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Expert Q&A

Is it better to pick stocks or invest in index funds?

The financial advisor I have worked with since college has always picked stocks, which sometimes seems to work and sometimes it doesn’t. I was reading a book recently that suggested it is too difficult to beat the market, so people should invest in index funds. I think my financial advisor likes to pick stocks, but I am not sure that is the right strategy for me. Please let me know your thoughts.


Related Topics: Investments, Financial Planning
Related Tags: Stocks, ETF, Index Funds, Financial Advisor
Chris Kim
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By Chris Kim - Tompkins Financial Advisors
Answered 8 months ago

It really depends on each individual investor’s situation, but I would say use all possible asset classes to create a diversified portfolio.

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Consistent alpha is generated when sound portfolio construction is combined with a disciplined approach to equities, bonds, derivatives, funds selection processes – all asset classes.


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Fundamental factors can be discovered and exploited for every asset class/industry.


§These factors include measures of earnings quality, valuation, capital deployment, investor behavior as well as economic trends.
Dennis Cherenkov
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By Dennis Cherenkov - Primerica Financial Services
Answered 8 months ago

Generally I agree with David’s answer. However, I would not advise any person to have more than 10% of their portfolio in individual stocks, there is a difference than in any “one security”. When you buy individual stocks you are taking a lot of risk, and usually the investor does not do nearly enough research and analysis. In my opinion once you have more than a million dollars in your mutual fund portfolio, then you can start investing into individual stocks on top of that first million.


I am a huge fan of mutual funds for many reasons, like professional management for instance. There are teams on analysts that do a lot of research before the fund invests into a company, like interview the officers, the managers, even call the suppliers to evaluate the companies reliability to get the resources needed to make profits, partnerships, and so forth. All of this is done because instead of investing say $100k as an individual investor the mutual fund might invest a $100 million plus. Keep in mind its not the dollar figure that I mentioned that is important but the concept, professional managers usually spend a lot more quality time doing their homework.

As for index funds, I am not a huge fan of them, even though it seems like the whole internet community is for them. Yes they have less fees usually, but it is not the fees that I like to focus on. Like no-load funds I consider index funds as “no-help” funds, if you invest as a do-it-yourself type of person. It is unfortunate that when the market dips these people who do not work with brokers or advisers usually have no one to turn too, and no one to encourage them to stay in the market to catch the rebounds, so instead they panic and jump out of the game into “safe” investments.

Therefore, in your place if choosing between individual stocks and index funds that invest in stocks, I would choose the index funds. You might have to choose a different broker/adviser though. But if I had to choose between and index funds and a good mutual fund with a good track record I would choose the mutual fund.


David I. Strunc, CRPC
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By David I. Strunc, CRPC - Sunrise Wealth Advisors, Inc.
Answered 10 months ago

A general rule of thumb is to not have more than 10% (while some say 5%) in any one security. ETF’s provide a way to invest in a certain strategy while diversifying and also controlling the price by buying ETF’s with limit orders. Think of wanting to buy oil stocks right before the BP oil spill last year… now at that point you could have just picked an oil company and hope it wasnt BP or you could have bought a oil/energy ETF that happened to have BP in it. The downside protection would have been night and day with just having the investment all in BP.

Do you have a different question?