When it comes to investing in the stock market, you have a seemingly unlimited number of options. It can be challenging to decide where to put your money, because each option has its advantages and disadvantages.
S&P 500 index funds are often touted as one of the best investments out there, particularly when the stock market is volatile. While these index funds do have their strengths, there are a couple of reasons why investing in individual stocks may be a better option for some people.
1. You can create a more customized portfolio
When you invest in an index fund, you don’t have any say in the stocks that are included in the fund. Each index fund tracks a particular stock market index, such as the S&P 500 or the Dow Jones Industrial Average. So by investing in an S&P 500 index fund, you’re investing in the companies that make up the S&P 500.
If you’re not picky about the companies you invest in, that’s not necessarily a bad thing. But if there are certain stocks in an index fund that you’d rather avoid, you’re stuck with them whether you like it or not.
By investing in individual stocks, you have full control over your portfolio. Not only are you able to invest only in the companies you like, but you can also control how much you invest in each company by choosing how many shares of each stock you want to buy. With this approach, you can create a fully customized investment portfolio that’s designed specifically for you.
2. You can try to beat the market
S&P 500 index funds are designed to be average. They track the S&P 500, which is considered one of the best representations of the stock market as a whole. So whatever the market does, an S&P 500 index fund will follow.
Of course, average performance is better than below-average performance, but it also means you can’t beat the market with an S&P 500 index fund. If you’re looking to achieve higher-than-average gains, that’s simply not feasible with an index fund that’s designed to follow the market.
Beating the market is tough, but it can be done with the right mix of stocks. By choosing your investments carefully and doing plenty of research, you may be able to build a portfolio that outperforms an S&P 500 index fund.
Are individual stocks right for you?
Whether you choose to invest in an S&P 500 index fund or individual stocks largely comes down to personal preference. For many people, index funds are the ideal investment because they’re lower-risk and less research-intensive. If you’re looking for a “set it and forget it” type of investment that doesn’t require much legwork on your end, an S&P 500 index fund may be the best option.
On the other hand, if you’re looking to take a more active role when investing, individual stocks may be a smart choice. You will need to spend more time researching to ensure you’re investing in solid long-term companies, but if you’re willing to put in the work, you can reap the rewards down the road.