Index funds take the guesswork out of investing, but you're by no means limited to them.
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.
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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
Investing legend Warren Buffett has said that the average investor need only invest in a broad stock market index to be properly diversified. However, you can easily customize your fund mix if you want additional exposure to specific markets in your portfolio.
Does Warren Buffett believe in index funds? ›
His recommendation to consistently invest in low-cost index funds, especially during market volatility, resonates with investors of all levels of experience.
Does Motley Fool have an index fund? ›
A passive ETF that tracks the Motley Fool 100 Index – a proprietary index by The Motley Fool, LLC which includes the top 100 largest and most liquid U.S. companies that are either active stock recommendations in a Motley Fool, LLC research service or rank among the 150 highest-rated U.S. companies in the Fool analyst ...
Are Motley Fool portfolios worth it? ›
Historical Performance and Top Picks
According to the Motley Fool's self-reported data, as of late 2023, an equal-weighted portfolio of all Stock Advisor picks since inception in 2002 was up an astounding 674%. That significantly outpaces the S&P 500's total return of around 154% over the same period.
Why don't people just buy index funds? ›
No Control Over Holdings
Indexes are set portfolios. If an investor buys an index fund, they have no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy.
Why doesn't everyone just invest in the S&P 500? ›
Lack of Global Diversification
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.
Do the rich buy index funds? ›
Warren Buffett might be the world's most famous investor, and he frequently touts the benefits of investing in low-cost index funds. In fact, he's instructed the trustee of his estate to invest in index funds.
What does Warren Buffett not invest in? ›
Warren stays away from technology companies because he likes investments in which he can predict winners a decade in advance—an almost impossible feat when it comes to technology. Unfortunately for Warren, the world of technology knows no boundaries.
What did Warren Buffett tell his wife to invest in? ›
Buffett said he revises his will every three years, and he still advises his wife to allocate 10% of her inheritance to short-term government bonds and 90% to a low-cost S&P 500 index fund.
Is Motley Fool or Morningstar better? ›
So Motley Fool is better suited to long-term investors focused on high growth potential while Morningstar is preferable for quantitative investors who rely on metrics and models.
Zacks is better if you want quantitative analysis and short-term trading ideas. Motley Fool is preferable for fundamental analysis and long-term investing approach.
How much money do I need for Motley Fool stock advisor? ›
A subscription with Motley Fool Stock Advisor generally costs $99 a year but can vary with promotional offers and the kind of subscription plan chosen. Motley Fool Stock Advisor can be worth it for investors who value the potential returns and stock picks as comprehensive investment guidance.
Has anyone made money with Motley Fool? ›
The Motley Fool is DEFINITELY NOT a scam. My results with the Fool picks over the last 8 years have been phenomenal, as you have seen. Of course it's not perfect and every stock tip is not a winner. But, they definitely are a legit company and for the last 8 years their stocks have easily beat the market.
Has Motley Fool really beaten the market? ›
Does Motley Fool beat the market? Yes, Motley Fool stock picks have historically beat the market significantly. Their Stock Advisor picks have returned over 5x more than the S&P 500 over the past 20 years.
Can I trust The Motley Fool? ›
Yes, Motley Fool has a long track record suggesting their stock picks are generally reliable. But as with any service, not every pick is guaranteed to be successful.
Should I just put my money in an index fund? ›
Over the long term, index funds have generally outperformed other types of mutual funds. Other benefits of index funds include low fees, tax advantages (they generate less taxable income), and low risk (since they're highly diversified).
Is it better to buy individual stocks or index funds? ›
Investing most or all your money in individual stocks is risky and can lead to losing your investment capital. Investing exclusively in index funds is risk averse and offers much less in the way of returns. Ideally, you want to keep most of your investment dollars in safer investments such as index funds.
Do billionaires invest in index funds? ›
It's easy to see why S&P 500 index funds are so popular with the billionaire investor class. The S&P 500 has a long history of delivering strong returns, averaging 9% annually over 150 years. In other words, it's hard to find an investment with a better track record than the U.S. stock market.
Are index funds really better than mutual funds? ›
Diversification Shortcut: Index funds passively track benchmarks; mutual funds aim to outperform. Investment Accessibility: Invest in mutual funds via company or trade ETFs like stocks for added convenience. Cost and Performance: Index funds cost less, have lower taxes. Most prefer them for cost-effectiveness.
