Owning Stocks

Which method is best for you?

Once you have addressed the big picture of asset class diversity between stocks, bonds, real estate, commodities, cash and other savings and investments, then you need to drill down and determine how to own each one.

For stocks, there are three main avenues of ownership:

·         Direct-owned, individual stocks

·         Mutual Funds

·         Exchange Traded Funds (ETFs)

Individual Stocks

Long before funds (a collection of stocks) came around, individual stocks were the only way to go from the late 1700’s until present.  They are still the way to go if you:

·         Are willing to invest at least an hour per stock per month

·         Are comfortable with some greater risk to pursue greater reward

·         Clearly understand if you want to trade (daily, weekly) or buy and hold (Buffett)

Mutual Funds

Mutual Funds arrived as an alternative to individual stocks almost a hundred years ago.  These funds are actively, professionally managed with the idea that the management will give better returns than the generic market.  They are the way to go if you:

·         Want to invest little or no time

·         Prefer the relative safety of multiple stocks in a collection representing a market sector (utilities, tech, bonds), the whole stock market (TSX, S&P500), a whole economy or global region (Europe, Asia)

·         Are comfortable paying additional fees for the active management

ETFs

ETFs arrived about 35 years ago as a new iterative variation on mutual funds.  They trade and are taxed a little differently and are likely to be passively managed though some are actively managed.  They are the way to go if you:

·         Like the benefits of funds vs stocks

·         Prefer an option for lower management cost

·         Looking for a market method to hold commodities like gold or copper

Funds - Active vs Passive Management

If you prefer the active management approach, consider rereading The 1% Rule blog from a couple months back.

SPIVA (S&P Index vs Active) Research (1) reports that 80% to 90% of active managed funds over time have underperformed passive index type funds.  Yes, you read that right!

Always remember you pay fees for active management.  You should be confident you are receiving value from those fees or be reducing them.

What are we doing?

Our big picture diversification includes 20% in stocks.  This is in sector-specific individual stocks where we invest 1 hr/stock/month of my time plus 0.5% on expert advice.  We sold our mutual funds years ago.  We own a few ETFs to hold commodities.

Be Prepared.  Invest the time needed to make good decisions.  Do your own research and discuss it with your advisor.   It must be right for you.

1.      https://www.spglobal.com/spdji/en/spiva/article/spiva-canada