"Young investors should be 100% stocks"
I often hear advice that young investors should go "all in" on individual stocks because they have a longer time horizon. While the logic holds on paper, it often falls apart in practice. I want to walk through why I adamantly believe you should have at least one ETF making up a good chunk of your portfolio if you really want to hold individual stocks.
First off, stocks are super risky and volatile and not everyone has the stomach for it. You might think you do but do you really? Will you not panic when your stock or portfolio drops 20%? 30%? 50%? Not to mention, continuing to invest as it keeps falling? If we go off majority of retail investors it seems panic selling or being kept up at night is the name of the game. Buy high sell low as they say. You might think you would be able to weather the storm (and maybe you can cause you're a boss) but until you actually experienced that situation for yourself you won't know for sure. Many investors today haven't lived through a structural bear market. When you've only seen "buy the dip" rallies, the prospect of five to ten years of stagnant or negative returns is a psychological shock most haven't prepared for.
Let's say you do have the willpower to hold on, what are the chances you actually pick consistent winners that outperform the market in the long term? Over the last five years, only about 50% of S&P 500 stocks outperformed the index in any given year, which essentially becomes a coin flip if you made the right choice or not. Even so, the vast majority of these were not the same companies year after year so even if your choices outperformed one year they could easily underperform the next year. Only a very select group of companies consistently beat the broader S&P 500 every single year for the past five years so your chances of outperforming consistently go down to 30%. Looking beyond just the last half-decade, since 1990, an average of about 239 stocks beat the market in any typical year, so 1/3 chance you will outperform over longer periods.
With those low odds, you are risking your hard earned money in a few picks hoping they continue to grow and remain dominant in their field. But history shows us most companies don't remain dominant for decades. If you were an investor in 1950s, you would have noticed that railroads, utilities, and heavy industry were the dominant industries so you would obviously invested in companies like U.S. Steel and Standard Oil. Now 1960s roll around and companies like AT&T, Kodak, and General Motors are ruling in the nifty fifty era. 1980s come and now it's all about early tech that rolls into the tech boom of the 1990s and we all know how that ended.
The beauty of ETFs is they are the most consistent, reliable, long term wealth building tool for everyone. The S&P 500 has a historical annualized average return of about 10% to 10.5% over the long term. There has never been a 20 year period in history when you would be in the red, which means even if there is a bear market, in a span of 20 years you are 100% guaranteed to make money. That's why I like S&P 500 to be my core holding. If oil is leading and tech is stagnating, your ETF readjusts and you are growing. If balance shifts and it's now tech that is dominating, then ETF shifts and you are continuing to grow without needing to lift a finger.
To be clear: I’m not saying you shouldn’t pick individual stocks (otherwise I would be a hypocrite). If you enjoy the research, do it. But don’t confuse stock picking with a retirement strategy. By using an ETF as your core, the foundation of your portfolio, you buy yourself insurance against the inevitable shifts in market leadership and your own emotional reactions to volatility. You can afford to be risk-on with your satellite holdings, but keep your core reliable, otherwise you are essentially gambling your whole life savings on a few companies. Remember, the goal of investing isn’t just to beat the market for one year but to still be in the game twenty years from now.
What do you think? Are ETFs an essential part of any portfolio or pure stocks can work?
