Index Funds vs. Individual Stocks: Which Strategy is Best for New Investors
When you are new to investing, the sheer number of stocks listed on various exchanges can feel overwhelming. Starting with an index fund might offer a smoother entry into the world of investing. However, deciding between index funds and individual stocks can be daunting. Both have their pros and cons, and finding the right fit depends on your financial goals and risk tolerance. So, which strategy is best for you? Let us take a quick look at the strengths and weaknesses of each.
Index Funds:
Pros
- Diversification: Index funds spread your money across the stocks of many companies, reducing the risk tied to any single company.
- Low Maintenance: They track an index (like the S&P 500), so no active management is needed – a great option for beginners.
- Low Management Fees: While individual stocks do not have ongoing fees, index funds typically have very low expense ratios compared to actively managed funds, such as mutual funds, making them a cost-effective option over the long term.
Cons
- Limited Upside: You will not see the same explosive growth that individual high-performing stocks might offer.
- No Control Over Picks: You are buying the whole index, so you will hold both strong and weak performers.
Individual Stocks:
Pros
- Higher Potential Returns: You can handpick stocks with higher growth potential, aiming to reach your goals faster.
- Control: You choose which companies to invest in, allowing for a more personalized portfolio that aligns with your objectives and risk tolerance.
Cons
- Higher Risk: A poor-performing stock can hurt your portfolio more than in an index fund.
- Time-Consuming: Stock picking requires research and constant monitoring.
Which Should You Choose?
Deciding between index funds and individual stocks comes down to your risk tolerance and time commitment. If you are looking for a low-risk, hands-off option, index funds provide steady growth with minimal volatility—perfect for beginners. On the other hand, if you are willing to take on more risk and enjoy researching individual companies, individual stocks offer the potential for higher returns. For many new investors, a hybrid approach works best: start with index funds for stability and gradually add individual stocks as you gain experience. Stick to your goals, stay disciplined, and let your portfolio grow along with your knowledge!
Now that we have outlined the key differences between index funds and individual stocks, let’s see what happened this past week….
Items that may only interest or educate me ….
Canadian Economic news, US Economic news, ….
Canadian Economic news
This past week’s key economic data that the Bank of Canada (BoC) considers when deciding whether to raise or lower the interest rate.
Consumer price Index (CPI)
Statistics Canada reported that inflation cooled more than expected in September, with the annual rate falling to 1.6%, down from 2.0% in August, which had hit the BoC’s target. This marks the lowest inflation rate since February 2021. On a month-to-month basis, headline CPI declined by 0.4% in September, following a 0.2% drop in August. Analysts had been expecting slightly higher numbers, with predictions of 1.8% for annual inflation and a 0.2% monthly decrease.
Among the CPI categories, ‘Shelter’ saw the largest year-over-year increase, rising 5.0%, while ‘Gasoline’ prices tumbled 10.7%. On a monthly basis, ‘Clothing and footwear’ posted the biggest gain, up 0.9%, while ‘Gasoline’ prices took another hit, falling 7.1%. The sharp drop in gas prices was the primary driver behind the broader decline in inflation, both monthly and annually.
Core CPI, which strips out volatile food and energy prices, remained steady with an annual rate of 2.4%, unchanged from August. On a monthly basis, core prices edged down by 0.1%.
With headline inflation now below the 2% target and core inflation stable, analysts believe the odds of the BoC lowering rates by an additional 0.5% have risen. Lower rates generally support economic growth, creating a more favourable environment for equities which is good news for us investors. 😊 However, the BoC will need to monitor inflation to ensure it does not fall too far, as dipping below 1% could raise the risk of deflation. Deflation, while it may sound appealing with cheaper prices, can dampen consumer spending and hurt business profits as people delay purchases in anticipation of further price drops.
Canadian market volatility
Canada’s Volatility Index (CVIX) began the week at 11.0, fluctuating between 10.0 and 11.5 before settling at 10.87 at week’s end. The Canadian market remained relatively steady, buoyed by rising commodity prices, along with growing investor optimism that the BoC might cut interest rates by 0.5%. This combination of factors helped ease market jitters, keeping volatility in check.
Tracked under the ticker VIXI on the Toronto Stock Exchange (TSE), the CVIX gauges anticipated market volatility. A reading below 10 suggests calm and stable market conditions, while values between 10 and 20 indicate moderate volatility with typical market fluctuations. When the index climbs above 20, it signals heightened uncertainty and the likelihood of more turbulent market conditions.
US Economic news
This past week’s key data points that the Federal Reserve (Fed) considers when deciding whether to raise or lower the interest rate.
Retail sales
September’s retail sales report from the Commerce Department exceeded expectations, with a 0.4% gain, up from August’s modest 0.1% increase. Analysts were predicting a smaller monthly increase of 0.3%, so this came as a pleasant surprise. Year-over-year, sales climbed 1.7%, slightly outpacing August’s figures.
Taking a closer look, ‘Miscellaneous store retailers’ saw the biggest monthly jump at 4.0%, while ‘Electronics & appliance stores’ took a hit, falling 3.3%. Over the year, ‘Miscellaneous store retailers’ also led the pack with a 7.9% gain, while sales at ‘Gasoline stations’ tumbled 10.7%.
Core retail sales, which exclude motor vehicles, parts, and gasoline stations, climbed 0.7% month-over-month. On an annual basis, core sales rose 3.7%, reflecting stronger performance in areas outside of fuel and vehicle-related purchases.
This report indicates the American consumer remains resilient, with spending continuing to support economic growth. However, the upside surprise in retail sales suggests the Fed may lean toward a smaller rate cut of 0.25%, dashing hopes for the more substantial 0.5% cut some were expecting.
American market volatility
The CBOE Volatility Index (VIX), often called the market’s “fear gauge,” started the week at 19.47 but quickly spiked to 21.01 after ASML Holdings (NASD: ASML) posted disappointing earnings, raising concerns about a slowdown in artificial intelligence (AI) chip demand. As the week progressed, however, the VIX steadily declined, closing at 18.03, as stronger-than-expected retail sales and a surge in AI chip demand reported by Taiwan Semiconductor (NYSE: TSMC) helped calm investor nerves and boost market sentiment.
The VIX measures expected market volatility over the next 30 days. Readings below 12 suggest calm, stable conditions, while levels between 12 and 20 indicate normal market fluctuations. When the index falls in the 20 to 30 range, it signals rising uncertainty, and levels above 30 point to heightened stress, often linked to significant market disruptions or crises.
Weekly Market Review
Monday: The Canadian markets were closed for the Thanksgiving Day holiday. However, the American markets were open and all three US indexes – the S&P 500 Index (S&P), the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite Index (Nasdaq) – all ended higher. Investor optimism about upcoming third quarter earnings buoyed the markets in a light day of trading. The S&P set another record high close, while the DJIA surpassed 43,000 for the first time on its way to a record high close. Slowing demand for oil, in particular from China, led to lower oil prices. A broad-based rally was led by the Technology sector, with Energy the only sector left behind.
Tuesday: the markets took a step back after yesterday’s strong rally, with all four major indexes finishing in the red. The drop was triggered by a weaker-than-expected earnings report and a gloomy forecast from ASML Holdings, the top supplier of semiconductor manufacturing equipment. Oil prices also slid as news broke that Israel will not target Iran’s oil production facilities in response to an Iranian missile attack, coupled with the International Energy Agency’s projection of a global oil surplus.
In Canada, falling oil prices more than offset the possibility of a 0.5% rate cut by the BoC after a lower-than-expected inflation report, sending the Toronto Stock Exchange Composite Index (TSX) into the red. In trading, Healthcare had the biggest advance, while the Energy sector had the biggest decline.
In the US, despite stronger-than-expected earnings reports from a few major banks, the pullback in oil and chip stocks proved too heavy to offset. In trading, the top performing sector was Consumer Staples, while the biggest loss was recorded by the Energy sector.
Wednesday: after yesterday’s pullback the markets resumed their upward march, with all four indexes ending higher. Oil prices were choppy throughout the day before settling in the green as investors weighed uncertainty in the Middle East and ambiguity over demand out of China.
In Canada, the TSX ended at another record high as investors are betting the BoC will drop its lending rate by a 0.5% to provide a much-needed boost to the Canadian economy. In trading, the Utilities sector advanced the most while Energy and Technology were the only sectors to decline.
In the USA, the DJIA set another record high close as more financial companies presented strong third quarter earnings reports. In trading, it was day of widespread gains led by the Utilities sector, while Consumer Staples and Communications Services were the only sector not to advance.
Thursday: A stronger-than-expected earnings report from Taiwan Semiconductor prompted the company to raise its outlook, boosting chipmaker stocks and sending all but the S&P into the green for the day. Oil prices nudged higher after data showed lower US fuel inventories.
In Canada, the TSX set another record high close thanks to higher oil and commodity prices. In trading, the Energy sector had the biggest advance while Consumer Staples suffered the biggest loss.
In the US, the DJIA set another record high close thanks to a higher-than-expected September retail sales indicating the American economy remains strong and reinforcing the case for a smaller 0.25% rate cut rather than another 0.5% reduction. In trading, the Energy sector rose the most while the Utilities incurred the biggest drop.
Friday: strong earnings from the big US banks and a blow out earnings report by Netflix (NASD: NFLX) put investors in an optimistic mood for next week’s earnings reports from the heavyweight technology companies. Oil prices ended lower on worries about lower demand and weak Chinese growth projections.
In Canada, the TSX set its third straight record high close on the back of rising commodity prices, especially gold and copper prices. In trading on Bay Street, Basic Materials (mining companies and fertilizer manufacturers) climbed the farthest, while Industrials fell the furthest.
In the USA, the S&P and DJIA each set another record high close as strong earnings increased investors’ confidence. In trading on Wall Street, it was a day of broad-based gains, led by the Communication Services sector. The Energy sector was the only sector to fall back.
Weekly Market and Portfolio Review
For the week, the TSX (SPTSX) increased by 1.4%, the S&P 500 (SPX) rose 0.9%, the DJIA (INDU) advanced 1.0% and the Nasdaq (CCMP) climbed 0.8%.
| Index | Weekly Streak |
| TSX: | 6 – week winning streak |
| S&P: | 6 – week winning streak |
| DJIA: | 6 – week winning streak |
| Nasdaq: | 6 – week winning streak |
North American markets continued their impressive run, with the major indexes notching six straight weeks of gains. Aside from a brief stumble on Tuesday, the trend remained upward, as highlighted in the weekly progress chart above.
The only major economic news came from the US September retail sales report, which exceeded expectations. While strong sales point to a resilient economy, it also tempered hopes for a larger rate cut. Now, the Fed is expected to lower rates by just 0.25%, rather than the hoped-for 0.5%.
The main focus this week was earnings, and they didn’t disappoint. Earnings season kicked off with a surprise stumble from ASML, whose underwhelming report sent its stock plummeting. As a critical supplier for chipmakers, ASML’s results raised concerns about a potential slowdown in AI chip demand, briefly dragging the indexes down. However, many analysts believe the miss was more a result of overcapacity at chip factories rather than weakening demand.
Two days later, the narrative shifted dramatically. TSMC, the world’s largest chipmaker, reported strong earnings and an upbeat sales forecast, easing fears of an industry slowdown and boosting investor confidence, especially around AI processors.
The big US banks also impressed with strong earnings, signaling robust consumer spending, business investment, and loan demand—further proof of a resilient economy. This, alongside TSMC’s report, helped push the DJIA and S&P 500 to record highs, with the S&P marking its 47th record close of the year as the two-year bull market rolls on.
In Canada, rising commodity prices powered the TSX to nearly daily record highs, extending its own six-week winning streak—the longest since April. Investors are also eyeing a potential 0.5% rate cut from the BoC, which would bring the benchmark rate to 3.75%, marking the largest reduction outside of the pandemic years.
As we head into next week, investors will remain focused on earnings reports and any economic data that could influence the market’s direction. While the streak of gains has been impressive, it’s essential to remember that market sentiment can shift quickly. For now, the balance of strong earnings and resilient economic data is sustaining the momentum of this broad rally. Let us hope the markets can extend their winning streak to seven weeks! 😊
| Portfolio | Weekly Streak |
| Portfolio 1: | 6 – week winning streak |
| Portfolio 2: | 2 – week winning streak |
| Portfolio 3: | 6 – week winning streak |
It has been another strong week for the portfolios, with Portfolios 1 and 3 outperforming all four major North American indexes, while Portfolio 2 beat the three American indexes, as shown in the chart below. However, lower oil prices did weigh on Portfolios 1 and 2, limiting their weekly gains.
Portfolio 1 extended its winning streak to five weeks, with 64% of its holdings posting gains. Leading the charge, Cameco (TSE: CCO) soared 15%, hitting an all-time high. Nvidia (NASD: NVDA) also contributed with a modest 2% gain, but it too reached an all-time high.
Portfolio 2 finally built some upward momentum, achieving two consecutive weeks of growth. Sixty-one percent of the companies in the portfolio recorded gains, with South Bow Corp (TSE: SOBO) up 12% and Brookfield Renewable Partners LP (TSE: BEP.UN) up 10%. The portfolio also benefited from iAG Financial (TSE: IAG) hitting a new high for the second week running.
Portfolio 3 took the top spot as the best performer, with a remarkable 81% of its holdings showing gains. Standouts included Brookfield Renewable Corp (TSE: BEPC) up 12% and Brookfield Renewable Partners LP up 10%. Also contributing to the impressive performance were the Royal Bank of Canada (TSE: RY) and Vertiv Holdings (NYSE: VRT), both of which reached all-time highs.
Overall, it was another strong week for the portfolios, with impressive gains across various sectors despite the pressure from falling oil prices. Moving forward, it will be interesting to see how the energy sector develops. While the dividends from energy companies are solid, I would still prefer to see the share price rising rather than falling. 😊 For now, the widespread gains have provided a good balance between stability and growth. Here is hoping this momentum continues into next week! 😊
Companies on the Radar
Things were quiet on my radar this past week, but one new company grabbed my attention – Topaz Energy Corp. (TSE: TPZ). This mid-cap Canadian energy investment firm, with a market cap between $2 billion and $10 billion (calculated by multiplying outstanding shares by share price), focuses on strategic investments in premium energy assets operated by top-tier Canadian companies. What stood out to me is their focus on driving cash flow growth, which fuels steady, growing dividends, currently yielding 4.77%. With Topaz added to the mix, my radar list now totals four companies, including the three listed below.
As always, these are not buy recommendations—be sure to do your own research and make decisions that align with your personal financial goals!
- On Holding AG (NYSE: ONON), a medium cap Swiss company, founder-run, sports products company.
- Zoetis Inc. (NYSE: ZTS), a leading animal health company that discovers, develops, manufactures, and commercializes vaccines, medicines, diagnostics, and other technologies for both companion animals and livestock.
- Coca-Cola (NYSE: KO), a global beverage giant, best known for its flagship soft drink, Coca-Cola. They offer a wide range of non-alcoholic drinks, including sodas, juices, teas, and bottled water, catering to consumers worldwide.
The Radar Check was last updated October 18, 2024.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended October 18, 2024: UP 
- Amazon (NASD: AMZN) has signed agreements to develop three Small Modular Reactors (SMRs) in the Pacific Northwest, aimed at meeting the growing energy demands of its expanding data centres, which power its cloud computing division. The project is set to cost the company over US$500 million, marking a significant investment in sustainable energy to support its infrastructure growth
- General Motors (NYSE: GM) announced they have formed a joint venture with Lithium Americas (TSE: LAC) to develop LAC’s Thacker Pass lithium mine, North America’s largest source of lithium used in batteries. This is part of GM’s plan to secure their supply chain of key materials used in the production of electric vehicles.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Canadian $
No C$ dividends this past week.
US $
BSR Real Estate Investment Trust (TSE: HOM.U)
Innovative Industrial Properties Inc (NYSE: IIPR)
Andlauer Healthcare Group Inc (TSE: AND)
Quarterly Reports
No quarterly reports this past week.
Portfolio 2
Portfolio 2 for the week ended October 18, 2024: UP
- Microsoft (NASD: MSFT) and OpenAI are in talks to restructure Microsoft’s nearly $14 billion investment in OpenAI into equity, as OpenAI transitions from a nonprofit to a for-profit entity,
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Canadian $
Whitecap Resources Inc (TSE: WCP)
SmartCentres Real Estate Investment Trust (TSE: SRU.UN)
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 3
Portfolio 3 for the week ended October 18, 2024: UP
- Brookfield Renewable Partners L.P. and Brookfield Renewable Corporation announced they will reorganize the company in a manner that maintains the benefits of their existing business structure, while taking into account proposed amendments to the Canadian Income Tax Act that are likely to result in additional costs to BEPC shareholders if the restructuring doesn’t occur.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
TD US Equity Index ETF (TSE: TPU)
Alvopetro Energy Ltd (TSE: ALV)
SmartCentres Real Estate Investment Trust (TSE: SRU.UN) DRIP
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.