For some people, the idea of building an investment portfolio is overwhelmingly daunting. And if you're new to investing, or aren't well-versed in vetting stocks, that's understandable. Thankfully, there's a good solution for those who are nervous about hand-picking stocks, or for those who would simply rather take a more hands-off approaching to investing -- buying index funds.
Index funds are passively managed funds that aim to match the performance of the benchmarks they're associated with. If you buy S&P 500 index funds, for example, those funds will aim to do as well as the S&P 500 itself.
Image source: Getty Images.
There are many benefits to buying index funds and holding them for many years. But should they be your only investment? That depends.
A world of pros, but also, some cons
The great thing about index funds is that they take the guesswork out of investing. Rather than spend time researching different companies, you could instead load up on index funds in your portfolio and then effectively sit back and do nothing.
Index funds can also lend to instant diversification. And that's a good thing for your portfolio to have. It can help you weather stock market turbulence and set you up for long-term gains.
But index funds have their drawbacks, too. For one thing, when you buy index funds, you get no say in what they're comprised of.
Furthermore, index funds won't let you beat the broad market. If you're fine with the idea of matching the market's performance, then this isn't a problem. But if your goal is to outpace the market, index funds won't get you there.
And that leads back to our question -- should index funds be your only investment? Well, if you really don't like the idea of hand-picking stocks or are extremely worried about making a series of bad calls, then there's truly nothing wrong with relying solely on index funds to grow wealth over time.
On the other hand, if you're up to the challenging of choosing some of your own stocks, you can assemble a solid portfolio that consists partly of index funds and partly of the companies you identify as winners. That way, you get the relative stability and consistency of index funds, but you also get a chance to beat the market with the individual companies you land on.
If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.
In fact, even if you reach the point where choosing stocks becomes second nature to you, you might still opt to hold onto index funds and add more to your portfolio. And if you have a 401(k) plan, which, unfortunately, generally won't let you invest in individual stocks, you should definitely consider loading up on index funds to avoid the heftier fees that tend to come with other employer retirement plan investments.
FAQs
The Bottom Line. Index funds are a popular choice for investors seeking low-cost, diversified, and passive investments that happen to outperform many higher-fee, actively traded funds.
Should I invest in single stocks or index funds? ›
Index funds often have lower fees than the costs incurred when trading individual stocks. If you are hiring a registered investment advisor for investing in stock individually it may cost you much more than investing in an index fund.
Should I put all my investments in S&P 500? ›
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
Are Motley Fool portfolios worth it? ›
Motley Fool Stock Advisor can be worth it for investors who value the potential returns and stock picks as comprehensive investment guidance. Prospective subscribers should weigh the cost against their investment goals and the potential for portfolio growth.
Why not just invest in the S&P 500? ›
The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.
Is there anything better than index funds? ›
Exchange-traded funds (ETFs) and index funds are similar in many ways but ETFs are considered to be more convenient to enter or exit. They can be traded more easily than index funds and traditional mutual funds, similar to how common stocks are traded on a stock exchange.
What are 2 cons to investing in index funds? ›
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).
What is a disadvantage to investing in index funds? ›
Lack of Downside Protection
Investing in an index fund, such as one that tracks the S&P 500, will give you the upside when the market is doing well, but also leaves you completely vulnerable to the downside.
Is it better to buy S&P 500 or individual stocks? ›
Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
What if I invested $1000 in S&P 500 10 years ago? ›
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
Investing $100 a month into an S&P 500 ETF can be a sound long-term investment strategy, especially for those with a lower risk tolerance. The S&P 500 has historically provided average annual returns of around 10%, which means that $100 invested each month could grow to a significant amount over time.
How much do you need to invest in S&P 500 to become a millionaire? ›
If the S&P 500 outperforms its historical average and generates, say, a 12% annual return, you would reach $1 million in 26 years by investing $500 a month.
What is Motley Fool's success rate? ›
According to Motley Fool, their Stock Advisor recommendations have averaged returns of 584% since 2002, compared to the S&P 500's return of 114% in the same period. That's over 5x the market's performance.
What are Motley Fool's 10 best stocks to buy? ›
See the 10 stocks
The Motley Fool has positions in and recommends Alphabet, Bitcoin, Block, Celsius, Spotify Technology, Walt Disney, and Zillow Group. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors.
What is The Motley Fool's top 10? ›
See the 10 stocks
The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies. The Motley Fool recommends the following options: short March 2024 $67.50 calls on PayPal.
Why would you want to just buy an index fund? ›
Lower Expense Ratio and Low Fees
Index funds typically have lower expense ratios than actively managed mutual funds, which means that you can invest more of your money where it will do the most good for your portfolio.
Do billionaires invest in index funds? ›
In fact, a number of billionaire investors count S&P 500 index funds among their top holdings. Among those are Buffett's Berkshire Hathaway, Dalio's Bridgewater, and Griffin's Citadel.
How long should I invest in index funds? ›
Index funds are recommended to investors with an investment horizon of 7 years or more. It has been observed that these funds experience fluctuations in the short-term but it averages out over a longer term. With an investment window of at least seven years, you can expect to earn returns in the range of 10-12%.
Are index funds really better than mutual funds? ›
Index funds offer lower fees and tax efficiency. Due to their passive nature, they often perform in line with market benchmarks, making them suitable for investors seeking broad market exposure at lower costs. On the other hand, active mutual funds aim to outperform the market by employing active management strategies.
