If you are like most investors, you have tried to hand-pick stocks only to suffer losses, break even or generate minimal gains. Selecting stocks that increase in value in the short-term or long-term is much easier said than done.
So why not give up?
Giving up does not mean you have to stop investing. It means that you invest in the entire stock market or specific stock market indexes rather than individual stocks. There are plenty of reasons to make the transition away from single stocks to several hundred or even several thousand.
Time Savings
The average investor has spent hundreds of hours poring over investment data in an attempt to pinpoint the perfect stocks for his portfolio. He watches CNBC when he gets home from work. He reads the Wall Street Journal at lunch. He might even subscribe to a stock-picking e-mail newsletter. Perhaps he contributes to an Internet message board centered on stock market analysis and predictions.
Then there’s the research. Countless hours are spent in front of the screen, reviewing all of the details about individual stocks. Charts. Graphs. Curves. P/E ratios. Beta. It goes on and on. Wouldn’t it be nice to spend this time with your family, on your hobbies or kick-starting your own business? It is possible if you make the transition to index funds.
Invest in index funds and you will spend little-to-no time performing investment research. All you have to do is select the particular index(es) that you believe will eventually rise in value and pull the trigger on the purchase of their shares.
As an example, the NASDAQ index is traded under the symbol of “QQQ”. Most investors believe that the NASDAQ will increase in value as time progresses as it is chock full of valuable tech stocks with seemingly limitless potential. Why not own a piece of all the stocks listed on the NASDAQ rather than a few of them? The opportunity to do so is available in the form of QQQ shares.
Lower Fees
An index fund contains the same stocks as the index it is tied to. This means that such an investment requires little management. You won’t have to pay a fund manager to perform research and make high-stress trading decisions. You are buying an entire index worth of securities so there is no need to shell out money for trading fees like you would pay when buying or selling shares of individual stocks. As a result, index fund investing carries minimal expenses.
Less Stress
Buy index fund shares and you won’t feel compelled to regularly check up on your investment. You will rest easy knowing that the money you have invested is tied to the entire market or at least a segment of the market.
Most professional investors agree that the stock market will likely rise as we move forward. Sure, it might suffer a few setbacks here and there but the general long-term trend is upward.
Diversity
Perhaps the best reason to invest in index funds is the fact that they spread out your risk across numerous companies. As an example, the Standard and Poor’s 500 has 500 companies. If a couple of these stocks go belly-up, you won’t lose everything like you would if you had solely purchased shares in those individual companies.
Even if a handful of the stocks in your index funds end up at zero, they will be offset by the index stocks that skyrocket in value over the next months, years and decade(s). If you have studied investment strategies, you know how important diversification is.
In the end, purchasing shares of an index fund really is the best way to diversify your money, limit your risk and set yourself up quite nicely for your golden years.
Tax Benefits
Index funds have minimal turnover. This means there is little buying and selling of individual stocks as indexes tend to be static rather than dynamic. Though some stocks are removed from index funds and others are added, such changes are made infrequently. This low portfolio turnover ultimately results in less capital gains taxes. In the end, those who invest in index funds keep more of their money invested in the market rather than handing it over to Uncle Sam.
Performance
In the long-run, the vast majority of index funds produce better returns than individual stocks. This statement has been verified by countless academic studies.
Research also shows that index funds perform better than actively managed funds. Though fund managers are professional investors, they also find it extremely difficult to beat the market average on a regular basis. Less than 10 percent of fund managers assemble a portfolio that beats the market average over the long-term. Furthermore, most investors can’t identify the fund managers who will perform at this elite level across posterity.
So be patient, invest in index funds and let the market work for you. This strategy is much better than wasting your free time studying the nuances of individual stocks, investing in them and praying that they increase in value. Don’t do such a thing to yourself or the money you have worked so hard to earn and save.
Regards,
Ethan Warrick
Editor
Wealth Authority
