s usually an average of all your funds. You’ll have ETF’s or Indexes within each of these that do much better than this and some which do much, much worse!

Now, don’t get me wrong here. I definitely see the appeal in a set-and-forget type investment strategy for anyone who’s happy with that kind of return.

Because let’s face it, getting an annual 7-9% ROI (Return on Investment) is many times what you would receive from any bank these days!

However, 7-9% for me isn’t enough.

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Maybe I’m greedy and foolish. But, if I can outperform this yearly ROI by optimising the different ETF’s I choose and picking some well-researched, healthy, individual growth stocks along the way, what if I could raise this ROI to more like 15%, or 20% even?!

I could reach FI way earlier! Let’s run these numbers and see if it’s worth that extra risk, because of course, as with any investment, your capital is at risk 😉

ROI at 7% (9% growth adjusted by 2% to account for inflation)

The below graph shows my current investment account balance, plus the £300/month contributions I make, assuming I will never increase this amount (which I will), with growth of 7% each year

So, at 25 years I’m at £257,031.50 which is great! But not amazing.

My FI number, what I need to retire on (See Here for more on this), is £636,990.

I am expecting my company pension pot to be worth around £375,000 by age 55 (assuming the gov. will let me have it at 55 😒). This means I need £261,990 from the account shown in the graph by age 55.

But what if I want to retire earlier than 55?

And, what if the government do up the age at which I can access my company pension to 58?

That leaves me in a situation where I need to live off my ISA for several years if I want to achieve early retirement!

So ideally, I need this ISA to be worth considerably more than the £257,031 I’d achieve with an index fund alone.

So what If I can achieve 15% ROI? Let’s see the graph.

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ROI at 13% (15% adjusted for 2% inflation)

It’s crazy, the difference a few percent can make over the long term!

You can see, by changing my investment strategy and aiming to achieve 15% instead of 9% by putting in a bit of extra time to research and picking some individual growth stocks, I’ll have an additional £100K and I’ll have it 5 years EARLIER than if I achieved 9%.

This is huge!

It means I can hit the FIRE button at 50, instead of 55. And, it gives me confidence that I’ll be more than comfortable in the years leading up to my company pension becoming available, likely at 58.

The numbers for 20% look even better, as you can imagine!

ROI at 18% (20% adjusted for 2% inflation)

In just 16 years, I’ll have what I need to top up my company pension to reach my FI number.

The power of compound interest is a beautiful thing! I have a separate post all about compound interest which you can read here.

However, this leaves a gap of potentially 12 years between achieving this £340,000 and getting access to my company pension at 58.

Therefore, I’ll likely play it safe and work another couple of years to ensure I have enough of a stash to cover the gap. The last thing I want to do is to pull the early retirement trigger too early and have to go back to work! Eurgh.

Just looking at the above graph you can see the difference a couple of extra years makes to the growth of the account.

By 20 years, I’d have achieved my stash goal with just my ISA savings, at which point my company pension would would just be extra cash!

However, the lovely, neat curve you see above won’t reflect reality. There’ll be lots of up’s and plenty of down’s along the way. I’m under no illusions! My aim is to achieve a consistent yearly ROI of around 15%.

I believe I can achieve a minimum of 12% growth per year from stock market gains, with an additional 2-3% coming from dividends.

Is this possible, you ask? Well let’s take a look at my investment account thus far…

My Stock Market Investment Account

This is my account since June 2019! To calculate my ROI, I need to subtract the £4,229 gain from the total value. This will give me the value of cash I have transferred to the account, which comes to £5,042.

The difference between this number and the portfolio value £9,271 has been achieved with pure market growth (And a few small dividend payments. Click Here to read about dividends).

This works out as 83%. That’s an 83% gain since June 2019.

So, in 19 months I’ve nearly doubled my money!

And lets not forget, I’ve achieved this 83% even after going through one of the most dramatic market crashes in the last century!

So, which stocks and ETF’s did I invest in this year to achieve this ROI?

I’ll get into that below.

If you want a weekly update on what I’m invested in, check out my Private Stock Group – Just £6.99/month for my complete weekly updates, beginners tips, rapid stock overviews, dividend stocks, ETF’s, live trade alerts so you ssee whenever I’m buying or selling anything and why, and much more!

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My Portfolio

This is what I am invested in right now. (As of 14 Jan 2021)

It’s a split between individual growth stocks and ETF’s, but more weighted towards stocks.

And within that list of individual stocks, there are 5 position which are now well in excess of a 100% gain!

25% of my picks have doubled-up.

Looking at the ETF’s, these have more modest growth. Decent, don’t get me wrong. But other than the clean energy ETF, definitely not seeing 50, 60, 100%+ gains.

And this is because these ETF’s are made up of a collection of stocks, sometimes a few dozen, sometimes hundreds, or even thousands!

And within these collections of stocks, you have some which perform incredibly well, like $TSLA and $TPR, and others which don’t perform well at all.

The beauty of ETF’s is that you’re invested pretty evenly over all of these stocks. So, in the S&P500 ETF for example, if one stock crashes and goes bankrupt, your losses are cushioned by the other 499 stocks that didn’t crash and go bankrupt!

Great, right? However, the opposite is also true for these. That means, if one stock, say Microsoft has an absolute scorcher of a week and climes 10% or even 20%, the growth is hindered by the other few hundred stocks that didn’t do so well, or maybe even declined that week.

This is why I feel that a good balance is necessary!

There’s certain stocks in the market which, when bought at the right valuation, are easy money!

But whether you focus on stocks or ETF’s is ultimately up to you. See my other post: How to Invest for the basics of investing, how to physically buy a stock and the 3 critical questions you must ask yourself before getting started with stocks and ETF’s!

Essentially though, what it comes down to is how much time you have to do some research on stocks. Without doing the research, you’re unlikely to see the gains I have.

But in my opinion, the few hours I put into research every week yields a more than satisfactory ROI to warrant the time spent on research.

If you want to learn my market-beating strategy, you can get 20% off The Investor’s Quick-Start Guide by clicking on the image below and entering ‘reader20’ at checkout.

Diversification

This table bothers me.

Why? Because obviously a single stock is not as diversified as a single share of an ETF. But I can have a diversified portfolio of individual stocks which considerably outperforms a selection of 6 ETF’s, let-alone a single ETF!

You’ve just seen the proof of this in my very own portfolio

I get what it’s trying to say. It’s going back to the point I made earlier about how your one stock can go to £0 and you can lose all your money.

Whereas, with an ETF, if one of the stocks in that ETF goes bankrupt, it’s replace by the next biggest company and your losses are cushioned.

But like I mentioned earlier, this is also true for when one stock in that ETF experiences multiple double-digit growth. The other stocks in that ETF will average out most of those gains and so you won’t feel the full benefits.

The key is to diversify your stock portfolio. No, it will never be as diversified as an ETF of 500 stocks. But if you do your research and invest in companies you genuinely believe, based on the right facts and data, should grow substantially over a 2-5 year+ period, then you should be able to outperform the stock market and thus, outperform those ETF’s too!

Hopefully you’ve enjoyed reading this post and have managed to take some value from it. If you want to know exactly what I look for in a stock before I buy, check out my ebook linked ebove.

See my other posts about investing here:
How to Invest
Dividend Investing
View My Stock Market Account

If you’re getting value from these posts and want to support this blog, subscribe below to join the FSD notification squad to get new posts straight to your inbox! Thank you!

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Published by Finance&Lifestyle

A Dad from the UK documenting his journey to financial freedom. Sharing my lifestyle and finance hacks so more people can find financial independence, retire early and take back control of their future.

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