“Stocks can get you more money long or short term, but high reward comes with big risk”: Should I stick with ETFs or invest in individual stocks for the long term?

Hi Money Minder,

As a 22-year-old eager to invest for the long term in my Roth IRA, HSA, and Brokerage accounts, I’m trying to figure out the best approach. Should I go for well-established companies like Amazon and Home Depot, or stick with ETFs for a safer bet?

I’ve heard that ETFs are less risky and less stressful to manage, which sounds appealing. On the other hand, investing in individual stocks could potentially bring higher returns, like the success stories of Amazon investors from 20-30 years ago.

So, what’s your take? Should I focus mainly on ETFs and maybe dabble in a couple of stocks for diversity? Or should I go all-in on individual stocks for that big payout down the line? I want to make sure I’m making the right decision for my financial future. Your guidance would be greatly appreciated.

Thanks in advance,

Response from THE MONEY MINDER:

Hello There,

It’s great to hear that you’re looking into investing at such a young age; starting early is a smart move. When it comes to deciding between investing in individual stocks like Amazon and Home Depot versus broad-market ETFs like the S&P 500 or Total Stock Market, it’s crucial to consider your risk tolerance and investment goals.

While individual stocks can potentially provide higher returns, they also come with higher risk due to their volatility. On the other hand, ETFs offer diversification, lower risk, and are often a recommended choice for long-term investors.

Given your preference for the safest route and your long-term investment horizon, a balanced approach might be beneficial. You could consider investing primarily in ETFs to gain exposure to the overall market while holding a small portion of your portfolio in 1 or 2 carefully chosen individual stocks that align with your investment strategy.

Keep in mind that investing in individual stocks requires thorough research and monitoring to ensure you’re making informed choices. If you decide to invest in specific companies like Amazon and Home Depot, make sure you understand their business models, financial health, and growth prospects.

Ultimately, diversification is key to managing risk in your investment portfolio. By combining ETFs with a few well-researched individual stocks, you can potentially benefit from both broad-market stability and the growth potential of select companies. Remember to regularly review your investments and make adjustments as needed based on your financial goals and risk tolerance.

Best of luck with your investment journey!

Farewell,
THE MONEY MINDER