— by Mitchell Clark, B. Comm.
So, if the good stocks have already gone up in price, then where do you put new dollars to work? The answer is in the index.
Again, from my perspective, most of the great public companies with growing businesses have already experienced dramatic price movements on the stock market. With the big gains already done, then what’s left represents speculating with much higher investment risk. This is broad market risk and individual security risk.
So, if you think the market is going to keep ticking higher, then an exchange traded fund (ETF) representing the broader market is a good fit.
Then, when we get into earnings season and a decent story comes across your desk, you can selectively consider individual stocks. Even as far back as March, the best trade going wasn’t a Chinese stock or a bank stock, it was the market itself.
Over the years, I’ve learned that the simplest investment strategy usually works out to be the best over time. From a portfolio management perspective, a simple basket of just a few select investments is easy to manage and has proven over time to be just as rewarding. The fact is that the stock market moves in waves and it also moves in groups. With ETFs, you can very easily take a general and/or specific view in the marketplace. All with low carrying costs to you.
I’ve been a big fan of benchmark investing for a long time and I like to combine it with individual stock speculation. Any dividends you get from an index fund go right back into new units of the fund and then you can strive for capital appreciation by creating a basket of individual stock-picks.
The great thing about an equity ETF is that it trades on the stock market like an individual stock. Therefore, if you decide that you want to go long the market, you can build this position over time. You can buy small amounts of shares when the market is going down or is in a period of consolidation.
Right now, while I think broad market investment risk is rising (because the market has run so much so fast), the market seems to want to keep ticking higher. Right now, I think owning an equity benchmark ETF makes sense. The great performance from individual stocks has already been completed. There may be more upside ahead, but from a risk/return perspective, the index is a better trade.