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The following is a guest post by Karl Marrion, a money saver and investor who runs the blog, WiseStockBuyer. Enjoy!
Individual Stocks or Index Funds?
Thanks to the web, the average small investor has more options than ever before to invest his or her cash. Readily available information on any publicly held company is within any investor’s grasp within minutes, thanks to online tools like Morningstar.com, Bankrate.com, SEC.gov, and thousands of others.
In addition, there are dozens of stock brokerages that will let anyone buy or sell shares in specific companies. However, there are also dozens of index funds designed to take the hard work out of investing.
Are you interested in individual stocks or index funds? Read on…
Individual Stocks: The Pros
Individual Stocks: The Cons
Index Funds: The Pros
Index Funds: The Cons
Keep in mind that market indices sometimes have long periods of mediocre performance. You’ll never know, of course, when one of these periods begins or ends. However, index fund investing is designed to make things easier for the small investor, so you shouldn’t spend any time worrying about when to get into, or out of, the markets.
Many small investors put the bulk of their retirement savings into index funds, while putting a little bit of “fun money” aside for dabbling in individual company stocks. Not a bad plan. Is this the plan you should follow? Every investor is different, and each investor is at a different period in his or her life.
Consider your own investing style, financial goals, and aversion to risk before making any decisions on where to put your money. And consider talking to that cute babe across the room about something other than stocks.
My personal approach
Personally, I prefer investing index funds rather than individual stocks. I like to get in after a big crash, when many investors are panic selling. I was a big buyer of index funds during the tech mess of the early 2000’s and the 2008-09 banking crash. I feel for me personally, this gives me a level of risk to reward that I’m comfortable with. Investing at these times takes a lot of nerve, as you are doing the exact opposite of what the masses are doing. Just remember one thing though, most traders are not making money, so you don’t want to be following them.
I use Optionsxpress as a brokerage firm. One thing I like to do when trading indexes is keep expense ratios as low as possible. When investing investing in the S&P 500 index, I use the Vanguard S&P ETF, ticker VOO. This is ETF has the lowest expense ratio of all the S&P trackers and it’s just 0.05%. Typically I have held positions for 6-18 months, depending on what happens in the market. As a general rule of thumb I tend to keep 50% of my portfolio in cash and the other half in equities and commodities.
***Photo courtesy of http://www.flickr.com/photos/argonne/4660306658/sizes/l/in/photostream/