Stocks Vs ETFs: How To Construct A Portfolio With Both

If you’re an investing nerd, you’ll love today’s installment. We enjoy messing around with different ideas. 

Today’s Juice kicks off the first in a series where we look at popular ETFs — the most searched in our proprietary sentiment indicator, Trackstar — and consider how to use them with other ETFs and individual stocks. 

Over the course of the series, we’ll construct and end up with a portfolio or two chock full of ETFs and stocks you can adapt to your specific situation. 

So, forward this email to a friend and tell them to sign up for The Juice. 

To kick things off and form a basis for our discussions, we run a few exercises, looking at ETF versus individual stock investments and the mixing of the two approaches. 

Today, we start with ETFs. In the next installment of this series, we’ll move to stocks. Then, we’ll combine the two types of investments. 

Let’s look at a few different scenarios. 

Invest $10,000 in the SPDR S&P 500 ETF (SPY) in December 2018

• Worth approximately $20,084 today 
• Percentage gain: 100.8%

Our estimates include dividend reinvestment. We used this handy calculator to make and double check our calculations. 

Invest $10,000 over five years ($166.67/month) in the SPDR S&P 500 ETF (SPY) starting in December 2018

• Worth approximately $13,587 today. 
• Percentage gain: 33.6%

So, obviously, a lump sum investment in SPY five years ago outperformed a dollar cost averaging approach over the same time period. If you eyeball the SPY chart, you see why. SPY has spent the last two-plus years in a $350 to $470 or so range, meaning you spent a lot of time buying relatively high. Whereas your initial investment in December 2018 was made at approximately $260 per share. 

Both: $10,000 initial investment, then $166.67 a month for five years starting in December 2018

• Worth approximately $33,336 today 
• Percentage gain: 66.7%

Fun exercise with SPY. Ultimately, it comes down to how much money you have to invest, when you have it and how you feel about allocating it. Plus, it’s always easier in hindsight. So you can’t rely on these exercises, but you can use them to help inform your decisions going forward.

You can also mess with different scenarios. 

Let’s say you weren’t jazzed about investing in SPY in December 2018. So you waited two years and threw $10,000 at the ETF in December 2020. Today, that $10,000 investment would be worth $12,930 for a percentage gain of 29.3%. 

So, keep this work we did with SPY in mind for what we have left in today’s Juice and our subsequent installments that evolve the matter and attempt to create the ideal stock and ETF portfolios. 

The experts at Charles Schwab caught our attention as we were researching this Juice series. They published a piece in September of this year, asking, Does Market Timing Work? 

Schwab looked at various S&P 500 investment approaches. Similar to what we did here. Here’s what each of Schwab’s five hypothetical investors did: 

• Perfect market timing. $2,000 invested per year (2003 to 2022) at each year’s lowest point for the S&P 500. 
• No market timing. $2,000 invested on the first trading day of each year. 
• Dollar cost averaging. Dividing the $2,000 up into monthly investments each year for the 20 years. 
• Bad market timing. $2,000 invested per year at each year’s highest point for the S&P 500. 
• No investing. All cash. 

After running the numbers, Schwab logically concluded that the best-performing approach (perfectly timing the market) wasn’t the best approach, because it’s literally freaking impossible to time the market much at all, let alone perfectly. 

Instead, investing immediately — the second point — was the best strategy. It turned $2,000 a year ($40,000) into $127,506 over 20 years, only $10,537 less than the impossible market timing approach. Dollar cost averaging approach came in third, with an ending balance of $124,248 at the end of 20 years.  

The Bottom Line: Our look back was only over a five-year time period. So it was more prone to the ups and downs that didn’t have time to straight line or smooth out. However, it produced similar results. 

Invest the money when you have it. Otherwise, you risk driving yourself crazy or, worse, never investing. If you have $50, start with it today. If you have $10,000, start with it today. Then, the question is ETFs only, stocks only or a mix of both. That’s what we consider with in-depth nuance in the subsequent parts of this series.

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