Investing in ETFs, Index Funds

Why I DON'T do it

Anshil Bhansali, Jul 25, 2020

A lot of friends have told me to invest in ETFs as it is a low risk method to capture an entire industry. Now, that completely makes sense, and there was a point where I had money invested in ETFs, but after a couple of months, I decided against it, and I'll tell you why.

An ETF (Exchange Traded Fund) is essentially a collection of companies in a certain industry, and investing in an ETF is investing in that collection. This collection can be 100s of companies. There is a certain philosophy in the equity market where the broader(or more diverse) the portfolio, the lower the risk, but also, lower the returns.

If you cover every single company in the S&P 500, your returns will match that of the S&P 500, or what I call, market returns. Through my experience , I have developed confidence to beat the market. It is because of this confidence, I stay away from ETFs, and in general I try not to have too many companies in my portfolio. Over time, my portfolios have actually been getting smaller and smaller.

I chose to handpick and invest in maybe 4-5 companies at a time, but when I'm really confident about a certain bet, I narrow it down even further. There was a point, where I had about half my money in a single stock, Roku, at an average cost of $105 per share, because I was so confident that it was undervalued, and bound to rise back up. And it did. I took my profits once it rose to $150 per share.

I like to hand pick companies, invest in them, take profit, and then reinvest elsewhere, this is how I compound my invesments. This is delivered me better returns than ETFs. It is high-risk method, but I have confidence in the companies I pick, and I always make sure my stocks to cash ratio is good enough where I still have enough cash sitting on the sidelines.

To sum up, if you are really confident in the companies you hand pick, just put money in them and be patient. The key is to manage your cash flow well, so that even if the stock keeps falling, you will keep buying. And if you picked the right company, it will definitely bounce back up. If you are passively investing, and are comfortable with market level returns, go for ETFs or just invest in the S&P 500 ETF. No shame in that.