3 Reasons to Ditch All My Individual Stocks for Index and Mutual Funds
- When I first started investing, I only bought a bunch of individual stocks, which resulted in low returns.
- I think I’m going to ditch all of my individual stocks in favor of mutual and index funds.
- I hope it makes investing less time consuming, diversifies my portfolio and improves my returns.
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I spent most of my 20s making lots of financial mistakes, from ignoring my retirement fund to racking up debt. A few years ago I was able to stabilize my finances and that’s when I decided it was time to invest.
Without much knowledge or strategy, I decided to buy a handful of individual stocks. I invested in companies of which I was a consumer and in companies that I thought had a promising future. Although it seemed like a good idea at the time, buying these individual stocks made my investment strategy long and not as profitable as I would like.
Index funds and mutual funds, which put your money in securities like stocks, bonds and short-term debt securities, often offer higher returns.
According to The balancein 2021, mutual funds in seven categories averaged an annual return of 11.54%, which is far more than the returns I’ve made on individual stocks.
As I reassess my finances in 2022, here are three reasons I’m considering ditching all of my individual stocks in favor of indices or mutual funds.
1. My individual approach to actions was haphazard
I was so excited to enter the world of investing that I just took a large sum of money and used it to start buying stocks. I bought stocks in companies that I thought were promising and companies that I was a loyal consumer of. While this approach may work for some, it hasn’t led to the best returns.
Instead, picking index funds or mutual funds — even some that encompass the companies I bought individual stocks in — might be a better strategy for boosting returns, because success doesn’t rest only on one company.
2. I want more variety with my investments
From the moment I started investing in stocks, I knew the importance of having a variety of categories and companies for my portfolio. In the end, I found that I mostly invest in technology companies, because those are the companies I know best.
One of the benefits of putting money in mutual funds or index funds is being able to have a more diversified portfolio. You can choose funds based on company size or categories like the S&P 500
emerging markets or an international equity fund.
3. I don’t have time to manage my stocks
Over the years I have purchased shares in over 15 companies. Although I’m often tempted to leave the money in the market and not check them out, I’ve seen for myself why that’s a bad idea.
Once, one of the companies I invested in went bankrupt and I lost all my money because I didn’t pay attention to the news or sell the stock fast enough.
Since I’m still new to investing, managing my stocks requires a few hours of research per week and requires me to make daily decisions about when to buy and sell stocks. Index or mutual funds do not require as much research and time.
Ultimately, I want to spend less time thinking about which stocks to buy and which to sell. Instead, I want to spend about an hour a month looking at my index or mutual funds, and a few hours a quarter deciding which new funds I should invest in.
I hope this approach makes investing less time-consuming and provides greater returns.