#invesing

If I had a dollar for every instagram post, Motley Fool article or personal finance “expert” who claimed to know which stocks to buy, what was hot and what you should get in on, I’d have enough money to give everyone reading this article enough money to retire right now. Picking individual stocks (if you intend to make money) is a very long arduous process. To be effective at it you need to understand the following about each stock you merely consider:

What type of business it is Profit to Earnings ratio (P/E) Earnings per share Past performance Current share price compared to past performance Past, current, and future plans for major dealings within the business A general understanding of the economy as a whole and how it relates to this stock Who is running the company and what does that mean for the future share price Staying up to date on daily news and trends …And ideally a lot more….

And even if you do that for every one of the thousands of publicly traded companies around the world you could still get it wrong and lose your money.

Let’s look at an example. Enron, the former energy giant:

This is a well-known case of a booming energy company where in the year 2000 brought in $101 billion in revenue! There were headlines everywhere telling investors to buy the stock. In March 2001 the stock was trading at $55/share. By October it was trading at $33/share and Wall Street was screaming “BUY”! On November 29th it was trading for a mere $0.36/share and Credit Suisse First Boston said to “hold”, it’ll go back up right?. But 3 days later the company filed for bankruptcy and that was it. All the money investors had in Enron was gone. It turns out for months they were fraudulently covering up their debts while publicly claiming their profits were great.

Don’t get me wrong, one of the fastest and most reliable ways to build insane amounts of wealth over time would be to put all your money in just a few companies that have huge potential. Just imagine if you put all your money into Apple in the 1980s, you’d be filthy stinking rich now, much richer if you had just put your money in an ETF, but we only know that now. If we put ourselves back in the 1980s it would have been almost impossible for you to have predicted how well Apple would have done. Steve Jobs was fired in the mid 80s and Apple had a very rough following decade. The company very well could have gone under meaning you would have lost all of your initial investment. Unless you are willing to risk losing all your money, I do not recommend this approach.

In fact, I made this mistake early on in my investing days. I was lured in by the headlines “Put $1000 in this stock to see your money increase 10x in the next decade”. “This is one stock I’m buying hand-over-fist this month”. “You’ll regret not buying this one energy stock now”. I get it, it’s sexy! Individual stocks have no management fees, and have the potential to earn you tons of cash. I mean, the next Tesla, or Apple, or Amazon is being publicly traded for dirt cheap right now. I just have no idea what the name of that company is, and looking for it is more likely going to be a waste of your time. But hey, if you want to spend hours, or even an entire career researching and picking the best stocks go right ahead, just know that it isn’t as easy as it sounds. There are tons of people already making a living doing that. They’re called Mutual Fund managers and how many of them consistently beat the market (the average return of the stock market)? It’s a ridiculously low number. Basically unless you’re ultra good at it like Warren Buffett or Ray Dalio, eventually you’re going to screw up.

But there is a solution! Honestly it is one of those things in life where it really is almost too-good-to-be-true. Enter the ETF.