Why I now invest in Exchange Traded Funds (ETFs) over individual stocks

Before I was married, I would invest in individual stocks.  Individual stocks are inherently more riskier than something like an ETF, not only because individual stocks are more vulnerable to larger swings, but there’s always the likelyhood that the individual company could go out of business, causing you to lose your entire investment.

It takes a lot of time to research and individual stock.  Beyond higher level macro picture of evaluating the economy and indivdual sectors, you need to spend time looking at intricate details like the company’s target market, finances, outlook, and management.  Failure to spend time to accurately look at and understand any of the major components that makes a company successful will leave you vulnerable to investing in a company that may go out of business.

Even if you do your diligence, then you are still vulnerable to the illegal espionage that can take a company down.  Management could be mis-reporting or there could be embezzlement.

No matter how well you research a company something could go wrong.  When I was single and didn’t have any dependents, I was more willing to take these risks by investing more of my investment money in individual companies.

Now that I am married and starting a family, both my time and risk tolerance have decreased.  I no longer have the time to obsessively bury myself in balance sheets and research various companies intricate details.  I also can’t risk the possibility of investing a significant portion of my portfolio in an individual company and having the company go out of business.

I now invest primarily in ETFs (Exchange Traded Funds), and I have become more sector focused.  I look for sectors that are getting beaten up for one reason or another.  I look more at the macro picture and have cut out the extra time it takes to investigating the intricate details of a particular company.

ETFs are funds, so there is virtually no chance of losing your entire investment.  Things may get rough and the value may diminish.  A few of the companies within the fund may go out of business, but since each individual company only represent a small portion of the ETF portfolio, the loss of that business won’t erase your investment.    Also, due to the law of averages, in really bad times, a couple companies within the ETF may go out of business, but likely that business will be picked up by other companies within the ETF and those respective stocks will gain in value (especially when the sector picks up), which will mitigate the damage done to your portfolio by the loss of the weaker companies.

I like ETFs over mutual funds because they don’t have “load” fees and usually have lower “expense” costs.  Most ETFs I invest in have an “Expense Ratio” around 0.5%.  Mutual funds tend to have higher management fees of around 1-3%.

When you purchase a mutual fund, the higher expenses go towards paying the fund manger, administrative fees, and advertising fees.  I don’t like paying for a fund manager because there’s so many fund mangers out there that the chance of purchasing a fund that actually does have an exceptional manager that’s worth the fees the person is getting paid is minimal.  To me, mutual funds are for the ignorant.  You are paying someone to sell you something and make you feel good about your investment, though its really no better than lesser managed fund that simply tries to represent a market segment, as mosts ETFs do.