Finance
Making money in the stock market can be easy, even if you’re not great at picking stocks
Investing in the stock market is a proven way to build wealth over time. However, often investors remain disillusioned because their returns have been disappointing or because they have lost money on stocks and investments that they thought should have been good buys.
Even when investors make seemingly safe investments, they can get burned. 3M is a stock that comes to mind. It’s been a solid brand and company for decades, but now due to legal issues it has split its operations and cut its dividend, which for years seemed incredibly safe. Walgreens Boots Alliance is another once-safe stock that had to cut its dividend earlier this year.
Investors who recently bought shares of these stocks are likely disappointed now, after their short stint on the market. Especially if they made the mistake of loading only a few shares instead of diversify their investments.
Selecting stocks can be risky and time-consuming
Investors who have been burned by one or two stock picks may have learned that picking individual stocks can be risky. But it is the allure of chasing big profits and trying to beat the market that attracts many investors.
It is this gamification in stocks that led to the late Warren Buffett’s right-hand man Charlie Mungerin 2021 to mockingly compare erratic behavior in the stock market to what someone might observe in a casino. And betting on high-risk stocks can be a dangerous strategy. Risk is real in the stock market. (View this page for help understanding your own risk tolerance.)
Even blue chip stocks can sometimes deliver disappointing returns to investors. And while many investors can outperform the markets while diversifying and holding a lot of stocks, it’s not an easy strategy to do on your own, especially if you don’t have the time to keep track of all those investments or aren’t really interested in them. are. So.
Many investors are better off sticking with a diversified exchange-traded fund
For many investors, a more suitable strategy may be to purchase exchange-traded funds (ETFs) that track different segments of the market. Through an ETF, you can gain exposure to not just dozens, but… hundreds of shares through just one investment.
For example the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) follows the S&P500 and allows you to benefit from the overall performance of the market. Because each share takes up a small portion of the fund, you don’t run excessive risk with a single investment.
And with an expense ratio of only 0.09%, the costs are not high. Over time, the fund’s composition may change as new growth stocks emerge and as other stocks struggle. Sticking with the fund’s shares is an easier way to stay abreast of market changes than trying to stay abreast of business news and developments.
While there will inevitably be dips and down years, following the S&P 500 is a solid way to grow your wealth over time. Since 2000, the SPDR S&P 500 ETF Trust is up 264%. And if we include the dividend payments, the total return is approximately 466%.
The downside, of course, is that investing in a fund that mirrors the S&P 500 is impossible surpass It. If you’re confident in your stock-picking skills, creating your own customized portfolio may still be what you prefer. But it’s certainly not the only way to make money in the stock market.
Investing in shares does not have to be complicated
Ultimately, your investment strategy can be as simple or complex as you want. Do you want to invest in dozens or perhaps hundreds of stocks and not have to worry about following all those companies? Go the ETF route. Do you follow the stock market daily and are you familiar with the latest trends and developments in the market? Do you have insight into what makes a stock undervalued or overvalued? Then choosing individual stocks may be the better option for you.
There is no one-size-fits-all strategy that suits everyone. And if your goal is just to earn good returns without having to beat the market, choosing an ETF that mirrors the S&P 500 may be the optimal strategy for you.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has one disclosure policy.
Making money in the stock market can be easy, even if you’re not great at picking stocks was originally published by The Motley Fool
