When you're new to investing, the idea of picking out individual stocks for your portfolio can be extremely daunting. Sure, you can read up on different companies and examine their financials, but at the end of the day, it can be tricky to predict whether a given stock is trading at a fair price, and if that stock's value will soar over time, decline, or largely remain flat.
Even if you're not a particularly new investor, selecting stocks on an individual basis can be a stressful process. If you're not confident in your ability to choose stocks, don't sweat it -- not when there's another option for building a solid portfolio.
Fall back on index funds
Index funds are passively managed funds that aim to match the performance of the different benchmarks they're tied to. If the idea of choosing stocks for your portfolio doesn't sit well with you, or you're worried you'll ultimately choose poorly, then you may want to load up on index funds instead -- specifically, those that track the S&P 500, an index comprised of the 500 largest publicly traded companies.
The good thing about buying an S&P 500 index fund is that you're effectively choosing a whole bunch of stocks with a single purchase. Within those hundreds of stocks, there may be some winners, as well as some losers.
But when you buy S&P 500 index funds, you're not relying on any single stock, in particular, to carry your portfolio. Rather, you're hoping that the stock market on a whole performs well. And that certainly takes the pressure off.
Of course, if you're new to index funds, you may not know how to choose one over another. So you'll want to look at these important points:
- The index that the fund in question follows.
- The fund's performance since its inception. (Keep in mind that newer index funds' performance may differ from that of funds that have been around longer, so aim to do an apples-to-apples comparison.)
- The fund's fees, which are typically listed as expense ratios. (Some index funds may not charge a fee at all, though most usually charge a modest fee that shouldn't eat away at your returns too heavily.)
Keep in mind that you don't have to choose an index fund that tracks the S&P 500, specifically. You can opt to buy index funds that track a particular segment of the market if you'd prefer a more narrow approach. But the great thing about S&P 500 index funds is that they offer a large degree of diversification, which is an important thing to have in your portfolio.
If you're interested in buying index funds, check out this list of solid funds for long-term growth. Also, remember that you can buy index funds, as well as individual stocks. It doesn't have to be one or the other. But if you're scared to handpick stocks for your portfolio, falling back on index funds is certainly a route worth considering.