Today’s investor has a lot of options for investing money. Index funds vs. stocks vs. bonds vs. alternative currencies. The list goes on.
With lots of research confirming the superiority of stocks over dividends for the very long term, many investors are approaching the stock market but in very different ways.
Many books, experts, and financial advisors recommend buying index funds (through ETFs) rather than trying to pick individual stocks. However, the behavior of the average investor has suggested a different view– with the many resources and services available out there to support an investor trying to pick stocks.
Both methods have pros and cons.
Indexing is relatively new to the world of investing while the ability to buy individual stocks has been around since the before the 1900s.
In this blog post about index funds vs. stocks, I’ll briefly introduce what an index fund/ ETF is, and talk about what makes it distinct from individual stocks. I’ll talk about why indexing is a common recommendation for the average investor.
I’ll highlight some of the emails I’ve received from readers, who know I advocate picking stocks and challenge that viewpoint. Finally, I’ll get to the crux of the issue and take a deep dive to consider which approach can give the most optimal returns and if it is feasible for the average investor.
What’s an Index Fund?
Much like a mutual fund, an index fund is a basket of stocks grouped together that an investor can purchase outright. This is commonly done through an ETF.
The most common index fund is a market index ETF like ticker symbol $SPY, which holds a basket of all of the stocks in the market (commonly defined as the S&P 500). Instead of an investor having to buy all 500 stocks of the market individually, the investor can purchase an index fund comprised of all 500 stocks.
This has multiple benefits. [click to continue…]