There are risks involved in pretty much any investment you make. But it’s fair to say that there’s a fair amount of risk when it comes to buying individual stocks.
If you choose to invest in a given company and that company’s financial situation takes a drastic turn for the worse, its share price could plummet — and as a stockholder, you could end up losing a lot of money. This holds true even if you do plenty of research before adding that stock to your portfolio.
If the idea of hand-picking stocks doesn’t sit well with you — namely, because you’re the risk-averse type — then there may be a better way for you to build a long-term portfolio. In fact, one strategy could make it possible to amass a lot of wealth over time without losing sleep or exposing yourself to undue stress.
Rely on the broad market
You never know when an individual company might take a turn for the worse. That’s why a better bet may be to invest your money in the broad stock market. And buying index funds is a good way to do that.
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Index funds are passively managed. That’s important, because it helps keep their investing fees low.
Also, index funds don’t employ a strategy other than to aim to do as well as the various market indexes they’re associated with. If you buy shares of an S&P 500 index fund, for example, the goal of that fund will be to match the performance of the S&P 500 itself. If the S&P 500 has a solid year, your index fund shares are likely to gain value. If the S&P 500 closes out the year in the red, you can expect the same performance out of your portfolio.
The benefit of buying index funds, however, is taking the guesswork out of investing. Rather than subject yourself to the stress of wondering whether you’ve chosen the right companies to put money into, you can instead effectively invest in the entire stock market and see where that leads you (ideally, to a very wealthy place).
Also, broad market index funds allow you to maintain a diverse portfolio without having to worry about your exposure to different market sectors. Again, the reason is that you’re just plain putting your money into the entire stock market — and so you don’t need to think or stress about whether you own too many tech stocks and too few energy stocks.
When you want peace of mind
Some people love taking control of their portfolios and choosing stocks they’re convinced will be strong performers. But you may feel differently. The idea of picking your own stocks might leave you feeling stressed and overwhelmed — to the point where you decide to stop investing altogether.
That’s not a good thing. And so rather than risk that scenario, if picking individual stocks just isn’t in your wheelhouse, consider putting your money into the broad market instead.
There’s no guarantee that you won’t lose money with index funds. But if that happens, you won’t be able to blame that scenario on your poor choices.
Also, historically speaking, the broad market has done well for long-term investors. And so if you’re willing to load up on index funds and leave them alone for many years, there’s a good chance you’ll be rewarded similarly.
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