What Would I Do - Buy Individual Stocks or Stock Index Funds?

Every Friday (last week a day late... this week... a day early) I post a "What Would I Do" topic. Keep in mind, it is not necessarily what you should do. Instead, it is written to give you insight into how to think about various financial decisions, understand the variables involved, and then, from an educated perspective, you can make the right decision for you.

So, what would I do, buy individual stocks, or stock index funds?

95% of the time I would buy stock index funds.

Why?

• Very simply put, with an individual stock, you can lose all of your money. With a stock index fund, for you to lose all of your money, the hundreds of companies listed in the index would all have to go out of business at once. If that happens, we've all got bigger problems on our hands than how much we've saved for retirement.
• To effectively manage a portfolio of individual stocks it takes a significant amount of time and research, and the odds are you will still end up with the same or lower return than if you had just bought an index fund.
• I prefer the simplest way to accomplish an end result and index funds provide a simple, low cost way to build a diversified portfolio.

What about the 5%?

• If I enjoyed stock trading, I would set up a play account in which I could buy and trade stocks. I would fund it with a dollar amount that was small in relation to my overall investment portfolio.
• If I worked in the investment industry, had earned my Certified Financial Analyst certification, and felt very confident in my ability to research and make unemotional investing decisions, than I might use individual stocks for a larger portion of my portfolio.

Learn More:

• Risk In A Stock Verses Risk In An Index Fund
• What Is An Index Fund And Why Would I Use One?
• Best Index Fund Families