Investing in the stock market isn't always easy, but it can be especially challenging during periods of volatility. When the market is turbulent, choosing the right investments is critical. The right strategy can set you up for significant returns when the market inevitably recovers, while the wrong investment could wreak havoc on your finances.
In times like these, are you better off seeking safety in numbers with an S&P 500 index fund? Or is it smarter to invest in individual stocks, like Amazon (AMZN 0.23%)? It depends on a few factors.
When the S&P 500 is a wise investment
When you invest in an S&P 500 index fund, you're buying shares of all 500 companies within the index itself -- including Amazon. Because you're investing in hundreds of stocks at once, that diversification limits your risk.
An S&P 500 index fund can be a fantastic option for you if:
- You want a low-maintenance investment: There's very little research involved in owning an S&P 500 index fund, so you never need to worry about choosing individual stocks or studying companies.
- You want a safer investment: While there are never any guarantees when investing, the S&P 500 itself has a decades-long track record of recovering from even the worst downturns. No matter what the future has in store for the market, it's extremely likely an S&P 500 index fund will recover.
- You're comfortable with average returns: Because S&P 500 index funds track the market, it's impossible for them to beat the market. This isn't necessarily a bad thing, and for many people, this investment's relative ease and safety outweigh its moderate returns. But it's still something to consider before you buy.
Whether you're new to the stock market or simply prefer a hands-off, reliable investment, it's hard to go wrong with an S&P 500 index fund. There are instances, though, where individual stocks may be a better fit.
When to consider buying individual stocks
Amazon has been making headlines in recent months due to its 20-for-1 stock split, and it can be a tempting investment. However, because Amazon is included in the S&P 500, you can own this stock by simply investing in an S&P 500 index fund.
So what's the advantage of buying individual stocks over an index fund? There are a few differences:
- Individual stocks give you more control: When you invest in an index fund, you have no choice but to own all the stocks within the S&P 500. But with individual stocks, you'll only own the specific companies you choose.
- You can potentially beat the market: When you have full control over every stock in your portfolio, it's easier to earn above-average returns. For example, while the S&P 500 has earned returns of roughly 167% over the past 10 years, Amazon is up nearly 864% in that time frame.
- There's more research involved: While an S&P 500 index fund is instantly diversified, you'll need to build your portfolio yourself with individual stocks. Most experts recommend owning around 20 to 30 stocks from a variety of industries for proper diversification, which requires much more research than buying an index fund.
There's no one-size-fits-all approach to investing. If you prefer a hands-off investment with less risk involved, an S&P 500 index fund may be your best bet. But if you're willing to put in the legwork for the chance of earning higher-than-average returns, individual stocks could be a smart option.