Investing in the stock market is one of the best ways to save for retirement and generate wealth, but it's important to put your money in the right places. No matter how much you can afford to invest, if you buy risky stocks, there's a chance you could lose more than you gain.
While there are countless options to choose from, many investors fall into one of two camps: Those who buy individual stocks, and those who invest in funds, such as exchange-traded funds (ETFs).
Both investing strategies can be fantastic options, but they each suit a particular type of investor. If you're on the fence about whether to buy stocks or ETFs, here are three questions to ask yourself.
1. How much are you willing to research?
One of the biggest differences between individual stocks and ETFs is the amount of research they require.
Investing in individual stocks requires significantly more research because you're responsible for choosing each and every company that's included in your portfolio. With ETFs, you simply have to invest in one ETF and you're automatically investing in all the stocks included in that fund.
There's also more at stake when you invest in individual stocks. You may only have a dozen or so different stocks in your portfolio, so it's important to do your best to make sure that each and every one of those stocks is a strong investment.
When you invest in an ETF, on the other hand, you may own hundreds or even thousands of different stocks. If a handful of those companies don't perform well, it won't have a significant effect on your entire portfolio. This isn't to say that investing in ETFs doesn't involve any research at all. But they are less research-intensive than individual stocks.
2. How personalized do you want your portfolio?
The downside to ETFs is that you have no control over the stocks in each fund. If you invest in a particular ETF, you have to own all the companies included in that fund whether you like them or not.
If having a highly personalized portfolio isn't at the top of your priority list, ETFs may work just fine for you. But if not having total control over every stock you own is a deal-breaker, individual stocks may be a better bet.
With individual stocks, you can build your dream portfolio that only includes companies you feel strongly about. And if a few years down the road you decide you don't want to invest in certain stocks anymore, you're free to sell them and buy something different without upending your entire portfolio.
3. Are you a hands-off or hands-on investor?
Finally, think about how much effort you're willing to put into maintaining your investments. ETFs are more hands-off investments, while buying individual stocks requires more legwork.
Most ETFs are known for being "set it and forget it" types of investments. All you have to do is invest regularly and leave your money alone. The fund will take care of the rest without you having to lift a finger.
Individual stocks, though, require more research upfront as well as more effort to maintain. After you buy your stocks, you'll need to keep up with the latest news on the companies you've invested in to make sure they're still worth owning. Holding your stocks for the long term is key to building wealth, but if a particular business is no longer a good investment, it's important to know when to sell, too.
While stocks are more effort than ETFs, there's also the potential to earn higher-than-average returns. So as you're deciding which option is best for you, think about how much work you're willing to put in in exchange for higher returns.
If you're happy with average returns and a hands-off investment, that's fantastic: ETFs may be your best option. But if you want to take a more research-intensive approach to attempt to beat the market, you may opt for individual stocks instead. There's no right or wrong answer, but knowing your investing preferences can help you choose the best option for you.