I’m thinking of investing in S&P500 ETF but a thought just came across my mind. How would my investments fare if I were to handpick and invest in the top few companies of S&P500 instead of investing in a S&P500 ETF? Which case would be better?
Also, other than S&P500 ETF, I’m also thinking of stock picking a few companies. Would it be advisable to further invest in a few of the top companies that are found in S&P500? Or what companies do y’all invest in?
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thefrugalstudent
21 Jun 2021
Founder at thefrugalstudent.com
Hi Jim,
As Frankie mentioned, this exposes you to more risk simply because your investments are concentrated within a few companies only. Index ETFs are considerably safe equity investments because they return you the average performance of the top companies, and are self-cleansing in nature - companies that don't meet the index's standard will fall out of the index and be replaced by a better one, so you don't have to worry about whether each company in the index performs well or not.
Also, picking the top few companies won't necessarily result in better or even similar performance. This is because past performance is not an indicator of future performance, and the current top companies may not be the top companies in the coming decade. If so, then you would potentially lose out on a huge amount of returns.
I think it's perfectly fine to dabble in stock picking, regardless of whether these stocks are in the S&P 500 or not - if they are, then you're increasing your exposure to them. If they're not, you're simply adding them to your portfolio. As long as you do your due diligence and you are aware of the risks and implications on your portfolio, then all is well :)
Hope this helps!
Regards,
thefrugalstudent
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This stock picking from the index would increase your risk significantly. the intention would be to ...
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Comparing the chart of appl vs SPY. There is a great upside potential of holding individual stocks. But you can observe there is also come with higher volitality. It is to note if you are holding long term, the companies should stay relevant as time pass, i.e. The top holdings of an ETF may change over time. In the 1980s, the top holdings are IBM, XOM etc... they cant withstand the test of time. You have to monitor, meaning u cant passively invest, neither do you need to be actively manage, as the ETF holding seldom change.