“Should I buy a stock or an Exchange-Traded Fund (ETF)?”
This is a question many beginner investors ponder over before making their first investment.
Both build long-term wealth, but work very differently.
Some prefer the simplicity of ETFs, while others relish the control in owning individual companies.
What Is a Stock?
Owning a stock is likened to owning a small part of a listed company.
As an investor, your returns can come from capital appreciation and dividends.
You probably recognise stocks like DBS Group Holdings (SGX: D05), Southeast Asia’s largest bank, and Singtel (SGX: Z74), Singapore’s largest telco.
What Is an ETF?
An ETF holds a plethora of assets in one fund, allowing investors to gain exposure to many companies instantly.
Straits Times Index (STI) ETFs like SPDR Straits Times Index ETF (SGX: ES3) track the performance of the STI, while S&P 500 ETFs like SPDR S&P 500 ETF Trust (ARCA: SPY) track those of 500 of the largest US companies.
Global diversified ETFs like Vanguard Total World Stock ETF (NYSEARCA: VT), with nearly 10,000 holdings in the fund, track the FTSE Global All Cap Index.
The Key Difference: Concentration vs Diversification
Here’s a table to illustrate the key differences between owning stocks and ETFs.
| Stocks | ETFs | |
| Concentration | Individual businesses | Many different companies |
| Returns | Potentially higher returns | Average returns across multiple holdings |
| Risks level | Higher as it relies on one company | Lower as risk is spread across businesses |
| Diversification | Low, only one company involved | High, from tens to thousands of companies in one fund |
Why Beginners Often Start With ETFs
- Simplicity: Novice investors don’t need to deep dive into individual companies when they buy an ETF since it features a basket of assets determined by the fund managers.
- Diversification: Investors gain exposure to hundreds of stocks and commodities in a single trade. This reduces reliance on any single company and the impact of one bad investment decision.
- Lower Emotional Stress: As ETFs tend to be less volatile than individual speculative stocks, investors will feel less stressed when making buy or sell decisions.
Why Some Investors Prefer Individual Stocks
- Potential for Higher Returns: Individual stocks offer higher returns potential if investors identify strong businesses with competitive advantages that can outperform the market.
- More Control: Investors choose exactly what they own, and how much they own.
- Dividend Opportunities: Investors can intentionally curate a portfolio of specific dividend-paying companies tailored to their exact cash-flow needs. These may include reliable payers like OCBC (SGX: O39), Sheng Siong (SGX: OV8), and CapitaLand Integrated Commercial Trust (SGX: C38U) for a stable recurring income stream.
The Risks Beginners Should Understand
Stock Investing Risks
In the case of individual stocks, the profits that you make are dependent on the performance of the companies in which you invest.
However, even an established company may end up facing reduced revenue and recessions.
Some investors may react emotionally when there is an adverse situation and panic-sell their securities, or go overboard during good times in the stock market.
These reactions can lead to buying high and selling low, locking in permanent losses.
Moreover, some people believe that they can accurately pick winners or predict stock trends.
While some selections may outperform, speculation increases risk and often results in poor outcomes.
ETF Investing Risks
Although ETFs provide diversification, they are not immune to market declines.
Broad-market ETFs typically fall when the overall stock market experiences a downturn.
Investors sometimes purchase multiple ETFs believing they are increasing diversification, but many funds hold similar underlying stocks.
Additionally, not all ETFs are broadly diversified.
Thematic ETFs that focus on specific industries or investment trends may hold a relatively narrow group of companies.
As a result, these funds can experience significant volatility and may underperform if the targeted theme falls out of favour or during industry-specific headwinds.
Which Approach Builds Wealth Faster?
Neither stocks nor ETFs are guaranteed to build wealth fast.
The final results depend on your ability to select investments and manage risks. It is also essential to stay invested throughout market cycles.
While a stock might generate potential higher returns, consistently choosing winners is impossible.
Many investors also underperform due to overtrading and reacting emotionally to downturns and trends.
While ETFs may not deliver gains as spectacularly as a top-performing stock, they often produce stronger long-term results as broad diversification reduces company-specific risk.
Why Many Investors Combine Both
Core-and-Satellite Strategy
The core-and-satellite strategy combines ETFs’ stability with individual stocks’ growth potential.
With this approach, your core investment is anchored in broadly diversified ETFs for stability.
A smaller portion is allocated to carefully selected individual stocks to target higher return potential.
This balanced approach allows investors to benefit from diversification and consistency while still pursuing higher returns through selective stock investments.
For example, a conservative, income-focused portfolio that aims for stable dividends and lower volatility can look like this:
Core (80%):
- 50% – SPDR Straits Times Index ETF
- 30% – ABF Singapore Bond Index Fund (SGX: A35)
Satellites (20%):
- 10% – DBS Group Holdings (SGX: D05)
- 5% – Singapore Technologies Engineering (SGX: S63)
- 5% – CapitaLand Integrated Commercial Trust (SGX: C38U)
Common Beginner Mistakes
Many investing mistakes begin with inadequate research.
Novice investors often buy stocks without understanding how the business makes money, its competitive advantages, or its risks, leading to poor choices.
Chasing speculative stocks may seem attractive to rookie investors when prices are rising rapidly.
However, these investments often carry significant risk and can experience sharp declines.
Another common mistake is focusing on frequent trading rather than long-term compounding.
Overtrading can increase transaction costs, trigger emotional decisions, and cause investors to miss the benefits of staying invested through market cycles.
ETF investors can also make mistakes by purchasing too many funds with similar holdings.
Remember, a simpler, well-structured portfolio is often more effective than a complex collection of overlapping investments.
Get Smart: ETFs With Stocks = Best Of Both Worlds
ETFs and stocks are not competitors in your pursuit of long-term wealth.
They are tools that serve different purposes; ETFs offer simplicity and diversification, while stocks offer targeted ownership and potentially higher upside.
The smartest investors don’t just choose the “perfect” investment; they start early and stay invested through market cycles.
If you’re nervous, confused, or worried about buying your first stock, then our latest beginner’s guide to investing can help. It’s easy to read yet packed with valuable insights. Download it for free today, and buy your first stock in the next few hours. Click here to get started.
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Disclosure: Wenting A. does not own any of the stocks mentioned.
