Stocks, ETFs Or A Mix Of Both?

As we focus on portfolio construction this month in The Juice, we’ll refer back to previous installments so that you can see the logical progression of building a long-term investing plan. 

In today’s Freshly Squeezed section, you’ll find yesterday’s installment where we discussed our rationale around starting with SPY and QQQ and only SPY and QQQ:

In practice, getting to the so-called exciting stuff — which is, let’s face it, individual stock picking — results in a non-strategy. People poke in the dark picking stocks based on little else than what others are doing and how their gut feels about it. Momentum trading doesn’t mean you buy a stock because you think it will keep going up or down. 

As we’ll discuss in a second, there’s nothing wrong with riding — for example, the Magnificent 7 higher — however that’s not really a strategy. It has been working incredibly well and probably will continue to work incredibly well, but there’s incredible risk inherent in concentrating your portfolio in a handful of hot stocks. No matter how hot they are. 

In fact, the more success you have, the riskier the “strategy” can become. 

If you started five years ago with $5,000 in Nvidia (NVDA), your stake is worth comfortably more than $100,000 today. 

Excellent work.

However, that position might make up an outsized portion of your portfolio. This is called concentration risk. One false move from NVDA and you stand to lose a lot of money. At least, on paper. And, maybe, forever. 

It’s easy to ignore this old adage when things are going remarkably well. It feels great to ride hot stocks higher. 

It’s sexy. 

However, if something goes wrong, things can get ugly fast. Sexy investing isn’t necessarily the best investing. 

Using a football analogy. The Juice has always wondered why NFL teams don’t run the option. You see it somewhat frequently in college football, but not in the pros. 

Sexy-looking offense. Very fun to watch. It’s exciting. 

But the reason why it’s rarely executed in the National Football League is because it exposes your quarterback. It increases the risk that your QB will get hurt. 

Similar situation with building a portfolio. 

If your largest assets take a hit, it can wreak havoc on the rest of your portfolio. In some cases, if you only own one or a handful of stocks, it can completely tank your portfolio. 

Diversification. It’s the goal as we methodically build out a long-term portfolio that blends ETFs, stocks and alternative investments. But it’s not just about asset type, it’s about allocation and — equally as important — strategy. Are you blending strategies designed to work together for growth, income generation, capital preservation and risk aversion?

Stock picking is like the option offense. It’s a process that makes you feel alive as an investor. When it works, like the option offense, you not only win, but you win in a way that makes people look twice. 

It’s so easy to fall for this feeling — or to chase this feeling — as an investor. But you have to resist the urge. Because it’s not a strategy. Start with the two-ETF strategy we outline at the link below. 

This doesn’t mean you don’t pick stocks. However, when you pick stocks, do it with the full realization that you’re never going to be able to create a basket of stocks that work as well as simply buying an ETF that gets at whatever area of the market — broad or specific — you want exposure to. 

So, you either stick with ETFs only or get somewhat strategic about picking stocks knowing full well you’ll never achieve diversification via the stock-picking route alone. 

If you decide to do some stock picking, The Juice thinks it makes sense for some investors to construct a portfolio of two sets of stocks: 

• Your favorites. The names you might own from the cradle to the grave. Companies you believe in over the long-term that you think will be perennial winners. If you have the disposable cash, dollar cost averaging into a few to a handful of your favorite individual stocks makes sense. 
• Dividend payers. Which might also double as your favorites. Tomorrow in The Juice, we will create a sample portfolio that blends favorites and dividend payers to illustrate one way it might look. 

Essentially, you’re picking your favorites from ETF holding lists that you find compelling for one reason or another. You know the company well. You use the product or service. You work in the space. Scouring ETF holding lists is a great way to create a watchlist you can filter down to a buy list. 

We’re not doing it today because, first, we wanted to (a) discuss the logic behind our approach and (b) stress the importance of ETF access to the broad market before you do anything else. Where this access makes up a significant chunk of your portfolio. 

The Bottom Line: You don’t even have to own individual stocks. You can diversify your portfolio after establishing yourself into SPY and QQQ with additional ETFs. We’ll show you how to do that shortly after we create tomorrow’s stock portfolio, which will blend growth stocks and dividend payers. 

One form of diversification, as we’ll see, can be buying and holding a mix of stocks and ETFs. And taking some profits in the process to start new positions or add to existing ones. The path you take ultimately depends on how involved you want to be in picking stocks and managing your portfolio.

• The Simple 2-ETF Strategy Every Investor Should Start With
• Diversify Your Portfolio: Beyond Stocks
• Will 2025 Be The Year Of ETFs And Alternative Investments?
• Check Out The Juice’s Favorite ETF Screen