Is it better to buy individual stocks or index funds?
Most investors are better off with index funds. If you have enough money to put together a diversified portfolio of individual stocks, and you buy and hold for the long-term, it can be cheaper and more tax-efficient to hold individual shares.
Choosing your investments
Once you've opened an investment account, you'll need to decide: Do you want to invest in individual stocks included in the S&P 500 or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky.
Individual stocks may rise and fall, but indexes tend to rise over time. With index funds, you won't get bull returns during a bear market. But you won't lose cash in a single investment that sinks as the market turns skyward, either. And the S&P 500 has posted an average annual return of nearly 10% since 1928.
Individual stock ownership may offer benefits that fit your investment needs, but you should consider the trade-offs to owning a large number of individual stocks. If you want the control and involvement of choosing which stocks to own, individual stocks may fit your needs.
Putting most of your investment dollars into an index fund is much safer and will likely get returns over the long run. Once you become more educated about the stock market and learn to analyze and research investments, you can diversify and delve into individual stocks.
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.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500 (^GSPC 0.74%), then you would be sitting on a cool $1.2 million today. That equates to a total return of 120,936%.
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.
While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.
The diversification inherent in an index mutual fund helps spread the risk across different companies and sub-sectors, reducing the impact of any single stock's poor performance. Moreover, index funds are passively managed, which typically results in lower expense ratios compared to actively managed funds.
Why not to buy individual stocks?
Financial pros like Benz urge investors to build broadly diversified portfolios for a reason: While the overall historical trajectory of the stock market has trended upward, any individual stock has a chance to decline sharply in price and destroy your portfolio's returns.
The 8-week hold rule helps you identify such leading growth stocks, letting you sit tight to reap potentially exceptional returns. This rule should be applied to true stock market leaders, not just any old stock.
Though there is no ideal time for holding stock, you should stay invested for at least 1-1.5 years. If you see the stock price of your share booming, you will have the question of how long do you have to hold stock? Remember, if it is zooming today, what will be its price after ten years?
Another reason some investors don't invest in index funds is that they may have a preference for investing in a particular industry or sector. Index funds are designed to provide exposure to broad market indices, which may not align with an investor's specific interests or values.
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).
But recent research shows that index funds' popularity might actually reduce returns for investors over the long term. Index funds are designed to mimic the performance of a specific market index, like the S&P 500 or the Dow Jones Industrial Average.
| Discount Rate | Present Value | Future Value |
|---|---|---|
| 6% | $1,000 | $3,207.14 |
| 7% | $1,000 | $3,869.68 |
| 8% | $1,000 | $4,660.96 |
| 9% | $1,000 | $5,604.41 |
How Much Has Tesla Grown in the Past 10 Years? As of March 28, 2024, the price of Tesla's stock was $175.79. Ten years ago, at market close on March 28, 2014, Tesla's stock was trading at $14.16 per share. This means that $10,000 invested in Tesla in March 2014 would be worth about $124,145 today.
| Years Invested | Balance At the End of the Period |
|---|---|
| 10 | $102,422 |
| 20 | $379,684 |
| 30 | $1,130,244 |
| 40 | $3,162,040 |
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.
How long will it take for an $1000 investment to double in size when invested at the rate of 8% per year?
The result is the number of years, approximately, it'll take for your money to double. For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
Does the S&P 500 Pay Dividends? The S&P 500 is an index, so it does not pay dividends; however, there are mutual funds and exchange-traded funds (ETFs) that track the index, which you can invest in. If the companies in these funds pay dividends, you'll receive yours based on how many shares of the funds you hold.
In 2020, Buffett said that “for most people, the best thing to do is to own the S&P 500 index fund, adding “People will try to sell you other things because there's more money in it for them if they do.” This no-frills investment strategy is one of the best for ensuring long-term, low-cost gains.
Buffett's ultimately successful contention was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two basic investing philosophies against each other: passive and active investing.
Warren Buffett has long recommended the S&P 500 index fund and ETF, and through his holding company Berkshire Hathaway, he also owns two of these types of investments: the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
