Top investors, like Warren Buffett, aren’t hiding any secrets to their success in the stock market. They know it takes a long-term approach to generate gains. However, for investors who are just getting started, there is often a question about how many stocks you should own.
Index Funds Versus Individual Stocks
For investors wondering “how many stocks should you own?”, they are already on the right track. It is usually best to have a diversified portfolio of several stocks, which may create a challenge if a person has limited funds to invest. Fortunately, Vanguard founder Jack Bogle solved this problem back in the 1960s. According to SoFi Invest, “Bogle’s innovation was to track the entire S&P 500 and to do it with low fees.” Low-cost index funds emerged out of Bogle’s work, solving the dilemma of becoming diversified at an inexpensive cost. Utilizing index funds provides diversification, but knowing what to look for when purchasing these investment vehicles is also critical.
Watch for High Fees
One of Bogle’s main reasons for creating index funds was to give investors a cheap alternative. SoFi Invest expands by saying, “people who made big salaries and passed on fees to investors, to try to make the funds make the most money possible” was highly prevalent before Bogle leveled the playing field. Unfortunately, times have not changed. Index funds with high fees are still out there, which requires an investor to be cautious.
ETFs and Indexes
ETFs have become widely popular in the past few years and are available for just about every industry. However, some companies have packaged ETFs into index products that offer back-tested results. Using this data as a decision-maker for investing may not be as valid as examining the real results received from a Vanguard Group index fund.
Your Holdings Can Change with Index Funds
The holdings in an underlying index fund aren’t set in stone. While changes usually don’t occur often, it can be helpful to know that they can happen. Taking a peek at the current holdings held by an index fund may be a good practice to perform periodically.
Risk Is Still Tied to Market Conditions
According to SoFi, “Buffett is an advocate of holding onto stocks for a long time and buying a slice of the company.” This philosophy is probably good to have when investing. Economic conditions can still send index funds into a sharp decline. Investors learned that lesson in 2008 after the housing bubble popped.
Success Is Not Ensured When Using Index Funds
Investing in the stock market does come with risk. Even though a person is invested in index funds that contain a wide array of stocks, it doesn’t ensure investment success. While they provide diversification, it’s essential to understand that no one knows what the future might bring economically.
Investing in index funds can be an excellent way to get started. Watching for high fees and realizing risk is still involved should make an investor more prepared and knowledgeable before choosing and using these investment vehicles.
