*This blog post is my personal opinion only and contains affiliate/referral links.
Individual vs Diversified.
Actively-managed vs Passively-managed.
Stocks vs ETF/Index Funds.
Your selection depends on your situation, really. You can be one or you can be both, actually. Let’s break it down further.
Owning a stock is watching it’s growth and misadventures. You look after it in some form because you want to know how it is performing according to your goal. Let’s say you buy an $AAL stock and your original goal is to hold it for capital appreciation and perhaps for dividend payouts too. As an active owner and also manager of this stock, you are responsible for determining whether it still align to your goal after the corona virus pandemic.
At the depth of it’s 52 week low, it’s share was $8.25. American Airlines is just one of the whole fleet of air travel stocks that were hit hard by the quarantine. Because it was not operational for weeks, it lose millions of revenue and a lot of investors bailed out, most notably Warren Buffet. No flow of profit eventually translates to a mounting debt and a future that is highly speculative for an investor.
Individual stock owner rides this game of buying, holding or selling and he/she does it alone on his discretion. Going back to the $AAL stock, three month forward the price is now $16.00, even reaching the $20.00 mark at one point. Clearly the price fluctuates, with news of bankruptcy driving it lower and news of more flight reopening pushing the price up. In the center of all this news is you, the stock owner, who have the final say if you still want to own it or not.
Index and ETFs are more passive than you think, and any beginner investor will tell you that this is where they started and still is a contributing investor. We can rephrase the first sentence of the first compound sentence and even say that an investor does little thinking on the management of Index or ETF stock portfolio.
For the sake of this argument, let’s say an ETF investor look up the holdings and find out it owns $LUV, another airline stocks that has it’s share of market volatility in the last three months. Do you think it will discourage him/her if this ETF also hold $JNJ, $CLX and other stable pandemic stocks?
Having a winner in the midst of one or two loser stocks is the appeal of a diversified ETF or Index fund portfolio. Major economic changes like the Covid-19 restrictions today or potential oil shortage and trade wars in the future will always affect one major sector in the stock market, but in the same context there will always be those winners that will pull up your investment.
It’s worth noting that an investor pay a management fee on an Index and ETF fund. Whether these active managers sell the $AAL and the $LUV on their holdings, you, the passive investor, can continue to dream of flying again as the economy recovers without worrying that your stress level will crash.
Thank you for reading.
Comments always welcome. Please let me know how you handle your investment during the Corona Virus market crash.