Invest in SPDR S&P 500 ETF or Individual Stocks?

It is tough to beat the return of SPDR S&P 500 ETF (NYSE: SPY). The ETF has returned a total return of 93% from 2018 to 2023, which translates to a compounded annual return of 14%!

Why pick stocks then when my return is worse than SPY?

The better questions to ask are:

  • If I have invested in SPY, would I have gotten the similar return as the ETF?
  • Would I behave as a passive investor over this period of time to get the above (or better) return?

Two articles that help me clarify my thinking

As mentioned in my previous article Forget the S&P 500 ETF: These 3 US Stocks Gave Better Returns (on The Smart Investor), the key reason that I pick stocks is because I enjoy investing in individual businesses.

There isn’t a need for any other reason. However, I came across two articles last month and they clarify my thinking further on my preference to be an active investor.

While the content and context of both articles are different, one key idea cut across them.

I probably would have gotten a much lower return if I had invested in SPY only

While SPY has compounded 14% over the past 5 years, its price was volatile during this period.

With hindsight, it’s easy to say that we could just buy near the bottom in 2020. But truth to be told, most of us in 2020 would not have expected the subsequent rally in the market. Well, at least I did not.

How would I know then that it might not be a repeat of what happened in the 2000s (or 1970s), in which the ETF had a flattish return over a period of more than a decade?

If I had only invested in SPY, I wonder if I would have panicked and sold in 2020! And if I had sold, it would be likely that I missed the rebound, or at least a good part of it.

Hence, while SPY have compounded 14% over the past five years, I was likely to have gotten a much lower return if I only invested in SPY.

How’s that difference from investing in individual stocks ?

When the whole market plunged, every counter will be affected. Hence, my actively managed portfolio will be impacted too.

The main difference is because I understand the businesses, I am less likely to panic sell. Some businesses will experience a larger impact during the crisis. Some will be able to act on it and reduce the impact. And others will even benefit from it.

These businesses might or might not be in the ETF. Hence, their performance might not mirror that of the ETF. As shared in my previous post, Amazon, Google and Tractor Supply did well during the last “lost decade”.

On the local scene, while the SPDR STI ETF (SGX: ES3) only had a compounded annual return of 3.0% from 2014 to 2023, some stocks provided a much higher return during the same period.

You can read this post Five Singapore counters that outperformed ES3 over the past 10 years for more information.

Knowingly thyself is important

I am not here to convince you that investing in individual stocks is better than investing in S&P 500 ETF.

There’s no one-size-fits-all approach to investing. Whether individual stocks or an S&P 500 ETF is right for you depends on your personality, lifestyle and investment goals.

Hence, knowing thyself is essential in deciding the suitable investing tool.

The followings are the links to the articles and related Youtube video.

Get Smart: 3 Burning Questions You’re Asking on the Magnificent 7

A More Reliable Way to Get Enough Investment Returns

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