Whether you’re an experienced investor or are brand-new to the investing world, picking stocks can be challenging. There are many to choose from, and some investments are better than others.
Investing in index funds is one possible avenue. There are plenty of advantages of choosing this type of investment, but there are downsides as well. Whether they’re the right fit for you will depend on your investing style and how much risk you’re willing to take.
Advantages of S&P 500 index funds
An index fund is a collection of stocks or bonds that mirrors a certain stock market index, like the S&P 500 or the Dow Jones Industrial Average. An S&P 500 index fund tracks the S&P 500, and it includes stocks from all 500 companies within that index.
S&P 500 index funds generate long-term positive returns. The S&P 500 itself is one of the best representations of the stock market as a whole. While the market has experienced volatility over the years, it’s always managed to recover from downturns, corrections, and crashes. S&P 500 index funds are thus likely to eventually recover when the market takes a turn for the worse.
In addition, S&P 500 index funds are perfect for hands-off investors. When you invest in this type of fund, you’re instantly investing in hundreds of stocks at once. You don’t need to research which stocks you’re investing in or worry about whether you should buy or sell particular investments — the fund takes care of all of that for you.
Finally, because index funds are long-term investments, they work best when you leave them alone for as long as possible. All you have to do is invest your money, sit back, and let the fund do everything else.
Who shouldn’t invest in S&P 500 index funds?
Although S&P 500 index funds have plenty of advantages, they’re not right for everyone.
One downside to this type of investment is that you have no control over the individual stocks in the fund. Investing in an S&P 500 index fund entails investing in all 500 companies in the index. This isn’t necessarily bad for most people, but it could be problematic if there are certain companies you’d prefer to avoid.
Another disadvantage of index funds is that they’re simply average. It’s impossible for them to beat the market they follow. Again, for many investors, earning average returns is just fine. But if you’re a serious investor who aspires to earn as much as possible in the stock market, this type of investment may be too safe for you.
Consider your investing style and how much effort you’re willing to put into it. If you want to take a hands-off approach, S&P 500 index funds may be perfect. If you’re eager to customize your portfolio as much as possible, investing in individual stocks may be a better bet.