In the recent months I have begun moving more and more of my money to index funds/exchange traded funds. Below I list the 5 main reasons why I have chosen to do this.
1. Picking Stocks Takes Time
I love researching and picking my own stocks, especially when they turn out to be big winners. However, in order to pick the right stocks it takes time and patience.
When I pick stocks I am very meticulous in my research. I only pick stocks that appear to be a great companies at a good value.
Finding these stocks takes time.
In order to free up time for my other ventures, I have begun investing more and more into exchange traded funds, also known as ETF’s.
2. My Chances of Beating the Market are Slim
I know that the chance of me beating the market as a whole is slim. While I love researching and picking stocks, it is highly likely that my returns will be subpar, or right at the market at best.
Instead of hoping to match the market and maybe beat it, I have instead chosen to invest my money into the very funds I am trying to beat.
This goes hand in hand with #1 listed above. Why spend so much time matching the market when I can buy an ETF in the market?
3. Diversification is Simpler
Trying to diversify a portfolio with many stocks can prove to be a difficult challenge. This is another reason I have chosen to invest more in ETF’s.
Consider this: I have one Total Stock Market ETF and on Total Bond Market ETF. It is much easier for me to balance this portfolio than if I am juggling with 20 different stocks and bonds in my portfolio all at one time.
4. Keeping Track of Stocks Takes Time
I noted above that picking stocks takes time, but tracking your own stocks takes even more time.
In order to maintain your portfolio, you need to have some idea of how your stock positions are performing.
So you need to stay updated on the stock’s news and know when a good exit point for you will be.
I have lost out in some instances where I waited too long to sell a stock. As a result, I am still holding some stocks that have proven to be losers which brings me to #5.
5. It’s Hard to Cut Losses
With individual stocks it is hard to cut losses and move on. This is something that I have struggled with.
I currently own some stock in 3D Technology (DDD) which has dropped 39% since I bought in about a year ago.
What is holding me back?
If I had to guess, it would be the loss aversion theory in action. I wrote a post about loss aversion which you can check out here.
Do you pick your own stocks or do you opt to invest in an exchange traded fund instead? Why did you choose one over the other?