Why my investment strategy doesn’t revolve around index funds | Smart Change: Personal Finances
The money you’re constantly putting aside for retirement absolutely shouldn’t stay in cash. If you go this route, you won’t grow your money at a rate fast enough to outpace inflation. The result? You could find yourself strapped for money later in life and your long-term goals could be in jeopardy.
Rather, it is important to invest the money you accumulate for retirement and other goals. And in this regard, you can decide to just load on index funds.
Index funds are passively managed funds whose objective is to track and match the performance of the benchmark indices to which they are linked. A S&P500 an index fund, for example, will aim to do as well as the S&P 500 itself.
Index funds are actually a very good choice for the typical investor, and that’s not just my opinion. Investment giant Warren Buffett has long index funds hailed as a great way for everyday investors to grow their wealth.
But my personal investment strategy doesn’t revolve around index funds. Here’s why.
1. I’m comfortable with stock picking
Index funds are a great option for people who don’t know much about picking individual stocks, or aren’t comfortable going that route. While I may not have the same stock-picking skills as some investors, I probably know more than the average person. Based on my knowledge, I am comfortable evaluating stocks and choosing individual companies in which to invest my money.
To be fair, I’m also willing to put in the time and research different companies before diving in. Some people may not have the desire or the patience to do this, and that’s okay. Since I regularly spend time reading about stocks (sometimes just for fun), investing in individual companies is doable for me.
2. I want a portfolio with the potential to beat the market
Index funds have a few drawbacks, one of which is that they won’t allow you to outperform the broad market in your portfolio. As I mentioned earlier, index funds want to outperform the indices they track, but their goals are not to beat them.
I, on the other hand, have slightly more ambitious goals. My goal is to build a portfolio that does at least slightly better than the broader market. To achieve this, I have to put together my own mix of investments.
3. I have choices in my retirement plan
People who save in an employer-sponsored account 401(k) plan are often limited to a selection of funds, as opposed to individual stocks. But because I have a different type of 401(k) – a solo 401(k) – I don’t have that restriction. Instead, I can invest my long-term savings in individual businesses, and that’s an option I prefer to jump on.
What is the right choice for you?
There’s absolutely nothing wrong with using index funds as an investment for retirement and other long-term goals. But I have my reasons for choosing different stocks that I believe have a solid level of growth potential.
One thing to keep in mind, however, is that you don’t have to choose between index funds and individual stocks. Investing in both could end up making you very wealthy, while making it easier to keep your portfolio nice and diverse.
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