We hear this question often and the best answer is it depends. Here at Seabird Stocks, we use both. About 75% of our portfolio sits in our active investing fund which allows for us to pick our own stocks depending on our due diligence for each stock. The remaining 25% of our funds are put into no fee Exchange Traded Funds (ETFs). Utilizing both investment vehicles allows for greater diversification and less stress during tough economic times.
As retail investors, picking stocks is in our blood. We choose individual stocks that we believe will beat the overall market’s growth. There is no denying that finding the right stocks to buy at the right time takes a lot of time and patience. With practice, we can improve our investing style to buy and sell stocks where we can make a profit. However, risk is also involved. If we invest in a stock that goes through a rough patch and our stop limit kicks in, we can easily lose money.
Investing in ETFs as well as picking stocks can help reduce loss of capital in the case that a few of your selected stocks do not follow your predictions. ETF’s can be your stabilizer as the NASDAQ and Russell 2000 aren’t as volatile as individual stocks and will allow you to diversify your holdings. This means that even on a down day with your stock picks, you can see profits from your ETFs. Think of it as peace of mind and gives your money a way to grow without you having to manage all aspects of where it gets invested. Most ETFs nowadays do not carry a fee which should help convince you to place a part of your portfolio in them.
All retail investors have made bad calls and mistakes. I would even go so far to say that all investing experts and professionals have made bad calls from time to time. Learning from these mistakes and discovering how to invest better is how retail investors can grow and earn money.
One mistake I have personally made is investing in Neovasc Inc. (NVCN), a specialty medical device company that develops, manufactures, and markets medical devices. In 2016 Neovasc was a promising company that had intellectual property that could make it a leader in the treatment of mitral valve disease which is a multibillion-dollar business. If they could bring their product to market the stock would shoot up and lead to massive stock price gains. Unfortunately, the medical device industry is ruthless and NVCN lost a major legal case resulting in hefty fines and forced profit sharing. The result, the stock lost 90% of its share price in two months. This led to my largest loss ever. While it was costly, the lessons this loss taught me were worth it.
The first lesson is taking risks and making a bet on a company’s chances of succussing are sometimes worth it and if the risk is high, never place a substantial part of your portfolio into these stocks. This will reduce your downsides and ensure you have the capital to live another day. Another lesson is that when news is released that is bad enough to take down the company you invested in, make sure to cut your losses early rather than doubling down. Finally, this mistake taught me to focus on companies with profits as they can better weather negative news and will not need to dilute the stock price and split their stock.