There are advantages and disadvantages behind investing in ETFs vs stocks. Above all, it’s important to focus on investments that will leave you with the least amount of risk.

Exchange traded funds (ETFs) trade on stock exchanges, just like stocks. These funds have gained popularity among investors, mainly because many ETFs offer very low management fees.

Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios, including stocks, mutual funds or (ETFs). Below we share some tips for investing in ETFs vs stocks.

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Investing in ETFs vs stocks: Why ETFs provide a great option for some investors

Exchange traded funds are set up to mirror the performance of a stock-market index or sub-index. They hold a more-or-less fixed selection of securities that represent the holdings that go into the calculation of the index or sub-index.

The MER (Management Expense Ratio) is generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

Investing in ETFs vs stocks: How to pick the best stocks

Some investors want to hold just ETFs in their portfolios—but at some point most want to add some individual stocks as well.

No one can predict which stocks will be average performers, which will be losers, and which ones will turn into the superstocks that wind up rising five-fold, 10-fold or more. You may avoid some temporary losses if you sell every stock you own that goes up faster than you guessed. But if you do that, you’ll also sell any superstocks you stumble upon, often when they are just getting started. That could mean that your stock investing strategy never pays off.

Note that our Successful Investor approach automatically limits your involvement in notoriously trouble-prone areas like new issues, startup companies and illiquid investments.

Of course, you also need to stay out of companies when you have doubts of any sort about the integrity of insiders. You need to recognize the special risks of investing in fashionable or excessively popular minefields, such as Internet stocks in the late 1990s, or income trusts in the previous decade, or green energy in the current decade. You can also benefit from sticking to our three-part Successful Investor philosophy:

Spread your money out across most if now all of the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.

You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Investing in ETFs vs stocks: Compound interest is king for both of them

Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long term, and lift the overall returns on your portfolio.

This applies to equity investments like stocks and ETFs, not just fixed-return, interest-paying investments like bonds. When you earn a return on past returns (including dividends), the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

Bonus Tip: Technical analysis is a useful tool, but just one of many.

Some investors decide when to buy an ETF with the help of technical analysis.

Technical analysis is a useful tool, but only if you recognize it as one of many tools. Before making any recommendations or transactions in client accounts, we always look at a chart. However, we don’t look at the chart for a prediction on what’s going to happen. We look to see if the pattern on the chart seems to support the view I’ve formed of the ETF and the stocks it holds, based on their finances and other fundamental factors.

What factors do you find important to pay attention to while investing in both ETFs and stocks?

Have you ever sold a stock you expected to lose value only to have it skyrocket? What did you learn from the experience?