Picture this scenario: you walk into a restaurant and face two options. You could order individual dishes — maybe the salmon, some roasted vegetables, and a side of rice. Alternatively, you could order the chef’s tasting menu, which offers small portions of twelve different dishes. Both approaches can be delicious, but they offer entirely different experiences.
That’s essentially the choice between buying individual stocks and buying ETFs (Exchange-Traded Funds). One lets you pick exactly what you want, while the other gives you a curated selection of many different things. Let’s dig into which approach might work better for you.
What Exactly Is an ETF?
An ETF is like a basket that holds dozens, hundreds, or even thousands of different stocks. When you buy one share of an ETF, you’re essentially buying a tiny slice of every company in that basket. It’s as if you could buy a single share that gives you ownership in Apple, Microsoft, Google, Amazon, and 496 other companies all at once.
The most popular ETF, called SPY (which tracks the S&P 500), contains pieces of the 500 largest U.S. companies. By buying one share of SPY, you instantly own a microscopic piece of each of those 500 companies. Pretty neat, right?
Individual stocks, on the other hand, are precisely what they sound like – you’re buying shares of one specific company. When you buy Apple stock, you own Apple stock. That’s it.
The Case for ETFs: Simplicity and Safety
Instant Diversification: This is the most significant advantage of ETFs. Remember the old saying about not putting all your eggs in one basket? ETFs are like having hundreds of small baskets. If one company in the ETF has a terrible day, it’s cushioned by all the other companies that might be doing fine.
Let’s say you put $1,000 into a broad market ETF. If one company completely fails and goes to zero, you might lose $2 of your $1,000 investment if you had put that same $1,000 into just that one failing company’s stock, you’d lose everything.
Less Research Required: When investing in individual stocks, it’s essential to understand the companies you’re buying. What do they do? How do they make money? Are they profitable? Who are their competitors? With a broad market ETF, you’re essentially saying “I believe the overall economy and stock market will grow over time,” which requires much less company-specific research.
Built-in Professional Management: Most ETFs are designed to track an index (like the S&P 500), which means the ETF automatically adjusts as companies get added to or removed from that index. You don’t have to worry about rebalancing or keeping up with changes.
Lower Emotional Stress: When you own individual stocks, seeing one of your companies drop 20% in a day can be nerve-wracking. With an ETF containing hundreds of stocks, daily movements tend to be smaller and less dramatic.
The Case for Individual Stocks: Potential and Control
Higher Return: Potential Here’s where individual stocks can shine. If you buy an ETF, your returns will roughly match the overall market. But if you buy individual stocks and happen to pick some winners, you could do much better than the market average.
Amazon stock has returned over 2,000% since 2009. No ETF has come close to those returns because even the best ETFs are weighed down by their weaker holdings.
You Know What You Own: When you buy Disney stock, you know exactly what you’re investing in – theme parks, movies, streaming services, and Mickey Mouse. With an ETF, you might not even know all the companies you own, let alone what they do.
More Engaging and Educational: Following individual companies can be more interesting than watching an ETF. You’ll learn about different industries, business models, and economic trends. This education can make you a better investor over time.
No “Weak Link” Problem: ETFs include both great companies and mediocre ones. When you pick individual stocks, you can avoid the companies you don’t believe in and focus only on the ones you think have the best prospects.
The Practical Differences
Cost Most broad market ETFs have very low fees – often 0.03% to 0.20% per year. Individual stocks don’t have ongoing fees, but you might pay a small commission when you buy and sell (though many brokers now offer commission-free stock trades).
Time Commitment: ETFs are essentially “set it and forget it.” Individual stocks require ongoing attention – reading earnings reports, following company news, and deciding when to buy more or sell.
Minimum Investment: Many ETFs cost less than $100 per share, giving you instant diversification. To build a diversified portfolio of individual stocks, you’d ideally want to own 15-30 different companies, which requires much more money to do properly.
Tax Efficiency ETFs are generally more tax-efficient than buying and selling individual stocks, especially in taxable accounts. The ETF structure allows them to minimize taxable distributions.
Which Approach Is Right for You?
Start with ETFs if:
- You’re new to investing
- You have limited time to research companies
- You want simplicity and broad market exposure
- You’re investing in a retirement account and want to set it and forget it
- You have a smaller amount to invest (under $10,000)
Consider individual stocks if:
- You enjoy researching companies and following business news
- You have strong convictions about specific companies or industries
- You’re willing to accept higher risk for potentially higher returns
- You have enough money to build a properly diversified portfolio (15+ different stocks)
- You want to learn more about investing and business
The Hybrid Approach (And Why It Makes Sense)
Here’s what many successful investors actually do: they use both. A common strategy is to put 80-90% of your money in low-cost, broad market ETFs for steady, diversified growth. Then use the remaining 10-20% to buy individual stocks of companies you’re excited about.
This approach gives you the stability and diversification of ETFs while still allowing you to participate in the potential upside of individual stock picks. It’s like having a solid foundation with some room for creativity on top.
Common Mistakes to Avoid
With ETFs:
- Don’t assume all ETFs are the same – some focus on specific sectors, countries, or investment styles
- Avoid complex ETFs with high fees when simple, broad market ETFs work just fine
- Don’t try to time the market by jumping between different ETFs
With Individual Stocks:
- Don’t put too much money in one or two companies, no matter how much you love them
- Don’t buy stocks just because they’re cheap – sometimes cheap stocks are cheap for good reasons
- Don’t panic sell when your stocks go down, unless the underlying business has fundamentally changed
Getting Started: A Practical Plan
If you’re just starting out, consider this progression:
- Start with a broad market ETF like VTI (Total Stock Market) or SPY (S&P 500) to get comfortable with investing
- Add some international exposure with an international ETF like VTIAX
- Once you have a solid ETF foundation, start researching individual companies you’re interested in
- Gradually add individual stocks, but keep them as a smaller portion of your overall portfolio
The Bottom Line
There’s no universally “right” answer to the ETFs vs stocks question. ETFs offer simplicity, diversification, and steady market returns with minimal effort. Individual stocks offer the potential for higher returns and greater engagement, but they also require more time, research, and risk tolerance.
The good news? You don’t have to choose just one approach. Many successful investors use both ETFs as their foundation and individual stocks for their satellite holdings. The most important thing is to start investing consistently, whether that’s through ETFs, individual stocks, or a combination of both.
Remember, the best investment strategy is the one you’ll actually stick with over the long term. If picking individual stocks feels overwhelming, start with ETFs. If broad market investing feels boring, add some individual stocks to keep yourself engaged. The key is finding an approach that matches your personality, time availability, and financial goals.
Your portfolio doesn’t have to be perfect – it just has to be consistent and diversified enough to grow your wealth over time.
Featured Image Credit: Photo by Kampus Production; Pexels
