A variety of strategies are utilized by numerous investors in their portfolios. One frequently used combination? ETFs and individual stocks. However, the primary concern is: how do you evaluate your portfolio that incorporates both? Does it make things easier or complicate them even more?
We explore the benefits of each strategy, how to properly assess and balance your holdings, and how to prevent your portfolio from becoming a confusing jumble. Whether you prefer solely ETFs, individual stocks, or a combination of both—this will assist you in clarifying and enhancing your investment strategy.
You’ll Discover
What Distinguishes ETFs and Stocks?
Mike and Vero begin by discussing the distinctions between individual stocks and ETFs, along with reasons some investors favor their combination.
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Stocks offer complete control, flexibility, and transparency. You know exactly what assets you possess and the reasons behind it.
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ETFs provide ease, extensive diversification, and professional oversight at lower costs.
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Though both possess unique strengths, your level of engagement and conviction varies depending on your selection.
The Dividend Triangle Compared to ETF Metrics
The dividend triangle serves as DSR’s primary method for stock evaluation, but it is not applicable to ETFs.
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For stocks, Mike employs the triangle: revenue, earnings per share, and dividend growth. This assesses the robustness of the business and identifies potential concerns.
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ETFs require a different evaluative approach—consider the clarity of the strategy, primary holdings, sector and geographic distributions, fees, and overall fund size.
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Always review the ETF’s fact sheet and website to fully understand your investment.
Developing a Thesis for ETFs and Stocks
Mike explains the process of constructing a solid investment thesis—and why it matters for both asset types.
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For stocks: your thesis ought to encompass a clear narrative, a straightforward business model, growth avenues, and a competitive advantage.
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For ETFs: the thesis focuses on the fund’s strategy, exposure (sector, theme, or geography), and how it aligns with your objectives.
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If you cannot clearly articulate what your ETF does, it is likely too convoluted for your portfolio.
Recognizing Risks in Each Strategy
Risks associated with stocks and ETFs are different—grasping both is crucial for informed decision-making.
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With stocks, risks pertain to company-specific difficulties, such as poor earnings, excessive debt, or market upheavals.
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ETFs come with their own challenges: strategy misalignment, undisclosed fees, low liquidity, and overconcentration in top holdings (e.g., the “Magnificent 7” in S&P 500 ETFs).
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Do not solely rely on past performance when selecting ETFs—comprehend the specifics.
Portfolio Evaluations Differ as Well
You cannot assess both asset classes using the same method. Mike shares tips on how to keep your focus sharp.
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For ETFs: a succinct quarterly review is sufficient—verify if the strategy, fees, and exposure still match your objectives.
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For stocks: apply the dividend triangle for trend analysis and perform thorough quarterly evaluations.
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Regardless of your combination, schedule an annual portfolio cleanup reminder.
Integrating ETFs and Stocks Effectively
Combining them can be beneficial…but only if done purposefully.
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Some investors build a “core and satellite” strategy: utilizing ETFs as the foundation, with stocks bolstering extra returns or personal values.
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Others apply ETFs for particular sectors or international markets while overseeing selected stocks domestically.
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Avoid unnecessary duplication (e.g., investing in Canadian dividend ETFs while also owning the identical banks and pipelines).
Simplicity and Consistency Prevail
It’s not about validating a strategy; it’s about adhering to what suits you best.
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Numerous DIY investors underachieve by constantly modifying their strategies.