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There are an ever increasing number of ETFs available to investors. There is also the “tokenization” of stocks, but that is for another post.
Jason Zweig addresses the proliferation of ETFs over at the Wall Street Journal:
“deworsification: cluttering a portfolio with too many investments.
I think many investors should worry instead about deversification…..That’s the opposite of diversification. Rather than spreading your bets, you concentrate them—and that can be dangerous.”
Over at another forum there has been a running debate about how many stocks to own to achieve diversification. I’m of the opinion that owning a basket of 100 growth stocks isn’t that.
Zweig goes on “The fewer stocks you hold, and the farther away from the overall market you move, the more extreme your returns are likely to become. Your potential gains are greater, but so are your losses……If you must speculate, bear a few things in mind. First, amplifying the risk of single stocks can make you a ton of money when the market is going up. It will wipe you out when the market goes down.
Limit your bets to a maximum of, say, 5% of your total assets. That way, you’ll make a lot if you bet right but can’t wreck your financial future if you turn out to be wrong. ” [That’s what some call a sandbox for experimenting in the market]. The more recently an ETF launched, the fewer stocks it tends to own. “A lot of newer investments are taking on more risk than investors may realize,” – Daniel Sotiroff, a senior analyst at Morningstar.”
When growth faltered a lot of people who had loaded up on a few individual stocks got burned. I’m not much of a stock picker, although I do own individual stocks, focus ETFs and funds. I do think there is a place for specialized ETFs and I do own a few. But as Mr. Zweig points out, you may get more (or less) than you bargained for. Some of these spin off higher dividends or emphasize sectors (the Energy Select SPDR XLE, for example).
My portfolio “ballast” is a number of ETFs/Funds which are large in scope and contain several hundred stocks. My experience has been as Zweig cautions. “Single stocks can make you a ton of money when the market is going up…”
I have sold portions or Dollar Cost Averaged out of individual stocks when they skyrocketed and I locked in impressive gains. It is to be noted I missed the top and that was expected. My ETFs are the foundation for my portfolio. I think a hybrid portfolio of individual stocks and ETFs can achieve better returns than the S&P 500. That’s been my long-term experience. Some of this can be attributed to differences in valuations. My portfolio is about 28% growth while the S&P500 is about 22%. There are other differences, too and for example, I avoid what some call the “sin stocks” which are more heavily a component of the S&P 500.
I’d suggest that there are benefits to tailoring a portfolio but as Mr. Zweig points out there are also potential risks.
Complexity is obviously the antithesis of simplicity. Most people, including a lot of HD readers, have neither the time, or knowledge to follow the strategies you offer. Nor, did you provide any numbers to suggest that someone following your investment prescription had actually surpassed market average returns over any specific periods of time. And, of course, past results are no guarantee of future returns.
There is signifant documentation that individual stocks can do better than an ETF. However they can and do falter at times. The easiest way to take on more risk is to hold 100% stock ETFs and eschew bonds, or take on a 80/20 portfolio. I do know the CAGR for my portfolio since 1995. It was never more aggressive than a 70/30 portfolio, but it did better than the S&P 500. Money chip indicate the S&p Cagr for that period was 10.94%. I did better. However, every hybrid portfolio is different. I accepted the risk inherent in mine.
“There is signifant documentation that individual stocks can do better than an ETF.”
You need to provide some links. Also, “an ETF”? Which ETF? Which stocks? How about a total market mutual fund? Over how long a period?
Visualcapitalist has a chart “the drawdown of the best performing stocks” 1985-2024. It has the top performing stocks for that period and a S&P comparison. The max drawdown of the S&P was -58% with 4.2 years to recover. The annualized return was 11.8%, but each of the stocks on the list did better. Of course, other stocks did worse. In general an S&P ETF will do better than a mutual fund simply because the ETF has lower fees. I can run my CAGR for any period of my portfolio since 1995 to present. That’s a period of 30 years. The performance for the past 20 years also was significantly better than the S&P, even with the drag of up to 30% bonds/cash. I’m not sayng what my current allocation is. Everyone says that is past performance. If you believe as some do that we are on the cusp of another “lost decade’ or worse, then it is expected that future returns will be less than the recent past. I have my own opinion and am invested accordingly. Even Zweig over at the WSJ points this out. A lot of people have done very well in recent years owning “magnificent seven” stocks etc. But be fully aware of the risks and wi