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Proprietary Data Insights Top ETF Searches This Month
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Stocks Versus ETFs: Backtesting Two Killer Portfolios
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If you look through The Juice’s massive, but still growing archives of personal finance and investing thoughts and knowledge (see today’s Freshly Squeezed section), you’ll find quite a few installments that advocate ETF investing. We take deep dives inside all types of ETFs and find that, generally, it’s easier for most investors to construct diversified portfolios using a handful of ETFs rather than by purchasing individual stocks. Using ETFs can help you avoid putting all your eggs in one basket of just a few stocks. The broad exposure — within specific ETFs and across different types of ETFs — also helps hedge weakness in one area of the market with strength in another. With this in mind, it’s a good exercise to compare past performance between the individual stock and ETF approaches. Of course, past performance isn’t indicative of future results. Plus, when you look in the rear view mirror like this, it’s easy to think that you made a mistake if the path you took didn’t return as much as the comparison case. This isn’t necessarily the case. It’s easy to say you would have purchased this or that 5, 10, 15 or 20 years ago. It’s much harder to have actually done it and let whatever it is ride over this period of time. Still, there’s value in this type of exercise. It can help guide, though it probably shouldn’t dictate what you do going forward. So, we took the ETFs in today’s Trackstar top five and backtested their performance. We replaced the Vanguard S&P 500 ETF (VOO) with the popular Schwab US Dividend Equity ETF (SCHD) to not duplicate SPY and get a pure dividend fund into the mix. We allocated 20% of our capital evenly across:
We ran performance with a $10,000 total investment, starting on January 1, 2015. Almost ten years ago. We used portfoliovisualizer.com to get this done. Here is a summary of the results:
So, investing in these ETFs like this basically quadrupled our $10,000 investment. For our individual stock portfolio, we took two stocks from each ETF. While the selection wasn’t random, it wasn’t wholly scientific. We went with solid names from the top ten holdings in each ETF. We also attempted to move away from tech with our selections from IWM and SCHD given that one of the points of ETF investing is sector diversification. Of course, this creates a bias towards this approach because, as these firms have grown and their stock prices have gone up, they have become more important to each ETF. But this is okay, as we’ll explain when we conclude. We gave each stock a 10% concentration, which helps offset this bias at least a little.
Here is a summary of the results on this portfolio:
So, obviously, much better results. If you’re saying, well The Juice must be idiots for advocating ETF investing, we politely disagree. There’s something that irks us about large corners of the financial media. While they say that past performance isn’t indicative of future results and talk about diversification, they rarely get into the on-the-ground practical and psychological aspects of long-term investing. Or even short-term trading for that matter. It’s so easy to look at out-sized returns in AMZN and NVDA over the years and feel like an idiot for not buying these stocks ten years ago or as recently as earlier this year. It’s not so easy to have actually made these purchases and stuck with them or have made them in meaningful sizes. Do the people who look back and write about ten baggers and such ever bring up things like:
As humans, we do a lot of self-preservation. In the day to day and with larger actions and decisions in mind. Some people are more likely to take risks than others. Many people, including quite a few long-term investors, will trade the possibility of a higher reward amid high and often scary risk for good, but not as great reward amid lower risk. There’s nothing wrong with this. This is part of the reason why mutual funds and ETFs exist in the first place. It’s easy to look at the history of individual stocks and even the market in general and kick yourself with what ifs. It’s much harder to find a course of action you’re comfortable starting and sticking with over the long haul.
The Bottom Line: Finding the balance between risk and reward with an appropriate strategy for you is absolutely a bigger win than looking back on percentage gains and the eventual value of $10,000 you probably never would have invested that way to begin with. That being the way that produced a ten-bagger. Take your four-baggers with ETFs and your favorite individual stock picks and be super grateful. |
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