How To Determine The Best Investment Tools For You

Stocks and funds and options, oh my!

The investment business is extremely diverse. So are the investment vehicles you can use. As someone who has made a science out of constructing investment portfolios, I can say this: individual stocks are always a consideration, but they are not as useful in the current environment as they have been in the past.

I stated in a recent article that I have not owned an individual stock in my portfolio since February. And, I will not fully “re-stock” my portfolio until I believe that the stocks I am buying have no more than 10% downside risk from purchase. I cannot name a single stock where I have that level of confidence.

However, that does not mean we don’t have many ways to pursue returns from the equity markets. Mutual funds are largely passé to me, and I say that as a former mutual fund manager! For those who want active management and can identify a fund they really connect with in terms of style, mutual funds are fine.

But as a professional investor, I find ETFs are the best-fit vehicle for the current environment, and might be for a while longer. However, my approach to ETFs is less about getting access to the broad market, and more about “renting” parts of the market at a time when nearly everything in equities should be rented, not owned.

ETFs are ideal for that purpose. This is especially the case if you can identify more “concentrated” ETFs. In other words, buying the ETF as a surrogate for buying a handful of the largest holdings in a sector or theme.

There is also something called “Direct Indexing” which is fairly new, but intriguing. That’s where you buy the holdings of an index, not the fund that tries to replicate that index. More on that as that corner of the market develops.

Then there are options. Options have been a boon to portfolio managers who know how to use them, especially in 2020. However, for the end-investor and the professional alike, there is a seriously long learning curve.

The bottom line is that the attraction of put and call options is that if you buy them, you define your loss limit up front. The flip side is that the clock is ticking from the moment you buy them, since they have a set expiration date.

Investors have many choices today. It can be overwhelming. But it doesn’t have to be. Because what securities you place in your portfolio is only a fraction of the battle. Investment philosophy and process are prerequisites for investing success. Otherwise, you are just throwing darts.

Related: How To Create A Simple, Balanced ETF Portfolio In 3 Steps