Investing in the stock market is one of the easiest and most effective ways to build long-term wealth, but choosing the right investments is critical.
There are seemingly endless options, from low-cost index funds to individual stocks. There's not necessarily a right or wrong answer when it comes to where you invest, as it will largely depend on your personal preferences. Here's how to decide whether S&P 500 index funds or individual stocks are a better fit for your portfolio.
S&P 500 index funds: What you need to know
An S&P 500 index fund is a type of investment that aims to track the S&P 500 index itself. In other words, it includes the same stocks as the index and mirrors its performance over time. Some of the include the Vanguard S&P 500 ETF (VOO -0.64%), iShares Core S&P 500 ETF (IVV -0.64%), and SPDR S&P 500 ETF Trust (SPY -0.61%).
There are several advantages to investing in S&P 500 index funds. For one, it's a relatively effortless way to grow your savings over time. With compound earnings, the longer you leave your money invested, the more you'll earn. All you have to do, then, is invest a little each month, then let the fund take care of the rest.
Also, S&P 500 index funds are generally safer during periods of volatility. While your investments will likely take a hit in the short term during downturns, the S&P 500 has a long history of recovering from crashes, bear markets, and recessions.
To be clear, it can sometimes take months or even years for the market to fully recover. But by investing in an S&P 500 ETF, your portfolio is almost guaranteed to rebound eventually. That can be a significant advantage right now as we face more economic uncertainty.
Individual stocks thrive where funds fall short
The biggest disadvantages of S&P 500 index funds are that they cannot be customized, and they can only earn average returns -- and these are the areas where individual stocks shine.
When you invest in an S&P 500 index fund, you have no choice but to own all of the stocks within the index. If there are certain companies you'd rather avoid, you're out of luck. However, investing in individual stocks gives you full control over every aspect of your portfolio.
Also, because S&P 500 index funds track the market, it's impossible for them to beat the market. For many people, this is a worthwhile trade-off for the safety and ease of this investment. But if your goal is to earn as much as possible and try to beat the market, individual stocks are the way to go.
One downside to investing in individual stocks, though, is that it's more time-consuming. It's crucial to thoroughly research every stock you buy, digging into the company's financials, leadership team, and competition within its industry. Not everyone has the time (or interest) for this much research, which can be a drawback.
Which one is right for you?
Your personal preferences and tolerance for risk can help you decide whether S&P 500 index funds or individual stocks are right for you.
S&P 500 index funds may be a better fit for those who:
- Prefer a hands-off, "set it and forget it" type of investment
- Want a lower-risk investment, especially during periods of stock market volatility
- Are willing to sacrifice above-average returns in exchange for a simple, safer investment
On the other hand, individual stocks may be a better option for those who:
- Want full control over their portfolio and the stocks within it
- Are willing to spend time researching individual stocks and companies
- Can tolerate higher levels of risk for the chance to beat the market
Both S&P 500 index funds and individual stocks can be fantastic investments, but the right option for you will depend on your investing preferences. By considering your tolerance for risk and how much effort you're willing to put into your portfolio, it will be easier to decide which investment is best for your situation.
Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
FAQs
Once you've opened an investment account, you'll need to decide: Do you want to invest in individual stocks included in the S&P 500 or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky.
Is Motley Fool a ripoff? ›
Given mixed reviews, a common question is “Is Motley Fool legitimate?” The company is 100% legitimate, registered business in good standing. They provide real investment research and stock recommendations. While there are some complaints about customer service issues, their core stock picking services appear sound.
Is it good to invest in the S&P 500 right now? ›
The S&P 500 is less than 3% away from its all-time high, making some investors hesitant to buy an index fund. There's no way to time a correction, and even if you buy at the highs, you'll likely do fine over the long run. Dollar-cost averaging could be a far better strategy, no matter what the market is doing.
What 10 stocks does Motley Fool recommend? ›
The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies.
What if I invested $1000 in S&P 500 10 years ago? ›
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
Why shouldn't you just invest in the S&P 500? ›
The one time it's okay to choose a single investment
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market.
What is Motley Fool's all in Buy Alert stock? ›
We regularly see similar ads from the Motley Fool about “all in” buy alerts, sometimes also called “double down” or “five star” buys, and they're generally just the type of steady teaser pitch that they can send out all year, over and over with no updates, to recruit subscribers for their flagship Motley Fool Stock ...
What is The Motley Fool's investment strategy? ›
The Motley Fool's approach to investing prioritizes buying and holding quality stocks for long periods of time. We focus the most on the business fundamentals of the companies in which we invest, rather than on their stocks' short-term price changes.
Should I buy Vanguard S&P 500 ETF? ›
S&P 500 ETFs are one of the safer types of funds, as the index itself has a decades-long track record of recovering from even the worst crashes, recessions, and bear markets. Also, because this ETF only contains stocks from large companies, it carries less risk than many other funds.
Should I invest in VOO right now? ›
VOO's analyst rating consensus is a Moderate Buy. This is based on the ratings of 505 Wall Streets Analysts.
Earnings Rebound
Analysts are projecting S&P 500 earnings growth will accelerate to 9.7% in the second quarter and S&P 500 companies will report an impressive 10.8% earnings growth for the full calendar year in 2024.
What stock will boom in 2024? ›
10 Best Growth Stocks to Buy for 2024
| Stock | Implied upside from April 25 close* |
|---|
| Tesla Inc. (TSLA) | 23.4% |
| Mastercard Inc. (MA) | 19% |
| Salesforce Inc. (CRM) | 20.8% |
| Advanced Micro Devices Inc. (AMD) | 30.1% |
6 more rowsApr 26, 2024
Here are eight of the best ways to invest $1,000 to help grow your money over time.
- Pay down high-interest debt. ...
- Build an emergency fund. ...
- Stash your money in a high-yield savings account. ...
- Put your cash in a certificate of deposit (CD) ...
- Contribute to an individual retirement account (IRA) ...
- Get your 401(k) employer match.
Tesla is a Zacks Strong Sell
The Zacks Rank is based on changes to analyst earnings estimates. It has a Zacks Strong Sell recommendation due to the cuts to the earnings estimates. But this is just a short-term recommendation of 1 to 3 months.
Is it better to invest in total stock market or S&P 500? ›
Most investors don't need to hold both a total stock market index fund and an S&P 500. The key to determining which is better for your portfolio is to look at your other holdings. For example, if you already have small- and mid-cap funds, you may want the more concentrated large-cap exposure of the S&P 500.
Is it better to invest in individual stocks or stock funds? ›
All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.
Is private equity better than the S&P 500? ›
Key Takeaways. Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020. Between 2000 and 2020, private equity outperformed the Russell 2000, the S&P 500, and venture capital. When compared over other time frames, however, private equity returns can be less impressive.
Is it better to invest in multiple stocks or one stock? ›
Owning more stocks confers greater stock portfolio diversification, but owning too many stocks is impractical. The objective is to diversify while still thoroughly understanding why you've invested in each of the stocks in your portfolio.
