Investors, especially at the beginning of their financial journey, are full of “big” questions and doubts.

Questions for which finding the right answers can seem more difficult than solving a Rubik’s Cube.

One of the questions investors ask most often is: “Where is it better to invest today: in individual stocks or in ETFs?”

In this guide, we’ll approach the answer to this important question step by step. You’ll not only understand the differences between ETFs and stocks, but you’ll also learn how and how much to invest in ETFs or stocks.

Stocks and ETFs: What Do They Have in Common?

Investing in ETFs or individual stocks may seem like a clear-cut choice, leaving no room for gray areas.

Either you invest in stocks or you invest in ETFs—no middle ground, two completely different things.

At first glance, stocks and ETFs may seem like oil and water: two substances that don’t mix and remain perfectly separate from each other.

In reality, that’s not the case. Stocks and ETFs are more like milk and coffee—they can be mixed together in different proportions. To better explain what this means, let’s briefly look at their definitions.

Stocks represent a small ownership stake in the companies that issue them, and they are traded on the stock market (broadly speaking, the stock exchange).

Selling shares on the market allows a company to raise capital and obtain funding to improve and expand its business. It is therefore one of the main forms of financing for companies, alongside credit.

Buying stocks, on the other hand, allows investors to become owners of a small part of that company and enjoy certain benefits—most notably the financial ones, such as receiving dividends and profiting from an increase in the share price, while also bearing the business risk that the stock price may decline.

Stocks are just one of the existing asset classes (the investment categories in which all the world’s money is invested), alongside bonds, commodities, and cash/money market instruments.

ETFs, instead, are formally mutual investment funds that are traded on the stock exchange like a stock. Their main purpose is to replicate the performance (and therefore the return) of a specific market index, such as the well-known S&P 500, the Nasdaq, or Italy’s FTSE MIB.

You can think of ETFs as containers inside which you can find different financial instruments and asset classes.

In fact, there are ETFs that hold bonds, others that contain short-term money market instruments, and others that invest directly in stocks.

There are also ETFs that invest in a mix of stocks and bonds at the same time.

With an equity ETF, you are effectively investing in stocks, because in order to replicate the performance of a stock index, the ETF manager goes to the market and buys the individual shares that make up that specific index.

Stocks and ETFs: The Differences

Beyond the technical differences related to the legal structure of a stock or an ETF, what really matters for you to understand is that stocks and ETFs differ in their level of risk.

This risk has two main components: the volatility you have to endure and the concentration of the investment.

Let’s look at a practical example.

What is the difference between investing in Tesla stock and investing in the iShares Core MSCI World ETF?

When it comes to volatility—that is, price fluctuations—individual stocks generally experience much larger movements than an ETF can (clearly, not all stocks are the same, just as not all ETFs are the same).

Take Tesla, for example, one of the largest electric vehicle manufacturers. Below, you can see the stock’s daily performance over two random weeks of the year.

Daily movements ranging from -8.45% to +7.36%.

Now let’s look at how the iShares Core MSCI World ETF moved over the same exact time period—an ETF that tracks the performance of more than 1,400 stocks across 23 developed countries worldwide.

Daily price fluctuations are still present, but they are significantly smoother, averaging around 1% per day.

This means that a single stock can potentially gain (and lose) much more than an ETF.

A single stock rewards the fact that you are taking on specific risk: you are investing in one company, operating in a specific sector, in a single country, doing business in a particular currency, and so on. Essentially, this is the business risk inherent in any entrepreneurial activity.

In short, a single stock is a much more concentrated investment compared to a well-diversified equity ETF that invests in leading publicly listed companies around the world.

By buying a single stock—or a small pool of individual stocks—you could do extremely well and make a lot of money, but things could also go badly, leaving you with an investment that is cut in half or worse.

Between these two extremes, there is also a middle ground: you might earn something, but less than what you could have earned by investing in a more diversified ETF.

And in that case, you would have taken on more risk in exchange for lower returns—specifically the risk that Tesla (or any other individual stock) could fail as a company.

This is a risk that well-diversified ETFs do not face, simply because for an equity ETF to fail, all the companies that make up the index tracked by the ETF would have to fail at the same time.

That scenario is practically impossible—and if it were to happen, your investments would likely be the least of your concerns.

Does this mean that today no one should invest in individual stocks anymore?

Absolutely not. Stocks and ETFs do not necessarily exclude each other. Stocks are not better or worse than ETFs in absolute terms—they simply serve different investment needs and objectives.

How to Invest in Stocks

So far, we’ve seen that individual stocks are structurally riskier (and potentially more profitable) than ETFs.

At this point, however, you might still have a doubt:
“Can’t I just try to pick only the best-performing stocks? That way I could make a lot of money.”

This is a legitimate question. By definition, since an ETF’s return is the average of all the components of an index, owning only the top performers would theoretically allow you to earn more.

While this sounds easy in theory, in practice it is a completely different story.

Identifying the best-performing stocks in advance is extremely difficult.

Very few professional investors manage to do it consistently.

It’s no coincidence that there is only one Warren Buffett—and that, in practice, he has no true successor. The reason is simple: many of the stocks that make up market indices do not deliver outstanding returns.

Only 20% of the stocks within an index generate returns higher than the index itself, pulling its overall performance upward. All the others either underperform or eventually fail.

The problem is that it is impossible to know in advance whether a specific stock will end up being part of that small group that outperforms the index as a whole.

Therefore, when you buy a single stock, you have 4 chances out of 5 of underperforming compared to investing in a boring but well-diversified ETF.

These are not encouraging odds—and certainly not numbers I would ever want as the foundation of a long-term investment plan.

This is why, if you still want to invest in individual stocks, it makes sense to limit these investments to a maximum of 10–15% of your total financial portfolio.

In this way, you keep the possibility of trying to “beat the market”, while also enjoying the peace of mind that—even if things don’t go as planned—you will still sleep well at night. That’s because the portion of your capital invested in individual stocks is one you can afford to see fluctuate significantly or even lose entirely.

How Much Should You Invest in ETFs?

The vast majority of your money (85–90%) should instead be invested in properly diversified ETFs.

This is precisely because ETFs eliminate, at their core, the specific risk related to the performance of a single company, a single country, or a single industry.

The diversification provided by ETFs protects us from our own ignorance.

Here, the word ignorance has no negative meaning—it simply refers to the lack of knowledge about what the future holds or what will happen in financial markets.

In fact, no one can predict the future performance of the stock market.

Anyone who claims otherwise is either knowingly lying or is completely delusional.

ETFs are the most efficient tools for small investors who are investing their hard-earned savings, simply because ETFs make no forecasts. They merely replicate the performance of a specific market, for better or worse.

This does not mean they are magical financial instruments—only that they are more efficient in terms of costs and performance compared to the countless actively managed products that the financial industry constantly tries to sell you.

In fact, costs (even if not zero) are minimal and therefore do not have a significant impact on performance, while historical returns have proven to be better than those achieved by most professional managers, who struggle to beat the market over the long term.

According to the latest data from the SPIVA report (S&P Indices Versus Active), more than 97% of global equity funds—funds that invest in stocks and are managed by professional analysts—have underperformed their benchmark index over the past 10 years.
This percentage remains extremely high, at around 90%, even when considering a 15-year time horizon.

However, be careful with overly simplistic statements such as:
“Just buy ETFs and you’ll be set for life” or “Start an ETF savings plan, invest for the long term, and you’re set forever.”

Buying ETFs at random is just as risky as trying to act like the next Warren Buffett.

First of all, because there are hundreds of ETFs available on the market (equity, bond, distributing, accumulating, physical replication, synthetic replication, currency-hedged, leveraged).

And the truth is that there are many decisions that, as a conscious investor, you must make well before choosing the financial products to invest in.

Insurance, savings, household budgeting, investment goals.

These are the decisions you need to think through and build your strategy around.

Important decisions that no one can make better than you, in the way that best fits your personal situation.

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