If you have heard it before, you're going to hear it again. Don't put all of your eggs in one basket. So many times, you will hear financial analysts or talking heads on Finance shows tell you the following:
BUY THIS STOCK.
THIS STOCK IS GOING TO SOAR
DON'T MISS OUT ON XYZ COMPANY
I SOLD MY HOUSE TO PUT IT ALL ON THIS STOCK
TAKE YOUR KID'S COLLEGE MONEY AND PUT IT INTO THIS STOOOOCK
(This guy has definitely said that at something like that at some point in his life)
All of that urgency can become very overwhelming for a beginning investor or even a seasoned investor. All that urgency can become even more overwhelming when many of those voices are urging you to purchase 18 other stocks. Who do you listen to? Who's right? And what if they're wrong? It can be absolute madness.
An alternative to selecting specific stocks is to select a wide range of stocks and have your portfolio do the work for you. This concept is called indexing and its tenents are to select an array of stocks by certain criteria. Those criteria could be the largest companies in America, oil and gas companies, or even social media companies. Whatever criteria you can think of, most likely there is an index that was created with that in mind. By choosing a proper index and portfolio strategy, you can simplify your investing strategy to maximize your performance, diversify your investments, and even protect against loss in some cases.
One of the most attractive features of choosing an index is its ability to diversify your portfolio. According to Forbes (8/21/2021), through diversification, one can 'balance out or mitigate the risk an investor takes on' if they were to invest in a singular stock. For example, the Vanguard Total Stock Market Exchange Traded Fund has 3,980 stocks! By possessing a large number of stocks, you gain the ability to stress less over a couple of companies that do poorly during a market cycle. You also no longer have to stress over choosing one stock over another. By selecting the properly diversified portfolio, you would essentially have access to them anyways!
Ok, let's talk about performance. Please hear me out on this. Did you know that by choosing an index fund that is already diversified you can outperform investors who select stocks individually?
I know, I know. You probably think I've lost my marbles. But seriously check it out. According to The Balance.com, "index funds.. tend to have higher returns over longer periods of time [when compared] to actively managed investments." The site also mentioned that in the short term individual stock picking and actively managing your portfolio may will in the short term but lose over time to index investing in regards to performance. This means that all you have to do is choose an index fund, keep investing in it and give it time. Like my favorite actor Denzel Washington said in Remember The Titans, “it's like Novacaine. Just give it time, it always works."
(I know I'm sad I couldn't find the gif either)
Sometimes, the simplest answer is the best answer. So no, you don't have to keep listening to all the voices. All you have to do is be consistent with your investments. now that you know about indexing, you have to know about your risk tolerance which can indicate how much money you should have invested into stocks versus more conservative investments. You can easily take a risk tolerance assessment online to learn about your proper portfolio allocation and then start. please be mindful that you can still suffer losses just like with any other investments but understand that by research, you can build your confidence and make sound decisions. For more information, you can read the Simplest Path to Wealth by JL Collins, visit sites like investopedia.com or schedule a chat with me (email contact@ikechiukazu.com). Best of luck to you and good luck on your financial journey! Godspeed 🙏🏾
Sources:
https://www.thebalance.com/why-index-funds-beat-actively-managed-funds-2466411
https://investor.vanguard.com/etf/profile/VTI
DISCLAIMER - NOT FINANCIAL ADVICE
The information is not intended as, and shall not be construed or understood, as financial advice or a recommendation but rather as financial education. I'm not a financial advisor, nor do I portray myself to be. I have done my best to ensure any information provided is accurate and provides valuable educational information. The information I provide is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your particular situation. Please continue to do your own research and make the best decisions for your situation.
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