The ETF Bias
There are tons of financial professionals and retail investors out there who drink the ETF kool-aid. Most parrot the same general rhetoric: "don't touch individual stocks, you'll get burned". Everyone knows that ETFs and mutual funds are a safe bet. Don't mess with individual stocks, DCA into index funds. We've all had this hammered into our heads countless times when we consider investing.
The ETF bias tries to convince you that individual stocks are too risky. A 3 fund approach is a common strategy. Ultimately, you want to hold a mix of large/small caps and domestic/international stocks. If you are approaching retirement increase how much is in bonds, money market funds or treasury bills. This target allocation can be achieved with both passive funds and individual stocks.
I propose that the financial industry has a bias against individual stock picking, perhaps because it is difficult to succeed. However, financial pros and bogleheads often write off stockpicking as being like going to the casino.
The truth is that it's easy to lose money by picking a bad stock at the wrong time. I've picked plenty of losers. But if you choose well, you can ride a stock's momentum for a long time, beat the market and make gains multiples higher than a passive approach. With stockpicking, you might need to be more dilligent in taking profits to reduce your downside risk. This active nature is not desirable to fund oriented investors. For those who don't mind the time to be hands on, this gives more granular control of your risk exposure.
Don't get me wrong, you should own the market. My 5th largest position currently is an S&P 500 index fund. I'm not suggesting we should abandon ETFs and mutual funds. Instead, keep your eyes open to stocks that are set for a 15-20 year run of an ongoing growth trend. Investing is not "all or nothing". You can take some small shots at a company that has the potential to give multi-bagger returns. Don't let the ETF bias convince you to buy the market and stay 100% passive. Find a Netflix before it disrupted the media game. Find an Apple when it drops a smartphone that changed the cell phone market forever. Get into Nintendo before its Switch 2 becomes the greatest selling console of all time. These types of moves plus some lucky timing can win.
I'm currently long at least 5 stocks that beat the market over the past 5 years. My bets on Cloudflare, Nvidia, Microsoft, Spotify and Tesla all beat the market in that time span. If I listened to the "play it safe" crowd, I would have missed out on these multi-bagger gains. Sure, Microsoft and Nvidia are two of the largest companies in the S&P 500 so I'm still somewhat correlated there with the S&P 500. I'm happy to have higher exposure to these incredible companies in the early innings of the AI trend.
Of course, for some investors they view researching companies and trying to assess their quality as unnecessary burden. I view it as an activity that I enjoy that makes me money when I excel. While I appreciate the "set it and forget it" nature of index funds and ETFs, I find the challenge of stockpicking to be like an enjoyable hobby. Personal finance truly is personal. You should discover where your risk tolerance falls on the spectrum. I might have survivor bias from some lucky picks, but I stand on my ETF thesis. Don't let the ETF bias convince you it's impossible to pick stocks and win.