Do you prefer stocks to ETFs or is it the other way around? Or do you prefer a mix of stocks and ETFs with a certain percentage allocation? Again, Canadian or US stocks, what about exchange rates?
What are stocks? Stocks represent individual companies traded on an exchange – TSX (Toronto), NASDAQ (US), NYSE (US), Down Jones (US), etc., are some examples.
Prices of stock securities rise and fall based on buying or selling demand, the price varies each trading day – Monday through Friday, unless the stock market is closed. Stock brokers such as Questrade and TD Ameritrade will charge you a flat fee to buy/sell stocks. Of course, with Robinhood and Wealthsimple, you can trade stocks without spending a dime on commissions.
When it comes to ETFs, ETFs are a pool of stocks, usually within a sector or can be multiple.
For example, consider the S&P 500 index fund. Now, this index ETF holds stocks of the 500 largest U.S. companies based on market capitalization. The S&P 500 Index is based on a committee that decides which stocks and companies should be included in the S&P 500 Index. ETFs that represent the S&P 500 should hold all of the stocks in the underlying index.
Finally, ETFs are associated with management and MER fees. The lower the fees, the better overall returns you can get.
So those are the basics on stocks versus ETFs. Let’s continue.
Before I continue, the mindset with which I invest my money is pretty clear:
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I will only invest in blue-chip U.S. and Canadian companies with good reputations and excellent growth records. I don’t like companies with mediocre growth rates and stable lines even with an 8% dividend. That’s not why I’m here. Dividend income is aimed more at retirees. Right now, you need to focus more on growing your money and picking the right stocks.
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Invest small but be consistent. Buy more at the lows and wait for the highs. Buy mainly on red days. FOMO logic 🙂
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On this blog, to cater to a wider audience, although I have extensively covered the best Canadian online banks such as EQ and Tangerine, the interest rates here are only 2% at most. I prefer these banks to hold my money in case of emergency or rather leave it in my CIBC checking account and invest later. (not emergency funds, of course, the rest of the pool)
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Personally, I prefer to invest in stocks rather than ETFs (the reasons will be explained with proof)
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Finally, never have the mindset of ordinary people when investing, I will talk about that too. Keep reading.
Advantages of investing in stocks over ETFs:
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With stocks you will be investing in reputable blue chip companies (at least in my case and some not get rich quick like KOADK did recently, which can be extremely volatile). Some of the best safe bets are Apple, Amazon, Microsoft, Google, Facebook, NVIDIA, AMD, Netflix, TESLA. Always aim to invest for at least 3-5 years and invest the money you don’t need during this time. Remember the investment mantra: the longer you invest with blue chips, the better it is for you.
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By investing in the blue-chip companies mentioned above or the blue-chip companies you prefer, you are buying a part of the company that are the dominant forces producing remarkable results quarter after quarter. Take Amazon for example. Today, the price of the apple could be $490 per share. This may seem expensive to you. But think about it, after the 4-for-1 stock split, Apple’s stock price will eventually fall to around $125 per share. I can bet that in a few years it will be back to $490 per share and you will end up having 4 times as many shares and therefore profits and growth. So whether you prefer to buy Apple stock today or after the split doesn’t really matter because the company and its fundamentals are strong and amazing. The fundamental business plan here is good.
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Continuing from point no. 2, there is never a wait to invest in blue chips. There may be market declines or crashes, but eventually prices will rise, leading to double-digit annual growth in stock prices. There is never a wait in the world of long-term investment (5 years at least)
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Even though they are safer than stocks, ETFs can’t really expect the same returns as Apple or Microsoft, because with ETFs it’s a large pool of hundreds of stocks and so the returns are much lower. Instead, my logic is to select stocks carefully and instead invest in those that can give me the best return.
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Blue chip stocks never fail to deliver on their promises. NEVER!
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Unless you’re nearing retirement, investing in good growth stocks should be your main motivation and not ETFs, unless you’re really scared for whatever reason. Bonds are also good options!
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Investing in 5-6 stocks is enough, replace the stocks that are not performing well and allocate funds accordingly. There are many preferences and choices, but always know the companies inside and out, don’t trust anyone in this matter.
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I prefer to choose a stock knowing everything about it rather than blindly investing in an ETF that is a large pool of 100 stocks that I can’t track individually. The lazy investing mentality doesn’t always work, I need to understand what I’m doing before I do anything. Ultimately, I want each of my dollars to grow in the right direction.
Advantages of investing in ETFs:
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ETFs are a large pool of stocks from different sectors. Thus, your mindset is more relaxed and you should be happy with the returns they produce through diversification.
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S&P 500 ETFs are the best on the market and are often considered the gold standard for returns. Examples – ZSP, VFV, etc.
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You need to consider management fees and MER rates before investing in an ETF, as they eat up your money over time.
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If your investing mindset is conversational, you can also consider bonds with ETFs. It’s much safer and healthier.
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ETFs trade like stocks on the open market and prices vary each trading day.
My personal take on why stocks are consistently better than the best of the best ETFs:
ETF prices may be lower today, as are yields.
Consider the example below of NVIDIA and AMD returns versus ZSP or VFV:
1. SPY is one of the best S&P 500 index funds on the market. When you compare market returns for something similar to Amazon, it’s nowhere near close. I prefer to invest in Amazon rather than SPY because I know it can perform better in the next 3-5-10 years. Not only Amazon, but you can also have similar comparisons with any of the blue chips, the results are quite similar.
2. The One ETF Battle (Best Canadian S&P 500 ETFs) – ZSP vs. VFV (BMO vs. Vanguard) – Last year’s returns are around 18%, which is great considering the pandemic. But again, they’re not as good as the American blue chips we’ve seen before.
3. ZSP Price Over the Past Year
4. Battle of the Blue Chips: NVIDIA vs. AMD: Again, look at the market returns for these two blue-chip stocks, which are over 150% in the last year alone.
6. Amazon vs Coca Cola – There is no real competition, again the numbers speak for themselves.
7. NVIDIA vs. VFV – Should We Even Talk?
From the case studies and graphs above, we can conclude a few points:
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Investing in Coca Cola simply as Warren Buffet said doesn’t really make sense, although in the long term the returns can be good and rewarding, I don’t think it can compete with the monopoly of stocks like Apple, FB, Microsoft or Tesla. Let’s leave that aside.
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Investing even a single $ should be a thoughtful process and not because a financial advisor told you to. You need to sit down, research and understand the business before you do it. Each company has an investor relations page with the most recent quarterly results and the analyst webinar. Also take help from YouTube, it has everything to help you get started and search for good blue chip stocks in the industries you love and prefer.
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Good businesses never fail, stock prices may be high, but it’s always worth it because they will only increase over time. So don’t wait and put your money in non-performing assets. Act intelligently and in a timely manner.
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If you can save $100 or $200 a month, invest it in growth stocks, the money will compound over time. Don’t go into FOMO and sell. Patience always pays.
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The US has better blue-chip growth companies than Canada and always looks for growth stocks over ETFs. It really pays off.
Conclusion
In this article, I didn’t want to cater to the mindset of all investors, but rather take my hard-learned approach: invest in blue-chip growth stocks and wait at least 3-5 years for them to grow. I will only consider increasing the portfolio if necessary.
Whether you like Apple, Microsoft, Google, Amazon or Tesla, it doesn’t really matter. Consistency and patience are always key.
If you can’t invest a lump sum today, you can always buy 1 apple stock every month, or 12 shares per year. By doing this, you will end up having a decent sized wallet.
Always prefer stocks to ETFs. Keep your portfolios simple and believe in the companies you invest in.
Thanks for reading! Let me know your thoughts.
