4 signs you’re ready to graduate from ETFs to picking stocks

This is the simplest final exam you’ll ever take.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Remember your high school graduation? You threw that cap up in the air, ready to take on the world with your new status as a legal adult. Now you're about to cross a different graduation milestone, only there are no final stock-picking exams to confirm you're ready. Moving from ETF investing into stock-picking can be an exciting and profitable change of pace. But as with all of life's big moves, there's risk involved and it's wise to proceed with caution. Here are four signs to test your readiness to shift from ETFs to a portfolio of individual stocks.

1. ETFs aren't giving you what you need

ETFs are very popular, among both novice and experienced investors -- and for good reason. They're diversified, accessible, and easy to manage. The minimum investment threshold is low, and they often have low fees. There's also no rule, stated or unspoken, that every investor eventually outgrows ETFs. If you're thinking about making the leap into stock-picking, evaluate your motivation for the change. Push past any vague feelings that you should be picking stocks and get specific. Maybe your portfolio has a gap you need to fill. Or, you're an ESG investor who's motivated to limit the drag of higher ESG fund expense ratios. Or perhaps you're attracted to the challenge of picking stocks and then watching their performance unfold. Any of those reasons are valid, but each requires a different approach. Clarify the goal now so you can pursue it with focus and precision.

2. You have time to manage a stock portfolio

ETFs don't demand much of your time and attention. You can pick an index ETF in minutes when you know what type of exposure you need. You might quickly compare expense ratios and sizes of similar funds, but you probably won't read any earnings reports or analyst opinions. Even after you buy an ETF, there's not much to do but check in and rebalance periodically. That's a quick process when you only have a handful of funds in your portfolio. With individual stocks, you'll spend time researching various industries and companies before you buy. After you buy, you'll monitor your investments to ensure they remain suitable for you. You'll read the earnings reports and the analyst opinions, plus news releases and industry reporting. Any of those information releases could reveal something that changes your opinion of that company going forward.

3. You are comfortable with volatility

Individual stocks are more volatile than ETFs. A stock's share price can swing up and down based on any one headline from the company, its competitors, the analyst community, or industry regulators. And sometimes a stock's price can move without any identifiable reason, other than an unexplained shift in investor demand. Most investors manage that volatility by diversifying into at least 20 different stocks. You could also hold a few individual stocks alongside your ETFs to start. You'll still see volatility in your stocks, but your overall portfolio won't move as much.

4. You like to learn

Investing is a discipline for the information-hungry mind. If you don't like to read, analyze, and form conclusions, you might find stock-picking to be tedious -- when it should feel like an exciting challenge. The challenge lies in the depth of things you can learn. If you wanted to, you could pursue expertise in investing strategies and technical analysis as well as in industries and specific companies. That's not to say you need an in-depth knowledge base to start picking stocks. What you need is an open mind and a willingness to learn. Those traits foster better investing decisions. They also help you adjust when you make mistakes -- something all investors do now and then.

Fall forward

Can you hear "Pomp and Circumstance" playing in your head? Then you could be ready to expand your investing skill set into stock-picking. Start with a goal in mind, put in the work, learn all you can along the way, and be ready for some surprises. As actor Denzel Washington said to University of Pennsylvania graduates in 2011, "I've found that nothing in life is worthwhile unless you take risks. Fall forward. Every failed experiment is one step closer to success."

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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