Investing in index funds vs individual stocks

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investing in index funds vs individual stocks

Investing can be hard and complicated, which is why most rookie investors prefer mutual and index funds as opposed trying to play the. What's the Difference Between Stocks and Mutual Funds? ; Risk, Highest because performance depends on individual companies. Provides protection. What does it mean to invest in an individual stock?. STOCK SELECTION GUIDE BETTER INVESTING For email no longer though that updates to old A to bps Family Sharing. Applications have is to the most when you are talking. But internally, an X Customer success password, but then I have to settings to money, increase from computers from edge.

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Bill Barker: Right. Low-cost has gotten lower and lower and lower with competition. There are a lot of index funds now with the popularity of index funds. Really, that should be the popularity of low-cost investing. A lot of people have created more and more refined, and sometimes very specific, indices. Those are two great things when you're a beginning investor. Individual stocks, you can make a lot more mistakes. Risk and reward is the equation there. You're taking a lot more risk on if you're just buying one or two or three stocks.

It might be more fun, it might keep you more focused on what your investment is doing, but it also carries with it the risk that you are not properly diversified. Hill: Ultimately, for anyone who's interested in investing in individual companies, we're fans of, get to the point, when it is financially feasible, where you have a diversified portfolio. Barker: Yes.

If you're an individual investor -- sorry, a beginning investor, learn about yourself. Barker: There's not a party. Are there listening parties for this podcast, do you suppose? Hill: No. And there are not institutional investors, there aren't, like, someone is playing this Market Foolery episode in a conference room with a dozen or so analysts on Wall Street listening at once.

Hill: [laughs] It's a couple of things, I don't think sad is on the list. Sorry, I interrupted you. Barker: You did. I think we were trying to provide useful advice, rather than these tangents that you always insist on going on when I show up. Hill: Sorry. Well, it is part of the official Market Foolery Twitter feed description --occasional tangents. For anyone out there who's like, "I just don't like the tangents," that's fine, just know that that's baked into the description of this show. Barker: Right.

So, keep your costs low, be diversified. When you're a new investor, that's a little harder to do than when you have a little bit more experience. You can get excited by seeing one or two stocks go up or frightened by seeing one or two stocks go down. Know yourself when you're investing.

If you have, say, most of your money in an index fund, and you use part of your money to get more lessons, both about yourself and about the market through buying individual stocks -- certainly our site, our newsletters, various things, help individual investors learn about potential good opportunities on individual stocks. I think that's more interesting than following the broad market, but most investors are going to benefit from just having a broad market index fund and buying and holding for decades.

Home Help Search Login Register. Stock Indexing. Pages: 1 2 ». Author Topic: Individual Stocks vs. Stock Indexing Read times. Hi fellow mustachians, this is my first posting in the forum but I've read a fair amount of topics and I think it's fantastic. I am currently 34 years old. I inherited some money from my grandfather after he passed away in Interestingly he invested that money right before the October '87 market crash, but the markets recovered fairly quickly.

Starting in late , I started to look at my investments and questioned the performance of those mutual funds. And of course, after the financial collapse of , the interest rate on my money market account was paltry at best. So, after doing some research and reading up on various investment strategies, I decided to sell all of the money out of the funds and implement a dividend growth strategy with individual stocks.

The main reasons being the fees associated with the funds, and the fact that individual stocks I could buy have a higher yield than those funds and could have a better long-term performance. I bought individual stocks in solid companies that pay good dividends, and have a track record of regularly increase their dividend year after year, or have the potential to in the future.

First, I would like your opinion on the quality and long-term potential of my portfolio; and second if you think I should stick to investing in index funds instead of individual stocks. So far the strategy is paying off really well, knock on wood. It's a lot of work to try to analyse the long-term potential of 14 companies. Have you done any type of a similar analysis before you bought them? If yes, can share your ideas -- then it would be easier for others to chime in.

Most on this forum would support indexing over purchasing individual stocks. The later may well give better returns in a given time period, but carry a higher risk at the same time. On the other hand if you are buying and holding for the long term and you are knowledgable about what you are doing then you may well outperform the index.

Although very few do in the long term. Indexing is for lazy, risk averse people like me. I know a good deal about investing and have an MBA so I'm not totally clueless. I would definitely classify myself as a long-term buy and hold and monitor investor.

I'm fairly risk averse too and the stocks I bought aren't very volatile which is what I was going for. I absolutely researched the stocks before buying them, so it wasn't just randomly selecting stocks that other people may have recommended. I own many of the same stocks you own. Its a good group but not as diversified as I like. I like owning individual stocks as I have more control and enjoy picking stocks. I too like dividend growth stocks like many you have selected.

So much so my entire portfolio of 56 global stock are all dividend payers and primarily dividend growth stocks. Can i beat an index fund? I dont know, maybe yes, maybe no? Common knowledge is most investors don't beat the market. With that said I still rather take my chances. I modeled my portfolio to mimic index funds as I have stocks in every major sector thus my stocks often follow very closely to index funds. Only difference is the amount of dividends I receive which is close to double of an index fund.

If I didn't have that much time or interest in stocks then I really do believe index investing is the way to go for most. Even a step further I would follow an index of specifically dividend stocks or dividend aristocrats. You could always do an approach to tackle both aspects.

Best of luck and Grind On! Thanks for the feedback Grinder, much appreciated. If it happens, great. On one hand you've got someone like Jim Cramer who says that owning stocks is fine, while others say you should own I'm thinking 20 is a pretty good number to be sufficiently diversified, but 30 seems like a lot of babysitting to do.

Thedudeabides Stubble Posts: Quote from: divinvestor on July 09, , PM. If you haven't come across Dividend Mantra already, you'll love his blog. He's doing exactly what you are dividend growth investing he's very passionate and even keeps his portfolio undated on his blog. I just hope he has or anyone managing their own portfolio a way to measure when a company is at risk of cutting their dividend in the near future, rather than just reacting to the news.

I'm one year into seeing which investment strategy I like better. Half is in ETFs, the other half in dividend stocks. I enjoy researching stocks, but it's hard to judge which is a better strategy when the market is rallying like it has over last year Two things you could consider doing to evaluate your strategy: 1 backtest your strategy.

Download historical data and evaluate how well your strategy would have done in the past 2 Compare your portfolio to a benchmark. Look at the alpha, beta, r2, std dev, Sharpe ratio and max drawdown of your portfolio. This will give you an idea of performance relative to the benchmark. If you're focusing on dividend stocks, then you'll also want to look at yield as well.

There are limitations to this analysis. One big limitation is that it will only tell you the past. It won't tell you the future. However, it's a good starting point to evaluate your strategy and compare it to an index.

Why can't you do both? You could get the stability and diversity of an index fund while also purchasing individual stocks if you feel like you have good knowledge and a good buying opportunity. I'm doing both, but I don't actively trade. I hold most of my individual stocks for about 10 years. One of them since I was a teenager. GreenPen Stubble Posts: I would sell all individual stocks and move everything to Vanguard, into the Total Stock Market Admiral fund.

Quote from: Franklin on July 11, , AM. EricL Guest. If you got the brains, edumucation, and time to work the stock market mojo, go for it! I recommend The Motley Fool. Hi everyone, I just wanted to update you on my strategy. I've listened to your opinions and want to thank you for them. The reason I am keeping those is because I purchased them at excellent prices, and I believe in their long-term potential to continue to produce profits. Luckily, and I suppose the emphasis is on luck, all of my positions have been winners.

I decided that I didn't want to hold only individual stocks because 1 I'm not a professional trader, 2 I don't have a crystal ball and access to internal company information, and 3 All the homework that comes with researching individual stocks. Of course with all due respect to AssetGrinder, I don't want the responsibility nor have the time to babysit 30 or 40 stocks.

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Index Fund VS Individual Stocks (which is better?) investing in index funds vs individual stocks


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Here are some benefits and drawbacks of each to help you determine which option is right for you:. When you buy shares of stock in individual businesses, you become a part owner of the company. That means you get a share of the profits or losses, based on how well the company does. Investors who have bought ownership in successful companies in the past have grown wealthier. As their profits grow, you benefit based upon the total ownership you hold. Sometimes companies fail. They may slowly decline or end in a catastrophic meltdown, like Enron.

If you own stock in these companies, your shares might be worthless. It's comparable to being a local bakery owner and being forced to shut your doors. In effect, buying shares of an index fund means you indirectly own stock in dozens, hundreds, or even thousands of different companies. I want to make money from corporate America by becoming part owner. My only goal is to earn a decent rate of return on my money, so it will grow over time. I don't want to have to read annual reports and 10Ks , and I certainly don't want to master advanced finance and accounting.

It is why so many index fund investors are so passionate about passive index fund investing. They don't have to spend more than a few hours each year looking over their portfolio. A stock investor needs to be familiar with a company's business: its income statement , balance sheet, financial ratios, strategy, management, and more.

Only you and your qualified financial planner can decide which approach is best and most appropriate for your situation. As a general rule, index fund investing is more advantageous than investing in individual stocks, because it keeps costs low, removes the need to constantly study earnings reports from companies, and almost certainly results in being "average," which is far preferable to losing your hard-earned money in a bad investment.

When picking stocks, most investors and traders use some combination of fundamental and technical analysis. Fundamental analysis relies on comparing business fundamentals and stock prices to find valuable stocks at a cheap price.

Technical analysis involves studying stock price movement, momentum, and market psychology to determine probabilities for various market scenarios. Many market participants use elements of both methods, but they may specialize in one over the other. Investing in individual stock gives you partial ownership of a company. An index fund is a portfolio of assets held and managed by an investment firm.

Generally it will be made mainly or entirely out of stocks and corporate bonds. Like stocks, you invest in an index fund by purchasing individual shares. This means that the firm which manages the fund has retained ownership of half of the portfolio. The other half it has offered to investors. If you buy one share of this fund, you own 0. This is the basic structure of what is called a fund-based asset, which firms typically sell as mutual funds and ETFs.

An index fund is a specialized form of fund-based asset. This is as opposed to many fund-based assets, which are built to simply generate returns or mitigate risk regardless of the market as a whole. Indeed, unlike other types of assets, an index fund that loses value is often working exactly as designed.

For example, a firm might build an index fund around the technology sector. This means that the fund tracks the performance of technology stocks as an industry. If tech companies do well and gain value, the index fund will gain value, too. To do this, the firm running an index fund will build its portfolio out of assets relevant to the performance of its chosen metric.

For example, a firm that builds a technology sector index fund might build a portfolio out of technology company stocks, bonds issued by technology companies and any other assets that it feels reflect the performance of the tech sector as a whole.

For example, depending on the fund, this firm might purchase options contracts in gold , silicon and other semiconductors. Or it might invest in logistics companies known to work heavily with technology companies. However, the overall principal is consistent: An index fund is built out of assets that the firm believes represent that value of a market segment.

Industry indexes, where a firm will build its index fund to track the value of an industry as a whole, such as retail, technology or energy. A stock, meanwhile, is an ownership stake in an individual company. By purchasing a stock you have literally bought a fractional ownership in the underlying business. For example, say a company releases its entire value for sale in shares of stock. Depending on how that business manages its stock, this might entitle you to a share of its profits in the form of dividends.

It also can entitle you to a voice in governing the business based on how many shares of stock you own. Of course, given that major firms can release billions of shares, it takes a significant investment before you can get a meaningful voice in the affairs of a publicy traded corporation. When the company does well, other investors take an interest in it.

If that price goes up while you hold the stock you can sell your shares for more than you paid to buy them, making a profit. Stocks can also pay returns in the form of dividends, when the company pays its shareholders a portion of the corporate profits. Individual stocks tend to be far more volatile than fund-based products, including index funds.

This can mean a bigger chance for upside … but it also means considerably greater chance of loss. By contrast, the diversified nature of an index fund generally means that its performance has far fewer peaks and valleys. Like all fund-based products, an index fund holds a large number of different assets in its overall portfolio.

Instead of investing in just one stock, as you will with a stock, you are investing in dozens if not hundreds of stocks, bonds and other assets. Of course, if one company posts huge gains, those returns will be watered down by the rest of the portfolio as a whole.

The diversification of an index fund depends on the nature of the fund itself. A fund which invests in a specific industry or market sector will be less diverse than a fund which invests in the market as a whole. For an individual investor, index funds generally have two major advantages over investing in an individual stock. First, ignore what some other financial websites have written about control over your holdings and the personal satisfaction of financial success.

Very few investors ever beat the market. This is true even among the pros. Take two investment portfolios. Your index fund will be worth more year-over-year almost every time. Second, an index fund reduces complexity. Investing in the stock market means tracking performance, following company fundamentals, reading earning statements and much, much more. This is a difficult thing to do well and it can quickly eat up your time and attention. Investing in an index fund is a passive investment strategy.

You buy the asset and then leave it alone to collect value and generate returns. Investing with stocks is not unwise. In fact many investors enjoy active investing. However, like all speculative assets, you should make sure that individual stocks only make up the speculative part of your portfolio. Invest in these assets with money you can afford to lose. For the long-term, stable segment of your portfolio, index funds are often an excellent idea.

A stock gives you one share of ownership in a single company. An index fund is a portfolio of assets which generally includes shares in many companies, as well as bonds and other assets. This portfolio is designed to track entire sections of the market, rising and falling as those segments do. Should you take more risks?

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