Stop Trying To Pick Individual Stocks

Hi everybody, my name is Nelson and I have a problem.


Uh, hi. My problem, upon first glance, isn’t so bad. I abstain from alcohol, don’t do any drugs, and no animals were harmed in the writing of this blog post. Outside of a ticket I once got for a burnt out taillight, I’ve never been in trouble with the law. I always strived to be the kind of guy the girl would actually bring home to meet her parents. I’m respected in the community and I’m relatively sure each of my former bosses would give me a good review.

There’s just one problem. I’m addicted to picking individual stocks.

You know how certain activities are appealing because they’re chasing a perfection you’ll never achieve? Some people get that while golfing, or taking pictures, or even playing a hard video game. I get that while poring over income statements and balance sheets. There are so many choices. I must find the best one.

I’m lucky enough that I managed to snag a position where I’m able to do that for a living. I take the information that I find buried in the back of financial reports and decode it for regular folks, filtering out all the unneeded information. Take it from the guy who has read hundreds of financial statements — there’s a lot of filler.

Because I spend a lot of intimate time with the inner workings of company related finance, I’m pretty comfortable with it. This is after thousands of hours of practice, starting off with watching the business channel while in high school, reading countless books as an adult, and spending some time talking to really smart people.

I don’t say this to brag. In fact, I’m a pretty humble investor. Because even though I spend at least 40 hours per week immersed in this kind of stuff, there’s still a really easy way for you to beat the pants off my portfolio, at least in 2014.

All you needed to do was buy the S&P 500 index fund. In Canada, an investor can do that by buying the index fund under the ticker symbol XSP.

If you would have bought $10,000 worth of XSP on January 2nd, 2014, reinvested your dividends, and then sold out on December 31st, you’d be up to exactly $11,500. You would have got that result by doing no more work than reading this blog post, clicking a few times to your online broker, and putting in an order. It would have taken all of five minutes.

Meanwhile, I spent 40 hours per week times 50 weeks hunched over a computer screen learning more about investing. Sure, I enjoyed most of those minutes, but I still only made about 13% on my money.

If we both had $10,000 to invest, the difference is striking. It would have taken the index investor about ten minutes of work and $20 to establish a position in XSP, consisting of $10 to buy it in the first place and $10 in management fees charged by the fund.

Meanwhile, I spent 2,000 hours of my life immersed in stocks. That’s a gross miscalculation — after all, I was paid for most of those hours — so let’s assume I spent a much more reasonable period of 1 hour per week on my portfolio. That works out to 52 hours per year.

Based on the $10 in management fees I saved myself by picking my own stocks (remember, I still pay commission to buy), I got paid a whole 19.2¢ per hour for my time. And to top it off, I didn’t even make as much as the passive investor did.

If you had the ability to outsource tasks for 19¢ per hour, would you? I suspect you would, even the ones you liked. The only way it makes any sense at all for me to pick my own stocks is if my portfolio is much larger than $10,000, or I get some sort of pleasure from the activity.

I’m relatively lucky. In my years as an investor, I’ve done better than the stock market, partially because all my assets aren’t in equities. Even though I live and breathe this stuff, it’s a constant struggle for me to stay ahead of passive indexers. If it’s hard for the guy who spends his days immersed in stocks and investments to beat a passive approach, what chance do people who spend an hour a week on their portfolio have?

I think they’re hooped before they even start. Which is why they shouldn’t bother. A simple, passively managed portfolio is the way to go for 90% of investors. Chances are, you’re one of the majority. Stop trying to pick individual stocks and go passive. You’ll thank me later.

Alternative Ways to Invest with ETFs

When I have a little extra money to invest, I like the idea of trying something a little different. While most of my investments are very boring (think index ETFs and dividend aristocrats), I do have a few somewhat alternative investments in my portfolio — just for fun.

ETFs make it a little easier to get a bit out of your comfort zone and mix it up in your investment portfolio. If you have a little play money, and you are looking for some alternatives to stocks and bonds, exotic ETFs and alternatives can be one way to go.

Adding Commodities and Currencies to Your Portfolio

This year, I’ve been participating in an investment challenge with several other bloggers. It’s been a lot of fun, and I’ve been able to play around a little bit, trying things I wouldn’t normally do. One of the things I did was to buy shares of a commodity ETF.

Not only does this commodity ETF provide me with portfolio exposure to precious metals, but it also pays dividends. It’s been kind of a fun way to go about things. Unfortunately, it hasn’t been doing all that well, thanks to the fact that a relatively strong U.S. dollar has meant that commodities aren’t seeing a lot of gains. But it was a fun experiment on hedging, just in case things went south.

You can use ETFs to easily gain exposure to asset classes you wouldn’t normally trade, and do it with relative ease, since ETFs are traded like stocks on exchanges.

Another possibility is trading currencies using ETFs. There are a number of currency ETFs that allow you to add this bit of diversity (and volatility) to your portfolio. Boosting your inclusion of these somewhat alternative asset classes has the potential to add growth to your overall portfolio. It can be one way to further diversify, and step a little outside what’s considered “normal” with today’s investing portfolios.

However, it’s important to be careful when investing in commodities and currencies using ETFs. It’s important to understand that you aren’t actually investing in the commodities and currencies themselves. These ETFs follow certain investments, but they are derivatives and not direct investments. Additionally, it’s important to understand that you can run into trouble through something called contango.

Because commodities are futures-based, there is a chance that near-month futures end up being less expensive than futures that expire later on. This can mean that, during a roll in the ETF, there is a chance to sell low and then buy high. This is one of the risks you run into when you get a little more into these exotic ETFs that go beyond stocks and bonds.

If you decide to go this route, it’s important to understand the possibility of contango, and be prepared for it. You also need to be prepared for the fact that the underlying assets, especially currencies, are often viewed as more volatile than “standard” investments like stocks and bonds. You need the risk tolerance to handle these swings, which is why it makes sense to use money that you can afford to lose. It’s why I used “fun” money as part of the challenge, rather than committing funds that I’m planning to use to build my retirement future.

Real Estate ETFs

It’s also possible to add real estate to your portfolio through ETFs. Even if you don’t want to buy the property yourself, it’s possible to get exposure to real estate — including real estate in other countries — with the help of real estate ETFs. It’s even possible to find real estate ETFs based on REITs, allowing you access to a diverse set of real estate investments.

As with commodity and currency ETFs, though, it’s important to understand that you aren’t actually buying real estate. ETFs might following the underlying investments, and you might be getting exposure to real estate companies, but you aren’t actually buying real estate. It’s important to make that distinction.

ETFs make it easier to diversify your portfolio through exposure to asset classes that you might not normally gain exposure to. Because they are easy to buy and sell, there aren’t the same barriers to entry that you might see if you were actually investing in commodities or real estate. But there are still risks, and it’s important to understand them before you move forward. Rather than putting a large portion of your portfolio in these assets, it might make sense to limit your exposure to 10 to 15 percent devoted to alternative ETFs.