Why index funds work for nervous investors
When you buy individual stocks, there is a lot at stake – and there is also a lot of work to be done. There are a number of key things that you should look for, including:
It is a particularly difficult task if you are new to investing. But even if you’ve been there for a while, buying individual stocks forces you to make some tough decisions that could end up backfiring on you. And that’s why index funds may be a better choice if you’re the nervous type when it comes to investing.
With index funds, you don’t buy or control individual companies. Instead, you buy a passively managed fund that tracks a specific index to which it is linked.
For example, a S&P 500 The index fund will aim to match the performance of the S&P 500, which is an index composed of the 500 largest trading companies by market capitalization. That’s a pretty good measure of how the stock market is doing as a whole.
As an investor this should make you less nervous about investing in index funds because, while there is a possibility for them to lose value, this usually only happens when the whole market is affected (especially when we talk about S&P 500 index funds). . Or to put it another way, with index funds, you won’t end up blaming yourself for choosing a specific bad investment. On the contrary, you will win when the broad market wins, and when stocks are going down, your portfolio will be going down as well – but it probably won’t be any worse than the market.
Another advantage of index funds is that the performance of individual companies matters less. When you buy a specific stock and its earnings report does not meet expectations, that stock may fall. But if that single stock is just one of many stocks in an index fund that you own, it won’t have the same impact on your portfolio.
Index funds also offer built-in diversification because, again, you buy a basket of stocks, as opposed to individual stocks. If you are worried about losing money in the stock market, index funds can alleviate this concern to some extent because if a single company or market segment is affected it may not affect you. as much.
Is there a downside to index funds?
One thing you need to know about index funds is that they are not designed to beat the market. If you invest in actively managed mutual funds – those with experienced fund managers at the helm – you could beat the market. But many actively managed funds repeatedly miss their benchmarks, and in return for this convenient approach to stock picking, you’ll pay a hefty fee – up to 10 times more than what you’ll pay to invest in funds. indexes.
Still, if you want to outperform the market in general, an actively managed mutual fund may be a better choice. This way you leave your investment decisions to people who analyze stocks for a living.
Another downside to index funds is that you don’t have a say in your investments. If there is one particular company that you don’t like, you could invest in it anyway. But if you’re the type to be afraid to pick stocks in the first place, you can’t want to a say in your investments. On the contrary, you may be more comfortable having this decision made for you.
Get over your fear
Index funds won’t prevent you from taking losses in your portfolio, but they will gives you the peace of mind that comes with knowing you are invested in the larger market. If the thought of picking stocks makes you anxious, try focusing on index funds. If anything, it will relieve you of a burden on the road to wealth building.