If you're leery of choosing investments for your portfolio at this point in time, well, you're probably in good company. The past 12 months have been extremely volatile in the world of stocks, and it's hard to know what the new year has in store on the volatility front.
In fact, it's a really hard time to be an active investor. Given not just the state of the stock market, but also inflation and recession warnings, you can easily let emotions get in the way of making shrewd decisions.
That's why it could pay to invest in an asset that Warren Buffett has long recommended.
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It pays to invest in the broad market
Buffett is really good at analyzing businesses and identifying winning stocks -- and his multibillion-dollar portfolio is evidence of that. At the same time, Buffett thinks everyday investors should take an easier approach to building a portfolio by loading up on index funds.
Index funds are passively managed, and their goal is to match the performance of different benchmarks. An S&P 500 index fund, for example, will aim to deliver a comparable performance to the S&P 500 itself.
There are a few reasons why broad market index funds are a particularly good choice for 2023. First of all, they offer the benefit of instant diversification. And at a time when the market is volatile, that's an important thing.
Also, index funds take most of the guesswork out of investing. When you buy individual stocks, you have to dig into different companies' financials and really spend time poring over the finer details. With index funds, there's really no need to do that work. All you really need to do is look at a given fund's past performance, make sure that it's line with the benchmark it tracks, and check to ensure that the fees involved aren't too hefty (in most cases, they're low and reasonable).
Finally, buying index funds is a great way to invest at a time when you don't want emotions dictating your choices. If you make a bad call on a stock and your portfolio tanks because of it, that might mess with your confidence and lead you to pull out of the market. But if you buy shares of an index fund and they lose value after the fact, chances are it will be due to a broad market decline. And that's not something you can beat yourself up for.
(To be clear, even seasoned investors make bad calls on picking stocks, so you should try not to get down if you do the same. But you may be even less likely to feel bad if you see the value of your index funds decline.)
Great advice to follow
If you don't think you have the same level of stock-picking skill as Buffett does, then you may want to largely stick to index funds in 2023, or look to a combination of index funds and individual stocks.
It's not clear what the next 12 months have in store for the stock market. But if you want to make them less stressful, index funds could be a good way to go about that.
